RPT-Fitch: Early vote has no direct impact on Czech Republic rating

Thu Aug 22, 2013 7:25am EDT

(Repeat for additional subscribers)

Aug 22 (Reuters) - (The following statement was released by the rating agency)

The prospect of early elections in the Czech Republic has no direct impact on the sovereign's 'A+'/Stable rating, Fitch Ratings says. The election of a new government may result in a change of policy emphasis, but there is currently no reason to assume that it will result in a dramatic shift in fiscal or economic policy.

The Social Democrat party, which was not part of the outgoing government, is comfortably ahead in opinion polls. Shadow Finance Minister Jan Mladek said earlier this month that the party would retain the commitment to cutting the fiscal deficit to below 3% of GDP. This is in line with our long-held view that the Czech authorities will consolidate the public finances to exit the EU's excessive deficit procedure and reflects a broad political consensus for consolidation, although the Social Democrats have been critical of some economic reforms and an austerity drive that has reduced public investment.

The Czech Republic's sovereign rating has been supported by a strong recent track record of consolidation in the public finances. Consolidation in 2012 and 2013 was maintained despite increasing political uncertainty after the Public Affairs Party, the junior partner in then-Prime Minister Petr Necas's centre-right coalition, split in May last year.

The fiscal deficit would have shrunk last year without the inclusion of one-off items, including compensation paid to churches and religious societies, in accordance with ESA95 methodology. These pushed the 2012 headline deficit up to 4.4% of GDP, from 3.3% a year earlier. Without them, the deficit would have been 2.5% of GDP, according to the Czech Ministry of Finance, substantially below the 3.2% target. This year's fiscal performance so far is consistent with our forecast that the deficit will stabilise slightly below 3% of GDP in 2013-2015.

Of greater importance in our assessment of the sovereign's credit profile is the extent to which an economic slowdown will affect medium-term fiscal targets and the stabilisation of the general government debt ratio. An increase in fiscal spending in 2014 need not be credit negative, as the scale of the adjustment since 2011 has created headroom for some fiscal stimulus. It could be supportive of the rating if it helped secure a broad economic recovery. GDP grew 0.7% in Q213 from the previous quarter after six consecutive quarters of contraction that partly reflected the sharp cuts in public investment undertaken as part of the fiscal consolidation process.

The Czech parliament's vote to dissolve itself on Tuesday will probably be followed by an election on October 25 and 26, according to President Milos Zeman. The calling of new elections is the culmination of a period of political instability since at least June, when Prime Minister Necas resigned in relation to a corruption enquiry. The subsequent caretaker government appointed by Zeman lost a parliamentary confidence vote last month.

Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.