Fitch Affirms Czech Republic at 'A+'; Outlook Stable

Tue Dec 10, 2013 1:22pm EST

LONDON, December 10 (Fitch) Fitch Ratings has affirmed Czech Republic's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+' and 'AA-' respectively. The issue ratings on Czech Republic's senior unsecured foreign and local currency bonds are also affirmed at 'A+' and 'AA-' respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'AA+' and the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following factors: -The Czech Republic benefits from a strong macroeconomic policy framework, low private sector indebtedness, a resilient labour market and a stable banking sector. At 6.8%, unemployment is well below the eurozone average of 12.1%, while household debt/income is barely half the EU27 average of 115%. Nonetheless, despite an absence of serious macroeconomic imbalances, the Czech economy has struggled to break out of a prolonged recession, reflecting its close ties to the eurozone and weak domestic demand. -Real GDP in 2013 is expected to have contracted 0.9%. This compares with Poland and Hungary, whose economies are projected to have grown by 1.4% and 0.7%, respectively, this year. Two years of recession since end-2011 has left the Czech economy as one of the worst economic performers among large Central Eastern European countries. Economic recovery in the Czech Republic is expected by Fitch for 2014. The healthier eurozone outlook and support from the weaker Czech koruna should help to revive real GDP growth to 1.6% in 2014 and 2.5% in 2015. -Strong consolidation efforts have helped to bring down the Czech Republic's fiscal deficit within EU rules. Narrowing of the structural deficit in 2009-2012 amounted to 2.7% of GDP. Currently, the Czech Republic is on track to meet its 2.9% of GDP fiscal deficit target by end- 2013. This would be in line with the 'A' median deficit of 2.8% of GDP among rated peers. -The Czech Republic has yet to form a new government following early elections in October. Political gridlock has stalled the approval of the 2014 fiscal budget. However, Fitch does not consider this hiatus to be materially negative for the Czech ratings. Although there is disagreement among the parties over fiscal policy, with some favouring a more pro-growth fiscal stance than others, the fiscal deficit is not expected by Fitch to exceed 3% of GDP in 2014 and public debt/GDP should remain below 60% over the medium term. Strong fiscal financing flexibility and sound debt management are important additional supports for the rating. Fitch's projection for the Czech public debt ratio at 48.6% for 2013 is in line with the 'A' median of 49.8%. -The sovereign's external finances are considered a rating strength. The Czech Republic is a net external creditor. Further improvement to external finances in Fitch's forecast horizon will come from narrowing of the current account deficit (CAD). An improved trade surplus outlook in 2014-2015 should see the CAD average 1.2% of GDP from 2.4% at end-2012. -A stable banking sector supports the Czech rating. Czech banks are net lenders to their parent banks, holding ample liquidity and strong capitalisation. Fitch's latest Macro-prudential Risk monitor ranks the Czech banking system 'bbb/1', reflecting an "adequate (and) low risk" operating environment. -EU membership underpins policy, governance and institutional standards. However, limited attractiveness in the business environment and declining competiveness compared with regional peers are weakness for the Czech ratings. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger a negative rating action include: -Continued weakness in the economy that would contribute to deterioration in government debt dynamics -Fiscal slippage and failure to stabilise the public debt ratio The main factors that could trigger a positive rating action include: -Meeting or exceeding fiscal targets in a sustainable manner, while putting debt-to-GDP on a firm downward trajectory in conjunction with higher trend growth -Improvement in the business environment that would stimulate investment activity and contribute to higher trend economic growth KEY ASSUMPTIONS Fitch assumes there will be successful inter-party negotiations allowing for the formation of a coalition government in the near-term. Fitch assumes that the Czech Republic will maintain fiscal policy broadly consistent with its medium-term fiscal framework laid out in its latest convergence programme. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policymakers. It also assumes that the risk of fragmentation of the eurozone remains low. Fitch assumes that under severe financial stress, support for the Czech subsidiary banks would come first and foremost from their parent banks. Contact: Primary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Matteo Napolitano Director +44 20 3530 1189 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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