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

Fri May 16, 2014 12:03am EDT

(The following statement was released by the rating agency) LONDON, May 16 (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 were also affirmed at 'A+' and 'AA-' respectively. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling has been 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 has a sound macroeconomic policy framework, underpinned by EU membership. Despite two consecutive years of recession (2012-2013), underlying fundamentals of the economy remain intact. Public and private indebtedness is low. Private sector debt stands at 72% of GDP, well below the EU28 average of 157%. Meanwhile, a fairly flexible labour market has helped to prevent rises in unemployment through the recession. -Fitch projects the Czech Republic to grow 1.9% in 2014 and 2.5% in 2015, a sharp improvement compared with a contraction of 0.9% in 2013. The Czech economic recovery will be aided by an improved eurozone outlook, accommodative domestic monetary policy (targeting a weaker CZK), and a renewed public investment drive in 2014-15. -Strong government finances support the ratings. The sovereign's headline fiscal deficit and gross debt, at 1.5% of GDP and at 46% of GDP at end-2013, are both below the respective 'A' medians of 2.2% and 52.3% respectively. The 2013 deficit outturn represents a significant outperformance against the government's target of 2.9% for that year. -The formation of a government in January 2014 (after early elections in October 2013) has reduced uncertainty around fiscal policy. For 2014-2015, in light of government plans for a more accommodative fiscal stance to support economic growth, a slight deterioration in the headline fiscal deficit is expected. Fitch expects the deficit to stay within the Maastricht 3% threshold, reaching 1.8% in 2014 and 2.3% in 2015. -The country's external finances are sound. The economy is a net creditor to the tune of 10.8% of GDP, although this is weaker than the medians of its 'A' (16.9%) and 'AA' (20%) peers. However, its external debt and interest service ratios are comparably better. The Czech Republic has a small current account deficit (CAD). For 2014 and 2015, Fitch projects that higher trade surpluses and inflows of EU funds will help narrow the CAD further to 0.8% and 0.4% of GDP respectively. -The banking system poses low risk to the sovereign. Fitch's latest Macroprudential Risk Monitor scores the system 'bbb/1', reflecting the banks' adequate stand-alone strength and a low risk of systemic stress. Czech banks have strong capital adequacy ratios (average of 17.2% at end-2013) and ample liquidity (deposits-to-loans at 132% at end-2013), in turn highlighting low dependence on parent-bank financing. Non-performing loans have stabilised at around 5.9% of total loans. -The Czech Republic is deeply embedded in the intra-EU supply chain. Eighty per cent of Czech exports are directed to the EU, of which one-third goes to Germany. Such a high degree of openness leaves the Czech Republic highly exposed to external shocks and the volatility of business cycles of its main trading partners. RATING SENSITIVITIES The main factors that could, individually, or collectively, trigger a negative rating action include: -A severe negative growth shock that damages the country's economic and fiscal stability -Fiscal slippage leading to a material rise in the public debt ratio The main factors that could, individually, or collectively, trigger a positive rating action include: -Higher trend growth over the medium term, for instance as a result of improvements in the business environment that stimulate investment activity KEY ASSUMPTIONS Fitch assumes that the Czech Republic will maintain fiscal policy broadly consistent with its medium-term fiscal framework laid out in its 2014 Convergence Programme. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Fitch assumes that under severe financial stress, support for Czech foreign subsidiary banks would be forthcoming 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 Douglas Renwick Senior Director +44 20 3530 1045 Media Relations: 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 9 August 2013, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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