(Repeat for additional subscribers)
Aug 22 (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.