Fitch Ratings said that the prospect of a snap vote in the Czech Republic has no direct impact on the country’s A+/Stable rating since the ratings agency does not expect the new government to introduce a dramatic shift in fiscal or economic policy.
Although the main left-wing Social Democrats (CSSD), which is tipped to win the early elections, has announced it will undo some of the reforms of the former centre-right government, it said it would keep the target of bringing the budget gap to below EU’s limit of 3% of economic output.
The Czech budget deficit widened to 4.4% of GDP in 2012 from 3.3% in 2011 due to one-off payments, including compensation to churches. Without these one-off items, the gap would have been 2.5%. The fiscal performance so far this year is consistent with Fitch forecast that the deficit will stabilise slightly below 3% of GDP in 2013-2015.
The ratings agency said that of main importance in assessing the sovereign’s rating is the extent to which the economic slowdown will impact mid-term fiscal targets and the stabilisation of the government debt ratio adding that an increase in 2014 fiscal spending may not be credit negative as the scale of the adjustment since 2011 has created headroom for some fiscal stimulus. On the contrary, it could be supportive of the rating if it helped secure a broad economic recovery, Fitch noted.
The Czech economy exited its longest recession on record in the second quarter when the GDP grew by 0.7% q/q after six quarters of contraction. The previous government’s austerity drive that included investment cuts and tax hikes was partly to be blamed for the 18-month recession.
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