Moody's Investors Service has affirmed the Czech Republic's A1 ratings with stable outlook, citing the government's significant fiscal consolidation to date and its commitment to continued sustainability of public finances coupled with limited contagion from the eurozone debt crisis thanks to prudent policymaking and a healthy banking system.
The Czech Republic’s budget deficit widened to 4.4% of GDP in 2012 from 3.25% of GDP in 2011, but Moody’s noted that when adjusted for one-off effects, the 2012 underlying fiscal deficit was 2.5% of GDP, reflecting the government's substantial structural consolidation despite the challenges associated with a lengthy recession.
The global ratings agency expects the 2013 deficit to be close to EU’s 3% limit, despite some risks stemming from the recent change in government. The Czech economy contracted by 1.2% in 2012 and Moody's forecasts a 0.3% decline in 2013. It expects the government’s debt ratio should stabilise below 52% of GDP.
Moody's noted that the Czech banking system remains very liquid and well-capitalised, providing a stable funding pool to the sovereign, thereby decreasing the government's reliance on non-resident financing and providing insulation from volatility in financial markets. It added that prudent policymaking has also held back funding-cost increases, anchoring fiscal-policy credibility and remaining the regional "safe haven" for investors.
Moody's said it may raise the Czech Republic’s ratings if it sees a significant improvement in the government's balance sheet as a result of a major reduction of debt levels. It added substantial structural reforms that enhance competitiveness and support growth would also have a positive effect.
On the other hand, the ratings may be lowered in case of a sustained deterioration in fiscal-policy credibility and rising debt following a substantial easing of deficit targets. A reversal of structural reforms and institutional arrangements that seek to establish fiscal sustainability would also have a negative effect on the ratings.
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