S&P affirms Czech Republic’s ratings, outlook stable.

By bne IntelliNews January 24, 2014

Standard & Poor's Ratings Services has affirmed the Czech Republic’s long-term foreign and local currency sovereign ratings at AA- and AA, respectively, keeping a stable outlook. The ratings agency affirmed also the country’s short-term ratings at A-1+, S&P said in a statement.

The ratings reflect the agency’s view that the Czech economy is prudently managed and balanced as it is characterised by low levels of foreign borrowing, a deposit-funded banking sector with minimal lending in foreign currency, and an independent central bank that has kept inflation low. Yet, the ratings are constrained by the economy's weaker performance and lower GDP per capita than similarly rated peers, political frictions that hamper the effectiveness and predictability of policymaking, and reliance on external financing.

As an open-economy, the country’s growth prospects are closely linked to external demand, S&P said. It is expected to slowly recover in 2014 after contracting in the previous two years on an improving external environment, with annual real GDP per capita rising by a yearly average of 2% in 2014-2016. S&P estimates that increases in investment and household income will increasingly offset the withdrawal of fiscal stimulus.

The stable outlook on the country’s ratings balances S&P’s expectation that the new centre-left government, to be appointed on Jan 29, will continue fiscal and structural reforms against the risks stemming from a weak outlook for economic growth and public finances and a potential reversal of public finance reforms.

Upward pressure on the ratings could come from a decline in the Czech Republic's external financing requirements. Conversely, downward pressure on the ratings could mount if the public finances deteriorate, or if the political uncertainty re-emerges threatening the effectiveness, stability, and predictability of the policymaking institutions. 

  2013e 2014f 2015f 2016f
GDP per capita (US$) 19,196 19,689 20,646 21,797
Real GDP growth (%) -1 1,3 2,1 2,5
General government balance/GDP (%) -2,9 -2,9 -2,9 -2,8
General government debt/GDP (%) 46.1 48.0 49.4 50.3
CPI growth (%) 1,4 0.7 1,9 0.9
Current account balance/GDP (%) -1,7 -1,4 -1,3 -1,1
Narrow net external debt/CARs (%) 3,8 4.0 4.0 4.0
Net external liabilities/CARs (%) 60.9 59.1 56.0 52.2
Source: S&P        

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