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 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. Additionally, the ability of the new government to deliver sustainable public finances, promote balanced economic growth and respond to economic shocks may be constrained by frictions within the three coalition partners that could hamper the effectiveness and predictability of policymaking, S&P said.

The ratings agency expects the Czech Republic’s economy to expand at an average annual rate of 2.4% in the period 2014-2017 supported by rising demand both from abroad and at home. Yet, as an open economy the country’s growth prospects are closely linked to the sustainability of economic recovery in its main trading partners.

S&P sees the general government fiscal deficit slightly narrowing to 1.4% of GDP in 2014 from 1.5% in 2013 but modest rises in capital expenses will lead to fiscal gaps averaging 2% over 2014-2017. The current account gap is forecast to average 1.7% of GDP over the next few years as the large income deficit will offset the trade surplus. Regarding the government debt, S&P expects it to reach 40.8% of economic output by 2017 from 38.2% estimated for 2014.

The stable outlook on the country’s ratings balances S&P’s expectation that the new centre-left government, in power since Jan 29, will continue to implement 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.

An upward pressure on the ratings could come from a decline in the Czech Republic's external financing requirements. Conversely, a 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.