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S&P Raised Czech Republic Ratings Following Sovereign Criteria Change; Outlook Stable

25 sierpień 2011 | Standard & Poor's

•Standard & Poor's has revised its methodology and assumptions for rating sovereign governments.
•Consequently, we are raising the long-term foreign currency sovereign credit rating to 'AA-' and the long-term local currency rating to 'AA'.
•We are also raising the short-term foreign and local currency ratings on the Czech Republic to 'A-1+'.
•The stable outlook balances our assessment of the Czech Republic's solid medium-to-long term economic growth prospects against the need to continue with fiscal consolidation measures.

Aug. 24, 2011--Standard & Poor's Ratings Services said that it raised its long-term foreign sovereign credit rating on the Czech Republic to 'AA-' from 'A'. We also raised the long-term local currency rating to 'AA' from 'A+' and the short-term foreign and local currency ratings to 'A-1+'. In addition, we upgraded our transfer and convertibility assessment on the Czech Republic to 'AA+' from 'AA'. The outlook is stable.

The upgrade was prompted by the application of our revised sovereign criteria, which places a greater weight on central governments' political and economic profile (see "Sovereign Government Rating Methodology and Assumptions" published on RatingsDirect on June 30, 2011). Our ratings on the Czech Republic thus reflect its prudently managed and balanced economy. The economy is characterized by low levels of foreign borrowing, a deposit-funded banking sector with minimal lending in foreign currency, and a largely independent central bank that has kept both consumer price inflation and interest rates at low levels. The upgrade also incorporates our expectation that the proposed reform of the social welfare system, which aims to reduce spending related to ageing, will be approved and implemented. We expect continued prudent management of the economy over the ratings horizon.

The Czech economy is small, competitive, and open. Its growth prospects are closely linked to external demand, particularly in its major European trading partners. Under Standard & Poor's sovereign criteria, governments with a high proportion of local currency debt that also benefit from substantial monetary flexibility are considered to possess higher debt tolerance. If the external environment deteriorates, the floating exchange rate would also serve as a useful buffer for the Czech economy.

Restrained fiscal policy before the crisis means that general government debt is relatively moderate, at 38.5% of GDP in 2010. We view the debt profile as favorable. It is predominantly denominated in local currency and takes the form of fixed-rate securities. Short-term debt comprises about 16% of the total. General government debt is currently rising; we expect it to stabilize at 45% of GDP in 2014, and decline thereafter.

We view the fiscal targets for 2011-2013 as broadly attainable, provided the government does not fragment or waver in its commitment to press ahead with structural expenditure reform. In this context, the government's reapproval of its fiscal measures for 2011, which will otherwise be reversed at end-2011, will be crucial for ensuring the steady decline of general government deficits and debt. It needs to reapprove the measures because in early 2011 the constitutional court ruled as unconstitutional the manner in which the authorities approved part of their fiscal austerity package at the end of 2010. The court did not rule on the measures itself, and has given the government until the end of 2011 to pass them again in a constitutional manner (or approve alternative reforms). These reforms included cuts in public sector wages or employment and some changes in social welfare coverage.

The stable outlook reflects our view of the balance of risks to the government's creditworthiness. Upward pressure on the ratings could come from a decline in the Czech Republic's external financing requirements. On the other hand, downward pressure on the ratings could mount if the social security reform falters, the public finances deteriorate, or if a new government formed after the 2014 election reverses some of the current government's public finance reforms.

Organizacja: Czechy

Pełna nazwa firmyRepublika Czeska
Country of riskCzech Republic
Country of registrationCzech Republic


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