Fitch Ratings has upgraded Czech Republic's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA-'from 'A+'. The Outlook is Stable.
KEY RATING DRIVERS
The upgrade of the Czech Republic's Long-Term IDRs reflects the following key rating drivers and their relative weights:
General fiscal prudence and government budget surpluses in recent years have lowered government debt/GDP to 34.7% of GDP in 2017, from a peak of 44.9% in 2013, well below the current 'AA' peer median of 41.8%. General government surpluses are forecast throughout the forecast period with only a moderate decline to 0.8% of GDP in 2020 from 1.5% in 2018. While public finances have been supported by strong cyclical tailwinds, cautious fiscal policy-making has also contributed to the improvement.
The strong recent fiscal performance is driven by strong revenue collection (such as VAT receipts, boosted by strong personal consumption) as well as relatively slower growth in expenditure in recent years. The moderation of fiscal surpluses will be driven by significant increases in the government wage and pensions bill. In 2018, wage growth for the public sector is expected to reach 12% yoy (equivalent to 1% of GDP in gross terms), while pension costs due to indexation are set to rise by about 0.8% of GDP-equivalent. However, the fiscal balances will still be sufficient to reduce debt/GDP to 30.1% in 2020.
The external position remains strong, driven mainly by the record of current account surpluses and FDI inflows. Fitch forecasts the current account balance to average 0.6% of GDP in 2018-20, as the outlook for automotive-related exports (12% of GDP-equivalent) remains relatively stable. While rising international protectionism could dent the Czech Republic's trade performance, the impact would be limited by the high concentration of Czech exports within the EU. The authorities estimate a worst-case scenario of 25% tariffs on EU-made cars would reduce Czech GDP by only 0.4%.
The net external creditor position is set to strengthen further, from 20.8% of GDP in 2017 to 21.9% by end-2020 (current peer median 27%). As of end-2017, sovereign net foreign assets had risen by 21pp to 48.2% of GDP, comparing favourably with the 'AA' peer's current median of 50.4%. Central bank reserves amounted to of USD144 billion (67% of GDP) at end June 2018, boosted by cumulative current account surpluses and foreign capital inflows in the context of the exchange rate floor. There has been no significant capital outflow since the floor was abandoned in April 2017. In Fitch's view, the risk of volatility linked to capital outflows is mitigated by the highly liquid banking system and strong government finances.
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