Czech Political Gridlock May Affect Rating, Moody’s Says
March 08, 2010, 7:31 PM ESTBy Peter Laca
March 9 (Bloomberg) -- The Czech Republic’s A1 credit rating may be at risk if elections in May fail to break a deadlock in parliament that hampers efforts to narrow a record budget deficit, Moody’s Investors Service said.
A new government must trim the shortfall to the European Union ceiling of 3 percent of gross domestic product by 2013 from a forecast 5.3 percent of GDP this year. The deficit swelled to an estimated 6.6 percent of GDP last year.
The country has a bit of a “disappointing track record” in restructuring public finances in recent years, said Dietmar Hornung, a senior sovereign risk group analyst at Moody’s, in an interview on March 5. “If the political gridlock continues” it may “put downward pressure on the rating,” he said.
The country has had a string of minority and interim administrations since communism fell in 1989. It took more than seven months for a government to emerge after the election in 2006, when an evenly divided parliament couldn’t agree on a coalition. Former Premier Mirek Topolanek then had to rely on independent or opposition lawmakers for a majority, which prevented him pushing through tax and spending cuts.
Topolanek was ousted last year while the country held the European Union presidency, leading to an interim Cabinet with limited powers to cut last year’s record fiscal deficit.
The opposition Social Democrats, who pushed through last- minute changes to the 2010 budget to increase social spending, topped an opinion poll last month with 28.6 percent support, ahead of Topolanek’s Civic Democrats, with 23.2 percent.
Not Ruled Out
Three other factions may gain seats in parliament, according to the survey by the CVVM polling unit of the Academy of Science in Prague, making several coalition government scenarios possible. The poll of 1,105 people was taken between Feb. 1 and Feb.8, and CVVM didn’t give the margin of error.
“Another gridlock can’t be ruled out,” said Pavel Sobisek, chief economist at HVB in Prague. “Without a strong government, the country can’t develop a business plan appropriately over the longer term.”
Four years ago, Topolanek won a confidence vote seven months after the election when two Social Democrat deputies voted with a group that favored lowering taxes.
During the prolonged talks to form an administration that would win parliamentary support, the koruna experienced several bouts of volatility and lost 3 percent against the euro in January 2007 on investor concern about the weak mandate of the government. The koruna traded at 25.607 per euro yesterday, about 2 percent weaker than in October.
‘Positive Scenario’
The Czech credit rating, Moody’s fifth-best grade, is the same as Estonia and euro-region members Slovakia and Malta. Estonia’s fiscal gap last year is estimated by its government at 1.7 percent of GDP, while Slovakia’s shortfall was 6.3 percent.
“The main issue with the Czech Republic is really the political gridlock that we have seen in recent years,” said Hornung said. “If this problem is solved, then there could be room for a more positive scenario.”
The wider deficit has pushed the level of public debt higher, though below the EU limit of 60 percent of GDP needed to adopt the euro. The European Commission in November forecast Czech general government debt at 41 percent of GDP in 2010. Greece and Italy will have the largest debts in the EU, at 125 percent of GDP and 117 percent, respectively, the EC forecasts.
The Czech ratio of interest payments to government revenue, which Moody’s uses to assess debt affordability, is “at around 4 percent,” a figure that “reflects that the Czech Republic is able to finance at relatively low rates,” said Hornung.
Right Rating
The Finance Ministry, trying to find buyers for a record amount of bonds this year, sold 7.28 billion koruna ($386 million) of 5 percent bonds maturing in April 2019, with the average yield dropping to 4.031 percent from 4.303 percent in the previous auction of the same paper on Jan. 13.
“Although the fiscal dynamics have been unfavorable, there are also rating positives here, that’s why ‘A1 stable’ is the right rating, and I don’t see imminent downward pressure on the rating even though the deficit has ballooned,” said Hornung.
The nation last year emerged from its worst recession in two decades, though the economy contracted 0.6 percent on a quarterly basis in the last three months of 2009, after growing in the previous two quarters.
--Editors: Alan Crosby, Chris Kirkham
To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net;
To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net
