Bloomberg News

Czechs May Risk Rating Cut If Policies Reversed, S&P Says

August 24, 2012

The Czech Republic’s credit rating may come under downward pressure if its public finances worsen or the country reverses fiscal policies pursued by the current government, Standard & Poor’s said.

The S&P affirmed today its AA- sovereign rating assigned to the Czech Republic, saying its “financial, monetary, and economic institutions remain robust and stable, enabling the prosperous economy to adjust quickly to adverse shocks.”

The rating reflected a view of the Czech Republic’s “prudently” managed and balanced economy, which has low levels of foreign borrowing, a deposit-funded banking sector with minimal lending in foreign currency, and an independent central bank that has kept both consumer price inflation and interest rates at low levels, according to the S&P.

“Upward pressure on the ratings could come from a decline in the Czech Republic’s external financing requirements,” the S&P said in a statement. “On the other hand, downward pressure on the ratings could mount if the public finances deteriorate, or if a new government, formed after the 2014 election, reverses some of the current government’s public finance reforms.”

The Cabinet in Prague initially targeted a public-finance deficit of 3 percent of economic output this year, while its latest estimate saw the shortfall at 3.2 percent of gross domestic product due to a recession. The government plans to trim the deficit to 2.9 percent of GDP next year.

“We anticipate slight fiscal slippage from the budget in 2012-2013 due to weak economic growth,” the S&P said.

The fiscal outlook is clouded by uncertainties as financial compensation to churches, if approved, could be a one-time boost in the public-finance deficit and some of government measures to narrow the gap have yet to be approved by the lower house of Parliament, the ratings company said.

To contact the reporter on this story: Peter Laca in Prague at placa@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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