Standard & Poor’s Ratings Services has affirmed all its ratings on the Czech Republic , including its ‘A-/A-2’ foreign currency sovereign credit ratings. The outlook is stable.
“The affirmation reflects Standard & Poor’s expectation that the authorities will be able to reduce the fiscal deficit, to about 5.5% of GDP in 2006 from a high 8.2% (on a cash basis) in 2003,” says Standard & Poor’s credit analyst Kristel Richard.
Key measures needed to achieve this moderate fiscal consolidation include more rational and effective spending on various social benefits, in particular on pensions and sickness allowances. These will help constrain growth in the pension deficit, estimated at 0.7% of GDP in 2003, and in the high level of mandatory expenditures.
“On the back of the gradual decline in the general government deficit, net general government debt is expected to rise more moderately, following rapid growth in the past few years,” she adds. “The net general government debt burden is estimated at 28.7% of GDP at year-end 2003, growing to 40.0% by 2006.”
The ratings are supported by the republic’s strong external position. Both the public sector and the overall economy are net external creditors, with net external assets estimated at 40% and 19% of current account receipts, respectively, in 2003. Meanwhile, external liquidity remains sufficiently strong. Reserves cover an estimated 136% of the current account deficit plus long and short-term principal payments in 2003, and 229% of short-term debt.
Standard & Poor’s expects that the Czech Republic ‘s upcoming membership of the EU, from May 2004, will continue to act as an anchor for structural and administrative reforms. The effective implementation of such reforms is required in order to maintain strong and sustainable economic growth–in particular, those aimed at tackling inefficiencies in the judicial system and improving labour flexibility.
“Rating improvements would be supported by reforms to the country’s public finances required to ensure long-term sustainability,” concludes Richard. “Failure to engineer fiscal consolidation would put downward pressure on the ratings.”