The budget ended in February with a deficit of CZK 119.7 billion, the deepest since the creation of the Czech Republic
Frankfurt/Prague – The American rating agency Fitch Ratings confirmed the main credit rating of the Czech the republic at grade AA minus, but the outlook remains negative. This means that the agency could lower the rating later. Fitch criticizes several things, such as insufficient consolidation of public budgets, according to Friday's press release.
“The negative outlook reflects the continued deterioration of public finance indicators, which is the result of two consecutive external growth shocks and increased government spending, together with tax cuts to offset the negative effects of these shocks,” the agency said. The negative outlook also reflects uncertainty about structural fiscal imbalances in the medium term, which results from a lower tax base and increased pension spending.
“Despite leaving the negative outlook, the Fitch rating is rather positive news for the Czech government. There is no deterioration in the rating,” said Trinity Bank Chief Economist Lukáš Kovanda. “Furthermore, it is clear from the assessment that the Czech Republic is not in danger of being hit by the mentioned debt brake during the term of office of this government. However, it must be said that rapid inflation will also help the Czech Republic to keep debt relatively low,” he added.
The Fitch agency is however extremely skeptical of the expectation that Petr Fiala's government will manage to collect the planned 35 billion crowns from the tax on extraordinary bank profits. This will reduce the possibility of effective consolidation of public budgets.
“Fiala's government has vowed for a long time to stabilize public finances without increasing current taxes. These were actually its two most important promises. And undoubtedly, according to the extent of their fulfillment or non-fulfilment, its success will be judged before the next election,” said Kovanda. “It would seem that she has fallen into a trap: she can fulfill the first promise, she can fulfill the second promise, but she cannot fulfill both at the same time. The new assessment of the Fitch agency confirms this dilemma,” he adds.
To keep the rating unchanged on the contrary, macroeconomic and monetary policy, as well as a strong institutional framework and favorable external financing, speak for themselves. On the contrary, the gross domestic product (GDP) per capita is lower than in the group of comparable countries.
The credit rating is an important guide for investors, showing the probability of proper loan repayment. It has a significant effect on the willingness of lenders to lend to the respective state, as well as on the terms of the loan, such as the interest rate. The higher the rating, the better the borrower is perceived in the eyes of creditors and the more likely it is that he will be able to secure cheaper loans.