Czech ratings raised on public finance, growth

Capital Intelligence, the international credit rating agency, has upgraded the Czech Republic's long-term foreign currency rating to ‘A’ from ‘BBB+’ and its short-term foreign currency rating to ‘A1’ from ‘A2’.
At the same time, the long-term local currency rating was raised to ‘A+’ from ‘A’ and the short-term local currency rating of ‘A1’ affirmed. The credit outlook is ‘stable’.
The upgrade reflects improved budgetary performance and the implementation of reforms aimed at strengthening the public finances and raising the potential growth rate of the economy. The Czech Republic’s ratings are also supported by rising living standards, with GDP per capita measured in purchasing power standards increasing from 65% of the average for the EU-15 in 2003 to 73% in 2007, and a strong external position.
The budget deficit narrowed to 1.6% of GDP in 2007 from 2.7% in 2006, owing to record high revenue growth, and is expected to be of a similar magnitude in 2008 and 2009. The government has begun to implement the stabilisation programme unveiled in 2007 and aimed at reducing the tax burden and containing the growth of public expenditure in a manner consistent with EU fiscal rules. General government debt is moderate and debt ratios have fallen over the past few years, driven down by robust GDP growth and higher tax revenues as well as by the use of privatisation proceeds to retire debt. Capital Intelligence expects government debt, most of which is denominated in local currency, to decline to 28% of GDP by end-2008 (70% of budget revenue) and to remain below 30% of GDP over the coming years.
The Czech Republic’s balance of payments position is strong, underpinned by a reasonably diversified and dynamic export base and sustained FDI inflows. The trade and services balances have been in surplus for the past three years while the overall current account has recorded comfortable deficits in the range of 2%-3% of GDP, reflecting increased profits for foreign-owned companies. These deficits have been fully covered by non-debt creating inflows in the form of FDI and EU structural funds. Gross external debt is increasing but, at 42.6% of GDP (about 49% of current account receipts) at end-2007, is the lowest of all countries that have joined the EU since 2004. Net external debt, which takes into account the external assets of the banking system, was a modest 8% of GDP in 2007.
The Czech Republic’s ratings continue to be constrained by the challenge of implementing deep reforms to the social security and healthcare systems in order to ensure the long-term viability of the public finances in the face of an ageing population. Further improvements to the business environment, particularly in labour and product market regulation and the judicial system, are also needed to support competitiveness and facilitate real income convergence.