Czech Republic’s healthy EU accession helps cut down deficit

In its annual report on the Czech Republic, Moody’s Investors Service said the country’s A1 foreign- and local-currency government bond ratings reflect the country’s advanced economic and financial integration with the European Union, improving fiscal policies, relatively low debt ratios, and healthy foreign direct investment inflows that cover much, if not all of the current account deficit.

The A1 government bond rating, along with Moody’s assessment of a very low risk of a payments moratorium in the event of a government default, serves as the basis for the Czech Republic‘s Aa1 foreign currency country ceiling for bonds.

“The Czech economy continues to perform strongly, with growth expected to be in excess of 5% over the medium-term,” said Moody’s Vice President Jonathan Schiffer, author of the report.

More rapid economic growth accompanied by real wage growth acceleration, lower unemployment, generous social benefits, and strong household credit growth has pushed the inflation forecast upwards, suggesting central bank interest rate tightening and a relative slowdown in economic growth into 2008 from the 6.5% annual figure of recent years.

While local currency debt has risen substantially because of the Czech Republic‘s fiscal stance during the past few years, Schiffer explained that a low base point and modest external debt means that the government aggregate (domestic and external) debt ratios remain moderate.

“The Czech Republic should have no difficulty servicing its debt burden,” said Schiffer. “Improving fiscal policies and economic growth as well as a modest inflation in the more recent past have prompted a positive outlook on the country’s rating.”