ČR not facing ratings threat

Analysts say the Czech Republic is unlikely to follow the United Kingdom in having its credit rating downgraded by the major agencies.

Their comments follow the decision by the ratings agency Moody's to remove the United Kingdom's coveted AAA status and replace it with an AA1 rating, as the world's sixth-largest economy struggles from the fallout of the eurozone crisis. The decision to downgrade the United Kingdom came amid warnings from Moody's that the country's government would struggle to reduce debt and that the outlook for the British economy was "sluggish."

While Moody's has issued a downgrade, a move that has put London's coalition government on the defensive over its handling of the economy, fellow ratings agencies Standard & Poor's and Fitch have yet to remove the United Kingdom's AAA rating, although analysts have said they are likely to do so. Fitch gave the country a "negative" outlook for its credit rating last year.

The Czech Republic currently has an AA- rating from Standard & Poor's, having been moved up two positions from an A rating in August 2011, an A1 rating from Moody's and an A+ rating from Fitch. All three ratings are accompanied by a "stable" outlook.

Helped by a debt-to-GDP ratio that remains below-average for Europe, the Czech Republic's current rating seems relatively safe, according to analysts.

"We don't think the Czech Republic is at risk of a downgrade of the rating, because the Czech government has made great progress in austerity measures and reduced the deficit quite significantly," said Václav Franče, an economist with Raiffeisenbank.

While acknowledging the austerity measures have had a negative effect on growth, Franče said this was not likely to have an impact on the credit rating.

Similarly, the chief analyst at J&T Banka, Milan Vaníček, said he did not believe there was "any kind of threat" of the Czech Republic's rating being downgraded "in the next month or even year."

"The economy is rather negative, it's true, but on the other hand it's not such a steep decline it would trigger a downgrade," he added.

While a downgrade appears unlikely, a move in the other direction, namely an upgrade in rating so the Czech Republic could get closer to the likes of the Netherlands, Switzerland and Luxembourg with their across-the-board AAA and Aaa ratings, seems an equally distant prospect. Analysts have cited risks from pension reform and the uncertainty linked to 2014 being an election year as factors that mean the Czech Republic is unlikely to see an improvement in its credit rating.

In affirming its A+ rating for the Czech Republic in December, Fitch said that while the country's debt situation was not a major cause for concern, there were "fiscal headwinds," notably poor domestic growth and "political discord on key reforms."

The agency also warned a severe recession in the eurozone could have a major impact on the Czech economy, and the country's rating could suffer "downward pressure" if the potential for growth in the medium term weakened further.

Daniel Bardsley can be reached at
business@praguepost.com