Fitch watches if Czech govt crisis will affect reforms

Rating agencies are monitoring the Czech Republic

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For more than a year, markets have been closely watching the European debt crisis, revolving mostly around several Mediterranean countries and Ireland. Most recently, the Moody’s rating agency downgraded the credit rating of the latter.



Nonetheless, rating agencies are monitoring also other, fiscally healthier countries, including the Czech Republic.

So far, so good – so don’t waste it. This could be the summary of what the Fitch rating agency said to Aktualne.cz, a Czech on-line daily, about the reform efforts of the Czech center-right government, whose future is uncertain because of a serious crisis it is going through these days.

In June 2010, the Fitch agency upgraded the Czech Republic’s rating outlook from stable to positive after the late-May legislative elections cleared the way for a reform-oriented liberal government.

Fitch said to Aktualne.cz that it will continue to watch the development of the Czech budget and the progress of economic and financial reforms.

“At this phase, it is not sure whether the current tension in the government coalition will have a permanent impact on these sectors,” Aktualne.cz was told by Edward Parker, Fitch’s director for Europe, Middle East, and Africa.

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Parker added that Fitch keeps monitoring the political situation in the Czech Republic.

The Czech Republic’s credit rating is going to be very important for the government, as it plans on selling bonds worth CZK 50bil (EUR 2.1bil) and treasury bills worth CZK 61bil (EUR 2.5bil) in Q2 only. So any downgrade would mean significant additional costs for the government.

Since March 2008, the Czech Republic is rated A+ at Fitch, and its rating outlook was changed from stable to positive after the 2010 election, in which the current coalition parties received a very solid majority (118 out of 200 seats) in the lower chamber of the Czech parliament.

“It (the outlook upgrade) was motivated by the expected forming of a center-right reform government, and by the expectation that it would implement a fiscal consolidation and step forward to key reforms of public finances, such as pension or health care reforms,” Parker explained. The resilience of the Czech economy against the global financial crisis and its fast recovery were another factors that contributed to the Czech Republic’s rating outlook being upgraded in June 2010.

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According to Parker, the Czech Republic has fared well – so far. It is relatively little indebted, has high income per capita, strong institutions, and sound macroeconomic policy.

“The government advanced in the fiscal consolidation when it managed to cut the budget deficit on the estimated 4.9 percent of GDP in 2010, compared to the 5.8 percent of GDP in 2009, Parker added.

 


Markets remain calm. So far

So far, markets have not reacted to the political crisis. On Wednesday 13 April, the auction of 12-year government bonds attracted strong demand, almost three times larger than the amount offered.

The domestic financial market rarely reacts to domestic political events, said Michal Brožka, an analyst for Raiffeisenbank, adding that also the CZK-EUR exchange rate remains stable.

However, says Brožka, this may not last forever.

“Unfortunately, it is worthwhile to remember that the factor that changed the expectation about the development of the Czech Republic’s rating was the promise of reforms after the last year’s elections. The reforms are threatened by the current developments, which can potentially change investors’ view of the Czech Republic,” said Brožka.

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Read more: Czech govt presses for higher taxes, stronger state
Read more: Greek Flu? Czech bond yields to surge by 0.4 percent
Read more: Czech government seeks support of turncoats to survive
Read more: Czech govt party disintegrates, coalition threatened


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