Dagong Maintains the Sovereign Credit Rating of Czech at A+ with a Stable Outlook
Dagong Global Credit Rating Co., Ltd.
Oct 16, 2018
Dagong Global Credit Rating Co., Ltd. (hereafter referred to as “Dagong”) has decided today to maintain the local and foreign currency sovereign credit rating of the Czech Republic (hereafter referred to as “Czech”) at A+, each with a stable outlook. Czech’s debt repayment environment has gradually become stable. Although the economic growth in the short term slows down, the government debt ratio continues decreasing due to fiscal surplus. This manageable debt situation, combined with current account surplus and sufficient international reserve, renders the debt repayment ability both in local and foreign currency stable.
Key reasons for maintaining the sovereign credit rating of Czech are below:
First, the political ecology remains stable, although the foundation of government formation is quite fragile. After the tough period of cabinet-formation in Czech, the coalition government led by AN02011 Campaign gained confidence votes from the House of Representatives. New government confronts issues including scattered power and low ruling efficiency caused by partisan constraints, but the parties have reached consensus on critical political and economic issues. This contributes to maintaining political stability, curbing corruption, accelerating investment, especially infrastructure investment, encouraging research development, and improving reforms on endowment insurance and medical policies. In terms of the credit environment, the tightening of monetary policy by the Czech central bank (The Czech National Bank) will have a convergence effect on credit resources due to the unexpected performances on economy and inflation. Meanwhile, the requirements for applying for mortgage loans will be strict. In the short term, the relative scale of credit will not fall sharply but the growth rate will slow down.
Second, domestic demand will support economic growth in the short term, while the improvement of economic potential in the medium and long term will be restricted. Wage inflation brought by labor shortage and structural imbalances will increase household disposable income, thus stimulating private consumption. Czech’s government has increased investment on transportation infrastructure including railway and highway construction, but low governing efficiency renders a slow progress on the usage of EU fund, leading to a weak pulling effect of investment on economic growth. Meanwhile, the growth in domestic demand combined with Kro ne appreciation will boost the import, causing a downtrend in the pulling rate of net export. It is expected that in 2018 and 2019, Czech’s economic growth rate will decrease a small degree to 3.5% and 3.0% respectively. In the medium and long term, considering restraints including lack of labor force, high dependence on external economy and slow improvement on productivity efficiency, Czech’s growth rate is expected to be at 2.5%.
Third, government primary fiscal surplus and financing ability are quite strong, enabling stable repayment sources. In the short term, economic growth and improved efficiency on tax-collection will bring up fiscal revenue. However, as the civil service salary, as well as government expenditure on social welfares such as old-age pension, long-term care allowance increases, it is projected that general government’s fiscal surplus will contract to 1.8% and 1.6% in 2018 and 2019, and the ratio of government financing needs to GDP will be 4.4% and 3.7% respectively. Additionally, low financing cost, smooth financing channels and support of EU fund can guarantee the security of repayment sources.
Fourth, government debt decreases and repayment ability remains stable. Benefited by the primary fiscal surplus, Czech’s general government burden is projected to decrease to 32.1% and 29.6% in 2018 and 2019 respectively, showing stable local currency repayment ability. Up to the end of 2017, Czech’s gross external debt to GDP ascended to 96.3% and the ratio of short-term external debt to gross external debt increased. The foreign currency repayment ability is under pressure due to increasing external liquidity.
In the short term, the external fragility that Czech’s economy confronts still exists. However, government policy support on domestic need will relieve the external pressure. Thus the economy can still keep growing in a moderate rate and the fiscal and debt status can maintain at a reasonable level, indicating stable repayment ability of the government. Therefore, Dagong assigns a stable local and foreign currency sovereign credit rating outlook for Czech in the following one to two years.