Moody's has improved the Czech Republic’s credit rating from stable to positive and affirmed the rating at A1. The mean reasons for this change include the continuing improvement in financial indicators supported by strong growth dynamics. According to Moody’s, the country’s debt burden is low. The political environment should be favourable in terms of the rating development, the agency said.
Reason for changing the outlook to positive from stable - faster-then-expected improvement in fiscal metrics due to strong growth
The government's fiscal consolidation and debt reduction has progressed faster than expected, supported by sustained strong growth momentum. The level of the debt ratio that Moody's had projected in the last rating action in October 2016 (36% of GDP by 2020) had been already almost reached by the end of 2016, and under Moody's current projections the debt ratio will continue to decline, to 30% of GDP by 2022 from 34.6% as of 2017. In addition, debt affordability is high, marked by very low interest payments to revenue of only 1.7% as of 2017, and Moody's expects this metric to remain broadly stable at around 2% over the coming years.
Under its base case scenario, the rating agency expects that continued fiscal prudence and sustained growth momentum, together with measures to eradicate tax evasion introduced in 2017, will benefit government revenues and help counterbalance the expenditure impact from announced spending increases in public sector wages and the expected pick-up in public investment spending as EU funds disbursement will speed up over the coming years.
Strong growth momentum to be maintained. At 4.4% year-on-year in 2017, real GDP growth was very strong and Moody's expects robust growth of above 3% to continue in 2018 and 2019. Domestic demand will be supported by strong consumption and investment. Investment growth will benefit from continued construction demand, particularly in residential housing, but also from faster usage of funds and related national-co-financing under the 2014-2020 European Structural and Investment Funds budget. Export performance will benefit from the expected continued robust growth in key trading partners, but the growth contribution of net exports will likely decline as import volumes will grow on the back of strong domestic demand.
Source: CIA News, www.moodys.com