September 1, 2017 / 8:10 PM / 10 months ago

Fitch Revises Czech Republic's Outlook to Positive, Affirms at 'A+'

(The following statement was released by the rating agency) PARIS/LONDON, September 01 (Fitch) Fitch Ratings has revised the Outlook on Czech Republic's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to Positive from Stable and affirmed the IDRs at 'A+'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The revision of the Outlook to Positive reflects the following key rating drivers and their relative weights: HIGH There has been a marked improvement in fiscal balances, which reflects prudent policy and strong economic performance. Fitch expects the general government balance to record a surplus of 0.1% of GDP in 2017 after 0.6% in 2016 and versus an average deficit of 4.1% of GDP in 2009-2013. The improvement reflects the positive impact of strong economic growth on revenues and contained government spending. Planned pre-electoral measures (including an increase in wages for some civil servants and social transfers) should only have a limited impact and the agency expects the deficit will be 0.1% in 2018 and 0.3% in 2019. The new fiscal framework includes an expenditure rule, which should support fiscal prudence. A rapid decline in the debt to GDP ratio is supporting the building of fiscal buffers to face future shocks. Fitch expects that tight government balances will contribute to a sustained fall in government debt, to 32.2% of GDP by end-2019 (vs. 48.2% for the 'A' median and 42.3% for the 'AA' median) from 34.7% in 2017 and a peak of 44.9% in 2013. In the medium term, Fitch expects government debt to continue to decline and reach 26.7% by 2026. MEDIUM Fitch expects growth to remain above its potential over the 2019 forecast horizon. The agency forecasts GDP growth will accelerate to 3.7% in 2017 (after 4.7% y/y in 2Q-2017) from 2.6% in 2016, driven by stronger domestic demand and a favourable external environment. Investment is boosted by the ramp up in EU funds and strong private sector investment. Household consumption benefits from a historically low unemployment rate (at 2.9% in June 2017). Growth is set to decelerate to 2.7% by 2019. The exit from the FX floor policy has not led to financial or macro instability. In response to rising inflation (2.4% in July for the HICP), the Czech National Bank scrapped the floor on the exchange rate in April 2017 and increased its policy rate in early August. The exchange rate has only appreciated gradually since April, gaining about 3%. The share of foreign holdings in CZK government debt has also remained fairly stable since then (48% in June 2017). Fitch notes that the risk of volatility on government bonds due to potential outflows from those investors is mitigated by strong fiscal finances and a liquid banking system (loan to deposit ratio is 80%), which should ensure high demand for bonds. Czech Republic's 'A+' IDRs also reflect the following key rating drivers: GDP and GNI per capita on a Purchasing Power Parity basis, are in line with the 'A' median, but much lower than the 'AA' median. More rapid growth in GDP per capita allowing convergence towards EU level of development is constrained by a relatively low GDP growth potential, which Fitch estimates at slightly higher than 2%. The key challenges to increasing potential growth include raising productivity and tackling adverse labour force dynamics. Czech Republic is a net external creditor, with net external debt at -16% of GDP in 1Q17. This is underpinned by the sovereign's net external creditor position (38% of GDP), which has benefited from interventions of the Czech central bank to support the FX floor before its removal. As of the end of March 2017, central bank reserves were USD131 billion from USD55 billion at end-2014. Fitch expects the current account surplus to decline to 0.4% of GDP in 2017 after 1.1% in 2016, reflecting the impact of acceleration of domestic demand on imports. The surplus should decline to 0.2% by 2019 reflecting higher investment and the potentially negative impact on the current account from the appreciation in the currency. Czech banks are mostly foreign owned, well capitalised and liquid. Non-performing loan ratios are low (4.6%). Fitch's macro prudential indicator is '2', indicating that credit growth is more than five percentage points above its long-term trend. In response to rapid lending growth, the central bank has issued tighter macro prudential recommendations. The stock of credit is still relatively low, with households' indebtedness equivalent to 30% of GDP at end-2016, versus 50% on average in the EU. Fitch expects growth in credit to the private sector to decelerate in the coming years, reflecting tighter monetary conditions. Fitch expects broad policy continuity after the October 2017 general election. The party currently leading the polls is ANO, a junior party in the current governing coalition. Its leader, Mr. A. Babis, was minister of finance in the current coalition until May 2017. ANO would likely need to form a coalition to govern. This could lead to modest instability, a recurrent issue in Czech politics, which has an electoral system of proportional representation. General institutional strength is underpinned by EU membership. World Bank Doing Business indicators and Human Development index and governance indicators are all in line or above the 'A' median and close to the 'AA' median. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Czech Republic a score equivalent to a rating of 'A+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main factors that could, individually or collectively, lead to an upgrade are: - Continued reduction in the government debt to GDP ratio supported by tight budget balances. - Stronger GDP per capita, potentially supported by economic reforms, and without the emergence of macroeconomic imbalances. The main factors that could, individually or collectively, lead to a stabilisation of the Outlook are: - Worsening dynamics in government finances, for instance, brought about by a reversal in the government's fiscal stance after the October elections. - Evidence of rising macroeconomic imbalances that pose a risk to macro and financial stability. KEY ASSUMPTIONS Fitch assumes that growth in the eurozone, Czech Republic's main economic partner, will be 2.0% in 2017, 1.8% in 2018 and 1.4% in 2019 after 1.8% in 2016. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'A+'; Outlook revised to Positive from Stable Long-Term Local-Currency IDR affirmed at 'A+'; Outlook revised to Positive from Stable Short-Term Foreign-Currency IDR affirmed at 'F1+' Short-Term Local-Currency IDR affirmed at 'F1+' Country Ceiling affirmed at 'AA+' Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'A+' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'A+' Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'F1+' Contact: Primary Analyst Arnaud Louis Director +33 1 44 29 91 42 Fitch Ratings S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Krisjanis Krustins Associate Director +852 2263 9831 Committee Chairperson Michele Napolitano Senior Director +44 20 3530 1882 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Related Research Czech Republic - Rating Action Report here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below