Fitch Ratings, one of the world’s top three credit rating agencies, has maintained a negative long-term outlook for the Czech Republic, indicating that the country’s credit rating is in danger of falling.
The move happened despite affirming the country’s current AA- credit rating. The news will have significant global economic consequences as the ratings assigned by these agencies guide investors in assessing a country’s or institution’s ability to repay its debt. The stability of a country’s credit rating has an impact on the willingness of investors to provide loans, as well as the terms of those loans, such as interest rates.
Public finances deterioration
Fitch’s latest report cites sustained deterioration in public finances metrics, increased government spending, and tax reductions to offset negative growth effects as contributing factors to the negative outlook.
The widening fiscal deficit, rising expenditures in 2023, and weakening GDP growth also played a role. However, Fitch notes that the Czech Republic has reduced its reliance on Russian gas and has successfully weaned itself off Russian gas over the past year.
While Fitch predicts that Czech inflation peaked in January 2023 and will decrease gradually over the course of the year, it is likely to remain in the double digits.
Trinity Bank Chief Economist Lukáš Kovanda says that the Fitch report is good news overall for the Czech government, as there is no deterioration in the rating. However, rapid inflation will also help the Czech Republic keep its indebtedness relatively low.
The negative outlook for the Czech economy will have significant global economic implications as investors reconsider their willingness to lend and the terms on which they lend to the country.