Fitch maintains negative long-term outlook for Czech economy

Fitch Ratings, one of the world's Big Three credit rating agencies along with Moody's and Standard & Poor's, has affirmed the Czech Republic's AA- credit rating but maintains a negative long-term outlook for the country, according to a press release issued this weekend.

Last year, Fitch downgraded it's outlook for the Czech economy from stable to negative for the first time in 25 years. Moody's followed suit months later. The negative outlook indicates the country's credit rating is in danger of dropping.

An important guide for investors, credit ratings assigned by the Big Three agencies assess the stability of a country or institution to repay its debt. The ratings have an impact on both the willingness of investors to provide loans, as well as the terms of those loans, such as interest rates.

"The negative outlook reflects sustained deterioration in public finances metrics, which resulted from two consecutive exogenous shocks to growth and increased government spending and tax reductions to offset the negative effects of these shocks," reads the new Fitch report, issued on Friday.

"It also reflects uncertainty regarding structural fiscal imbalances over the medium term, stemming from a lower tax base and increased pension spending."

A widening fiscal deficit, rising expenditures in 2023, and weakening GDP growth all contributed to Fitch maintaining its negative outlook. However, the news isn't all bad. Fitch notes that the Czech Republic has successfully weaned itself off Russian gas over the past year.

"[The] Czech Republic further reduced its reliance on Russian gas imports as currently less than 5% of purchased gas comes from Russia, with the rest stemming from Norway or liquefied natural gas (LNG) terminals in the Netherlands, Belgium and France."

"Although the country is well-positioned to navigate the current winter, uncertainty around 2023/2024 heating season remains high given the need to replenish storage capacity and possible reduced availability of alternatives."

Fitch also predicts that Czech inflation peaked in January 2023 and will gradually decrease over the course of the year, though it is likely to remain in the double digits.

Speaking to Czech News Agency, Trinity Bank Chief Economist Lukáš Kovanda says that the Fitch report is good news overall for the country.

"Despite leaving the negative outlook, the Fitch rating is rather positive news for the Czech government. There is no deterioration in the rating," says Kovanda. "However, it must be said that rapid inflation will also help the Czech Republic keep its indebtedness relatively low."