Moody's downgrades Czech economic outlook from stable to negative

Moody's, one of the world's Big Three credit rating agencies, has affirmed the Czech Republic's current rating but downgraded its long-term outlook from stable to negative in a new press release issued by the company this weekend.

The agency cited dependence on Russian oil and soaring inflation as primary factors in downgrading the Czech Republic's economic outlook.

Moody's is the second of the Big Three credit rating agencies to express a negative outlook for the Czech Republic after Fitch Ratings did the same in May. The third agency, Standard & Poor's, stuck with a stable outlook for the country earlier that month.

"Another bill we pay for the eight years of [Andrej] Babiš's rule," Czech Finance Minister Zbyněk Stanjura tweeted last night. 

"Moody's agency confirmed the high rating of the Czech Republic, but worsened the outlook due to the Czech Republic's strong energy dependence on Russia. We know that Putin uses gas and oil as a weapon, the priority is the de-Russification of the Czech and European energy industry."

In February 2022, prior to the Russian invasion of Ukraine, Moody's had forecast GDP growth for the Czech Republic at 3.5 percent this year and 3.2 percent in 2023. As of this weekend, however, they have revised those estimates to 2.3 percent and 1.0 percent, respectively.

Despite the pandemic, Moody's had predicted consistent GDP growth averaging around 1.9 percent for the Czech Republic from 2017-2026. Now, the agency estimates that will be between 1.0-1.5 percent lower as a result of the Russian invasion of Ukraine and subsequent fallout.

"The decision to change the outlook on the Czech Republic to negative is the increased risk of a materialization of a prolonged, severe gas supply disruption from Russia amid [the] Czech Republic's high dependency on gas supplies from Russia in combination with limited substitution possibilities in the near term," Moody's writes in their press release.

"Russia materially reduced gas supply to the European Union in recent weeks, and several EU countries experienced either complete shutoffs or significantly curtailed supply from Russia in early July."

"A prolonged, severe gas supply disruption from Russia would have a material negative impact on the Czech Republic's trend growth and fiscal metrics and therefore on Moody's assessment of economic and fiscal strength putting pressure on the country's Aa3 ratings."

In addition to uncertainty surrounding energy supplies from Russia, Moody's highlights higher-than-expected consumer inflation, ongoing global supply chain issues, and similar issues among the Czech Republic's main trading partners (especially Germany) as additional reasons for the negative outlook.

In the event of a complete shutoff of energy supplies from Russia, Moody's predicts the Czech Republic will be more greatly affected than other EU countries given its heavy reliance on the industry sector. Czech industry accounts for 25.2 percent of the country's GDP, far above the EU average of 17.8 percent.

While the Czech Republic's large capacity for reserves provides some short-term security in the event of a complete cutoff, Moody's points out that households and critical infrastructure would be prioritized in an energy rationing plan, negatively impacting the industry sector.

The Czech Republic has maintained or improved its credit rating from each of the Big Three agencies for the past 25 years, but that streak is now in danger of being broken. A drop in the Czech Republic's credit rating could have severe impacts on an already-suffering economy.

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.

A dip in the Czech Republic's credit rating would result in its debt becoming more expensive and directly lead to other economic factors, including increased inflation.