Moody’s upgrades Czech Republic’s outlook to stable

PRAGUE, CZECH REPUBLIC - 21 JUNE 2014: People on the streets of Prague, Czech Republic. Prague is one of the most visited city in Europe with over 5 million visitors every year.

Ratings agency Moody’s has upgraded the Czech Republic’s outlook to stable from positive, in what is the country’s first upgrade for 17 years.

Key drivers include the country’s fiscal strength metrics and the government’s reforms focused on increasing the share of value-added in industry and on fostering innovation across sectors.

Moody’s expects that the Czech Republic’s fiscal strength indicators will remain resilient even under an adverse scenario. Moreover, the stable outlook balances intrinsic strengths in the Czech Republic’s economic structure, as well as an overall strong institutional framework, with credit challenges that predominantly relate to the negative impact of an ageing society on long-term fiscal stability, as well as continued reform needs in order to maintain income convergence with more advanced economies similarly rated.

Social considerations are therefore material to the sovereign credit profile, and without further pension and healthcare reforms, the very strong government balance sheet could deteriorate significantly from the mid-2030s.

Moody’s also expects the Czech Republic’s government debt burden to decline further in 2019 and 2020, reaching 30.8 per cent of GDP by the end of 2020, and fall below 30 per cent of GDP by 2023. Primary surpluses of 0.4 per cent of GDP on average between 2019 and 2023 will be the main contributor to continued reduction in the debt burden, followed by a positive contribution from economic growth.

Most relevant from a long-term potential growth perspective, the Czech Republic has made some progress in increasing labour market participation of underrepresented groups, and also some progress in strengthening the education system. The country exhibits only relatively limited structural reform gaps compared to the OECD average, mainly in areas such as labour market and innovation capacity.