S&P upgrades the Czech Republic’s ratings

Interview

Standard & Poor’s on Tuesday raised its foreign currency sovereign credit ratings on the Czech Republic to A/A-1 from A-/A-2 with a stable outlook, citing the implementation of public finance reforms aimed at lowering the budget deficit.

“The upgrade reflects the implementation of public finance reform, which will help bring down the Czech Republic’s comparatively high government deficits,” said Kai Stukenbrock, a credit analyst at Standard & Poor’s, in a statement. Also underpinning the country’s ratings are the good economic growth prospects, its well-diversified and wealthy economy, and its above-par external position, Stukenbrock said. GDP growth is expected to average 5% from 2007 to 2010, fuelled by robust investment demand and consumption.

“The challenge of further lowering general government deficits and implementing further fiscal and social security system reforms are the main constraining factors." In Prague, the PX benchmark stock index gained 0.9%; the index has surged 16% year-to-date. The Czech koruna surged 0.8% against the dollar at 19.40.

S&P cites public finance reforms
The Czech government passed a package of public finance reforms in September that are aimed at bringing the government deficit below the 3% of GDP Maastricht threshold. The so-called Maastricht criteria are the requirements that members of the European Union have to meet in order to adopt the euro, the official currency of the Eurozone. The Czech general government deficit is projected to climb to 3.9% of GDP this year, but it is expected to decline to 3% in 2008 and 2.5% by 2010, S&P said. Still, S&P expects the Czech Republic to adopt the euro no earlier than 2012.

“Today’s upgrade is definitely good news for the Czech foreign exchange and fixed income markets,” said Stanislava Pravdova, an assistant analyst at Denmark’s Danske Bank, in a research note. “Although the fiscal reforms are positive, some important reforms such as in the pensions area are still needed, and the Czech government still has a long way to go,” Pravdova said.

Adrian Ciocoi, the Romania-based director of research for emerging Europe at the Riedel Research Group, said that the upgrade comes at a right time since the Czech central bank will begin to sell on Wednesday three-year bonds worth 6 billion Czech koruna (about $310 million).

“The upgrade is a proof that besides the good public reform, there’s a good economy going in Czech Republic,” Ciocoi said. “This shows that Czechs passed well the important stress test from the past couple of months - the credit crunch in the US and Western Europe - which proves that over the past decade the economic fundamentals have improved in the emerging European countries.” (marketwatch.com)

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