Scope Ratings reviews its ratings either yearly, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations. Monitoring reviews are unrelated to the calendar that outlines public finance rating actions.

Scope performs monitoring reviews to determine whether outstanding ratings remains proportionate. Monitoring reviews are conducted either by performing a portfolio review in terms of the applicable methodology/ies, latest developments, and the rated entity’s financial and operational aspects relative to similarly rated peers; or through targeted reviews on an individual credit. Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Czech Republic (AA/Stable; S-1+/Stable) on 26 July 2021. This monitoring note does not constitute a rating action nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Czech Republic’s AA/Stable ratings are underpinned by i) robust public finances, sound fiscal policies and a substantial liquidity buffer, resulting in considerable fiscal space; ii) steady economic performance and a competitive industrial base, as evidenced by high FDI inflows and low unemployment; and iii) a well-capitalised domestic banking sector with strong profitability and good asset quality, which underpin the sector’s resilience to rising impairment losses. The Czech Republic’s highly open economy with large exposure to cyclical industries has been severely affected by the Covid-19 pandemic and associated mitigation measures. A large and effective set of fiscal intervention to support the healthcare sector, businesses and households cushion the economy from the pandemic’s impact. These factors, combined with the unprecedented EU-wide monetary and fiscal stimulus in response to the crisis, underpin Scope’s view that the country is well positioned to weather the Covid-19 crisis and will return to robust growth from 2021 onward. Against these strengths, the rating considers structural challenges posed by i) an economic structure reliant on foreign funding and external demand, weighing on macroeconomic stability and sustainability; and ii) the country’s rapidly ageing population, which limits potential growth and places increasing pressure on public finances due to rising healthcare and pension costs.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the next 12 to 18 months.

The ratings/Outlook could be downgraded if, individually or collectively: i) Scope observes materially higher debt ratios than currently projected as a result of, for example, fading commitment to fiscal discipline; and/or ii) medium-term growth potential significantly weakens because of a decline in foreign demand and/or a strong decline in foreign investment inflows.

Conversely, the ratings/Outlook could be upgraded if, individually or collectively: i) structural reforms are implemented, strengthening macroeconomic stability and medium-term growth outlook; and/or ii) fiscal performance improves, resulting in a significant decline in public debt ratio.

For the updated scorecards accompanying this review, click here.

The methodology applicable for the reviewed rating(s) and/or rating Outlook(s) (Rating Methodology: Sovereign Ratings, 9 October 2020) is available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Jakob Suwalski, Director.

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