Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Czech Republic (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AA-/Stable Outlook; short-term local- and foreign-currency issuer rating: S-1+/Stable Outlook) on 6 November 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The Czech Republic's AA- rating reflects the country's: i) favourable track record of sound macroeconomic policies, enhancing economic stability; and ii) competitive industrial base, including a well-developed manufacturing sector, supported by large and steady FDI and EU funds inflows, contributing to its overall resilience.

Challenges are related to: i) adverse demographic trends and budget constraints related to the country's rapidly ageing population and labour shortages, which limit potential growth and increase medium-term pressures on public finances; and ii) an economic structure reliant on global supply chains and external demand, which exposes the country to external shocks.

Scope forecasts a -0.4% GDP contraction in the Czech Republic for 2023, primarily due to reduced household consumption, as economic activity declines. In 2024, Scope expects a growth rate of 1.6%, driven by modest external demand and fiscal consolidation effects. For 2025, Scope projects GDP growth to rise to 2.8%, primarily due to improved real income, leading to increased household consumption. Longer-term growth is expected to stabilise around the medium-term potential of 2.5% in the following years, which is strong compared to peers but below pre-crisis levels.

After reaching 5.1% of GDP in 2021, the budget deficit declined to 3.6% in the following year, mainly due to strong tax revenue and social contributions. In 2023, Scope expects a similar deficit of 3.6% of GDP, mainly attributed to government assistance for energy costs and aid to Ukrainian refugees. The government's consolidation plan, scheduled for implementation in 2024, aims to gradually reduce the deficit through tax hikes and subsidy reductions. However, economic challenges may hinder its execution.

Furthermore, budgetary prospects in the medium term are hindered by persistent primary deficits, estimated at around 0.5% of GDP between 2024-2028, in contrast to the pre-pandemic period of 2015-2019 when the Czech Republic recorded an average primary surplus of about 1.2% of GDP. The government's commitment to increase military spending to 2% of GDP starting in 2024, along with rising pension expenses driven by demographic shifts such as an aging population and constraints in the labour market, which limit the capacity for additional social contributions, exerts structural fiscal pressure. Scope foresees an increase in the debt-to-GDP ratio in 2023 to around 45%.

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

The ratings/Outlooks could be downgraded if, individually or collectively: i) ongoing budget deficits result in unsuccessful fiscal consolidation and hinder government targets; and/or ii) medium-term growth prospects were constrained, for example as a result of high inflation.

Conversely, the ratings/Outlook could be upgraded if, individually or collectively: i) fiscal performance improved materially, resulting in a significant decline in the public debt ratio; and/or i) the country’s resilience to external shocks strengthened notably, supporting macroeconomic sustainability.

For the updated report accompanying this review, click here.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Jakob Suwalski, Senior Director

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