Investors Service changed the outlook for the Czech Republic's A1 foreign- and domestic-currency government ratings to stable from positive.
"Although the Czech economy and its public finances are likely to be more resilient to the current global crisis than some other countries within Central and Eastern Europe," said Dietmar Hornung, a Vice-President Senior Analyst, "the change in outlook reflects our view that an upgrade to the Aa category will not be forthcoming in the next 12 to 18 months."
The rating agency further noted that economic activity in the Czech Republic has weakened considerably. As external demand is being dampened by the sluggish growth of the country's main trading partners, Czech growth is also set to fall considerably below potential, with a current forecast of 0.8% for 2009.
That said, Mr. Hornung pointed out that growth prospects hinge to a considerable extent on the prospects of the struggling global automotive industry, as the country has become a hub for car production. The Czech car industry employed 120,000 persons in 2007, representing 3.25% of GDP and 16.9% of total exports in goods and services. Already, one of the bigger producers in the country cut its output target for 2009.
Mr. Hornung also emphasized that still assesses the economic strength of the Czech Republic as "high," noting that the country has enjoyed a steady income convergence to the EU average as a result of rather robust economic growth.
"The A1 rating of its government debt reflects the advanced economic and financial integration of the country with the EU and relatively low government debt ratios," he said. "However, the ratings are constrained by concerns over the government's capacity to pursue needed structural reforms in the fields of pension, social welfare, and health care given the payments pressures that will be exerted by the imminent and rapid ageing of the population."
EMU prospects are still relatively dim: although euro adoption could be technically possible as early as 2012, there is no official target date yet, and, hence, even expectations that the euro will be adopted in 2013 appear optimistic at this stage. As part of today's rating action, the outlook on the Aa1 foreign currency country ceiling for bonds and the A1 country ceiling for foreign currency deposits was also changed to stable from from positive. No changes were made to the local currency bond or deposit ceilings, which are both Aaa.
The last rating action with respect to the Government of the Czech Republic was on March 30, 2006 when the outlooks on the government's A1 ratings and Aa1/A1 respective country ceilings for foreign currency bonds and bank deposits were raised to positive from stable.