Czech fiscal performance starts to win credit

Photo: Khalil Baalbaki

A wave of good news about the Czech economy has resurrected the possibility that the country’s rating might be edged upwards and, as a result, the costs of servicing the country’s public debt could come down by several billion crowns.

Photo: Khalil Baalbaki
The most striking figures from a raft put out by the Czech Statistics Office on Tuesday are those for government deficit and overall public sector debt for 2013. The former dropped to just 1.44 percent of Gross Domestic Product from 4.20 percent in 2012. Overall public sector debt actually shrank as a percentage of GDP to 46.04% last year from 46.16% in 2012.

Those statistics look even better given the fact that the Czech Republic was still in recession for much of 2013 and only really pulling out of it in the last quarter of the year. And they have fuelled some early anticipation that the Czech fiscal situation and outlook is improving to such a degree that the big global credit rating agencies will soon have to start upwardly revising their evaluations of the country.

In fact, one of the more overlooked agencies, Japan Credit Rating Agency, already improved selected ratings of the Czech Republic on March 24, pointing out the falling fiscal deficits and high likelihood that the current coalition government will keep control of the purse strings helped by cautious economic growth.

Patria Finance chief economist David Marek says that the government might only have to hold onto its current prudent path for the big boys of the credit rating world, the likes of Standard and Poor’s, Fitch, and Moody’s, to take notice and possibly hand out improved evaluations as well. That reward could take a few weeks or months, he says.

Ratings are a somewhat esoteric subject, but the bottom line is that they are essentially an evaluation of risk, mainly the risk of holding debt, or government bonds, from the country under review. And the expected reward from an improved rating is that the state should be able to borrow at a cheaper rate as its risk profile improves.

Currently there is around a 0.5-0.6 percentage point difference between the yield offered on German and Czech 10-year bonds. If improved Czech credit ratings could compress that by 0.2 percentage points, then the Czech state could save around 4 billion crowns a year in its borrowing costs, Marek points out.

While the business as usual course could bring its own rewards in due course, the government could of course give the ratings agencies a nudge in the right direction by showing its determination to curb public deficits and debt.

The Patria Finance chief economist says dredging up the former debt brake proposal of the previous centre-right government, giving it a new coat of paint and modifications to make it look like something new, might be the signal that is needed. The bonus from such a move could be that it would probably get the biggest opposition party, TOP 09, on board for the three-fifths constitutional majority needed for approving the EU fiscal pact which Prime Minister Bohuslav Sobotka is keen to sign up to.

Although theoretically in favour of the EU fiscal disciplinary mechanism, TOP 09 are playing hard to get with their key votes in the lower house of parliament and want the domestic fiscal brake in place before they line up to vote for the longer term European measure.