Czech Fiscal Plans

The Czech Republic’s credit rating may be increased if the new government delivers on its promise to cut the budget deficit, Moody’s Investors Service said, pushing the koruna up as other east-European currencies fell.

The three-party government, named on July 13, has pledged to reduce the public-finance deficit to the European Union limit of 3 percent of gross domestic product by 2013, from the 2010 target of 5.3 percent. Moody’s rates the Czech Republic A1, its fifth-highest investment grade, with a stable outlook. “If we see a resumption of real convergence towards core Europe that could put upward pressure on the rating,” Dietmar Hornung, a senior sovereign-risk group analyst at Moody’s, said in a July 16 interview. “And if the fiscal plans were to be implemented as planned and result in stabilization” of debt ratios “that would also be reassuring.”

The deficit widened last year as the global economic crisis cut demand for Czech exports, including cars made by the local units of Volkswagen AG and Hyundai Motor Co., slashing tax revenue. The EU is increasing penalties on members that flout budget rules after Greece’s spiraling deficit undermined confidence in the euro.

The Czech Republic’s debt rose to 35.4 percent of GDP last year, from 30 percent in 2008, less than the 60 percent limit for joining the euro.

“The Czech Republic is acting as a stabilizing element in the region,” said Prague-based Raiffeisen Bank analyst Michal Brozka in a note to clients, referring to Hornung’s comments. The new government has 118 seats in the 200-member lower house of parliament, giving it the strongest majority since the country became an independent state in 1993. That creates “preconditions for removing the gridlock” that hampered efforts to overhaul government finances, Hornung said.

The Finance Ministry forecasts the economy will grow 1.6 percent this year and 2.3 percent in 2011, after a 4.1 percent contraction in 2009. The European Commission, the European Union’s executive arm, estimates the euro area’s economy will grow 0.9 percent this year and 1.5 percent in 2011.

Businessweek