On Monday, Moody’s rating agency warned that Czech public finances might not be sustainable in the long run. According to the agency, the government’s budget plans for the medium term do not include any significant consolidation objectives, which has a negative effect on the assessment of creditworthiness.
According to Moody’s, the consolidation of the state budget will be a task for the next government, which will be formed after the parliamentary elections scheduled for October. The rating agency pointed out that creating a strategy for reducing budget deficits and stabilizing or reducing the government’s debt will be key to Czechia’s future creditworthiness.
At the beginning of February, Moody’s confirmed the Czech Republic’s credit rating at Aa3 with a stable outlook. A credit rating is an important guide for investors, as it shows them the likelihood that loans will be repaid, which has a significant effect on the willingness of creditors to provide loans to the state or other entities. It also affects the terms of the loan, such as the interest rate. The higher the rating, the better creditors perceive the borrower and the more likely they will accede to cheaper loans.
“Moody’s warning is the first shot, fiscal consolidation was quite painful ten years ago, but now the situation is worse,” said the chief economist of the Deloitte Czech Republic consulting company, David Marek.
“Even Moody’s has noticed that Czech public finances are not on a sustainable trajectory. In this case, no one will be happy to be right. We will pay hard anyway. All of us,” stated the Raiffeisenbank’s chief economist Helena Horská.
According to the ING bank chief economist Jakub Seidler, Moody’s statement is not too surprising.
“The government’s medium-term fiscal plans are not that ambitious and do not try to sufficiently curb the current trend of increasing the government’s debt. The continuation of this trend in the coming years will logically lead to a deterioration of the Czech Republic’s rating,” Seidler noted.
According to him, the unfavorable budget development and postponing the problems to the next generation will be possible to reverse, but it will require great political courage of the government created after this year’s elections.
“The coronavirus crisis is, of course, unprecedented, and it is okay for the government to support the economy at the cost of rising debt. But it is not reasonable to resign on the budgetary responsibility in the future,” Seidler added.
In mid-April, the Czech Ministry of Finance stated that the Czech public finances would end up in a deficit of 8.8 percent of GDP this year. The figure is expected to fall to 5.9 percent next year. At the same time, the ministry prepares austerity measures so that in 2023 and 2024, the public finance deficit and debt will be lower than without the planned steps.
Title image: A sign for Moody’s Corp. is shown Aug. 13, 2010 in New York. Moody’s Investors Service is a credit rating agency. (AP Photo/Mark Lennihan)
