TSX runs higher on rate cut expectations
Investing.com -- On March 28, 2025, S&P Global Ratings confirmed its ’AA-/A-1+’ long- and short-term foreign currency sovereign credit ratings and its ’AA/A-1+’ long- and short-term local currency sovereign credit ratings on the Czech Republic. The outlook for both long-term ratings remains stable. The ratings affirmation is based on the country’s strong government and external balance sheets, which S&P believes will offset the effects of a more subdued European economic outlook and global trade disputes.
The Czech Republic’s real economic growth is expected to average 2% annually in 2025-2026, due to sluggish German growth and the repercussions of global trade tensions on its export-oriented economy. Despite a challenging medium-term outlook, the country’s credit profile benefits from a strong external balance sheet, a moderate level of government debt, and high GDP per capita.
S&P also expects increasing defense spending and medium-term investments in nuclear power generation to push the country’s net general government debt toward 40% of GDP by 2028, up from 30% in 2024. However, this level of debt is still considered low from a global perspective.
The ratings could be lowered if the Czech Republic is significantly affected by global trade frictions or if the Czech automotive sector fails to adapt to challenges posed by technological change and rising competition within the industry. Conversely, the ratings could be raised if the country’s GDP per capita continues to strengthen towards levels displayed by developed market peers, and its key automotive sector remains globally competitive.
Czechia’s real GDP growth is expected to be about 2% on average over the next two years, below its potential rate of 2.5%, before rising slightly to average 2.4% in 2027-2028. The country’s fiscal consolidation in 2024 was the strongest within Central and Eastern Europe (CEE), with a general government deficit smaller than 3% of GDP.
Institutional settings are viewed as a credit strength in the Czech Republic. The country’s economic progress over the past two decades has been driven by pro-EU and pro-business policies. The independence and effectiveness of key political and economic institutions, such as the Czech National Bank (CNB), are not impeded.
However, the Czech Republic’s manufacturing-heavy and automotive-dependent growth model faces challenges as productivity and economic potential growth rates recede. The country’s energy security has improved thanks to alternative supply routes to Russian energy, and a long-term government plan for domestic energy security rests on an expansion of nuclear power generation.
Czechia’s external profile remains a rating strength, with the current account surplus estimated at 1.5% of GDP in 2024. The country’s flexible exchange rate and sizable official reserves protect against external shocks. Resurging price pressures in food items and real estate have halted the decline in Czech inflation at the start of 2025, which will delay the CNB’s easing plans.
The Czech banking sector, predominantly foreign-owned, remains profitable, well-capitalized, and funded by domestic deposits. The sector poses a limited contingent liability risk for public finances, and the country’s modest private-sector debt, strong employment, and sound disposable income levels support the banking sector.
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