[Czech Republic] Moody’s downgrades economic outlook from stable to negative

Moody's, one of the world's Big Three credit rating agencies, has affirmed the Czech Republic's current rating but downgraded its long-term outlook from stable to negative, Expats.cz reports.

In the press release issued by Moody’s over the weekend, the agency cited dependence on Russian oil and soaring inflation as primary factors in downgrading the Czech Republic's economic outlook.

Moody's is the second of the Big Three credit rating agencies to express a negative outlook for the Czech Republic after Fitch Ratings reached the same conclusion in May. The third agency, Standard & Poor's, stuck with a stable outlook for the country earlier that month.

"Another bill we pay for the eight years of [Andrej] Babiš's rule," Czech Finance Minister Zbyněk Stanjura tweeted on August 5. 

"Moody's agency confirmed the high rating of the Czech Republic, but worsened the outlook due to the Czech Republic's strong energy dependence on Russia. We know that Putin uses gas and oil as a weapon, the priority is the de-Russification of the Czech and European energy industry."

In February 2022, prior to the Russian invasion of Ukraine, Moody's had reportedly forecast GDP growth for the Czech Republic at 3.5 per cent this year and 3.2 per cent in 2023. As of this weekend, however, they have revised those estimates to 2.3 per cent and 1.0 per cent, respectively.

Despite the pandemic, Moody's had predicted consistent GDP growth averaging around 1.9 per cent for the Czech Republic from 2017-2026. Now, the agency estimates that will be between 1.0-1.5 per cent lower as a result of the Russian invasion of Ukraine and subsequent fallout.

"The decision to change the outlook on the Czech Republic to negative is the increased risk of a materialization of a prolonged, severe gas supply disruption from Russia amid [the] Czech Republic's high dependency on gas supplies from Russia in combination with limited substitution possibilities in the near term," Moody's said in their press release.

"Russia materially reduced gas supply to the European Union in recent weeks, and several EU countries experienced either complete shutoffs or significantly curtailed supply from Russia in early July."

"A prolonged, severe gas supply disruption from Russia would have a material negative impact on the Czech Republic's trend growth and fiscal metrics and therefore on Moody's assessment of economic and fiscal strength putting pressure on the country's Aa3 ratings."

In addition to the uncertainty surrounding energy supplies from Russia, Moody's has highlighted higher-than-expected consumer inflation, ongoing global supply chain issues, and similar issues among the Czech Republic's main trading partners (especially Germany) as additional reasons for the negative outlook.

In the event of a complete shutoff of energy supplies from Russia, Moody's predicts the Czech Republic will be more greatly affected than other EU countries because of its heavy reliance on the industry sector. Czech industry accounts for 25.2 per cent of the country's GDP, far above the EU average of 17.8 per cent.

While the Czech Republic's large capacity for reserves provides some short-term security in the event of a complete cutoff, Moody's said that households and critical infrastructure would be prioritised in an energy rationing plan, negatively impacting the industry sector.

The Czech Republic has maintained or improved its credit rating from each of the Big Three agencies for the past 25 years. That positive streak is now at risk of being broken. A drop in the Czech Republic's credit rating could have a severe impact on an already-suffering economy.

Credit ratings - an important guide for investors - are assigned by the Big Three agencies. They assess the stability of a country or institution to repay its debt. The ratings have an impact on both the willingness of investors to provide loans and the terms of those loans, such as interest rates.

A dip in the Czech Republic's credit rating would reportedly result in its debt becoming more expensive and directly lead to other economic factors, including increased inflation.

Source: Expats.cz

(Links and quotes via original reporting)

Moody's, one of the world's Big Three credit rating agencies, has affirmed the Czech Republic's current rating but downgraded its long-term outlook from stable to negative, Expats.cz reports.

In the press release issued by Moody’s over the weekend, the agency cited dependence on Russian oil and soaring inflation as primary factors in downgrading the Czech Republic's economic outlook.

Moody's is the second of the Big Three credit rating agencies to express a negative outlook for the Czech Republic after Fitch Ratings reached the same conclusion in May. The third agency, Standard & Poor's, stuck with a stable outlook for the country earlier that month.

"Another bill we pay for the eight years of [Andrej] Babiš's rule," Czech Finance Minister Zbyněk Stanjura tweeted on August 5. 

"Moody's agency confirmed the high rating of the Czech Republic, but worsened the outlook due to the Czech Republic's strong energy dependence on Russia. We know that Putin uses gas and oil as a weapon, the priority is the de-Russification of the Czech and European energy industry."

In February 2022, prior to the Russian invasion of Ukraine, Moody's had reportedly forecast GDP growth for the Czech Republic at 3.5 per cent this year and 3.2 per cent in 2023. As of this weekend, however, they have revised those estimates to 2.3 per cent and 1.0 per cent, respectively.

Despite the pandemic, Moody's had predicted consistent GDP growth averaging around 1.9 per cent for the Czech Republic from 2017-2026. Now, the agency estimates that will be between 1.0-1.5 per cent lower as a result of the Russian invasion of Ukraine and subsequent fallout.

"The decision to change the outlook on the Czech Republic to negative is the increased risk of a materialization of a prolonged, severe gas supply disruption from Russia amid [the] Czech Republic's high dependency on gas supplies from Russia in combination with limited substitution possibilities in the near term," Moody's said in their press release.

"Russia materially reduced gas supply to the European Union in recent weeks, and several EU countries experienced either complete shutoffs or significantly curtailed supply from Russia in early July."

"A prolonged, severe gas supply disruption from Russia would have a material negative impact on the Czech Republic's trend growth and fiscal metrics and therefore on Moody's assessment of economic and fiscal strength putting pressure on the country's Aa3 ratings."

In addition to the uncertainty surrounding energy supplies from Russia, Moody's has highlighted higher-than-expected consumer inflation, ongoing global supply chain issues, and similar issues among the Czech Republic's main trading partners (especially Germany) as additional reasons for the negative outlook.

In the event of a complete shutoff of energy supplies from Russia, Moody's predicts the Czech Republic will be more greatly affected than other EU countries because of its heavy reliance on the industry sector. Czech industry accounts for 25.2 per cent of the country's GDP, far above the EU average of 17.8 per cent.

While the Czech Republic's large capacity for reserves provides some short-term security in the event of a complete cutoff, Moody's said that households and critical infrastructure would be prioritised in an energy rationing plan, negatively impacting the industry sector.

The Czech Republic has maintained or improved its credit rating from each of the Big Three agencies for the past 25 years. That positive streak is now at risk of being broken. A drop in the Czech Republic's credit rating could have a severe impact on an already-suffering economy.

Credit ratings - an important guide for investors - are assigned by the Big Three agencies. They assess the stability of a country or institution to repay its debt. The ratings have an impact on both the willingness of investors to provide loans and the terms of those loans, such as interest rates.

A dip in the Czech Republic's credit rating would reportedly result in its debt becoming more expensive and directly lead to other economic factors, including increased inflation.

Source: Expats.cz

(Links and quotes via original reporting)