OREANDA-NEWS. Fitch Ratings has affirmed Czech Republic's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+' and 'AA-', respectively with Stable Outlooks. The issue ratings on Czech Republic's senior unsecured foreign and local currency bonds have also been affirmed at 'A+' and 'AA-' respectively. The Country Ceiling has been affirmed at 'AA+' and the Short-term foreign currency IDR at 'F1'.

KEY RATING DRIVERS
Czech Republic's 'A+' rating balances the sovereign's strong fiscal finances and external balance sheet with weak structural indicators relative to the 'A' median such as lower levels of per capita income and more volatile GDP growth. The Czech economy is closely linked to the euro area, rendering the economy vulnerable to developments in the region. Nevertheless, a gradual recovery in the eurozone over 2016-17 should support growth.

We forecast real GDP in 2015 to grow 4.3%, after growing 2% in 2014, driven primarily by higher government spending because of higher drawdown of EU structural funds and strong household consumption. Although Fitch expects growth to slow in 2016 and 2017, average real GDP growth over 2015-17 is forecast to be 3.3%, higher than the average over 2012-14 of 0.2%.

External finances are a credit strength. Czech Republic recorded a current account surplus in 2014 - the first since 1993 - of 0.6% of GDP. Fitch expects the current account to remain in surplus over 2016-17, mainly driven by strong export performance on account of a weaker exchange rate and lower imports driven by a decline in oil prices. Fitch estimates Czech Republic's net external creditor position at end-2015 at 28% of GDP, which is greater than the 'A' median's 22%.

Czech Republic's public finances are a strength relative to the 'A' median. Gross general government debt at end-2015 is estimated by Fitch at 42.5% of GDP, below the 'A' median's 44.4%. The fiscal deficit has, however, widened to -1.9% of GDP in 2014 from -1.2% in 2013. Fitch estimates the deficit in 2015 to remain at just under 2% of GDP, as government spending rises to partially match the disbursement of EU structural funds.

Czech Republic continues to score lower than the 'A' median on structural indicators such as per capita income and governance. At end-2014, Czech Republic fell in the 59th percentile of the World Bank's Ease of Doing Business Index, while the 'A' median fell in the 84th percentile.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside pressures on the rating are currently balanced. The main risk factors that could, individually or collectively, trigger negative rating action are:
-A severe negative growth shock that damages the country's economic and fiscal stability.
-A material increase in the public debt ratio, for instance, brought about by substantial fiscal loosening.

The main factors that could, individually or collectively, lead to positive rating action are:
-Higher growth rates that would drive income convergence towards the EU average over the medium-term, without a build-up of imbalances.
-An improvement in structural indicators including governance and business environment.
-Sustained reduction in general government debt and narrowing of deficit

KEY ASSUMPTIONS
Fitch assumes growth in the eurozone to recover gradually and its baseline forecast is for GDP growth of 1.6% in 2015-17.