The credit rating of the Czech Republic
The sovereign credit rating evaluates a country’s creditworthiness and its future ability to pay its obligations. Such ratings are produced by independent credit rating agencies, the best known being Standard and Poor’s, Moody’s and Fitch. The rating uses a scale ranging from the lowest speculative grade up to the highest investment grade (see Table 1). In addition to the rating, rating agencies typically release an outlook (positive, neutral or negative) that indicates future changes in the rating, along with a report giving the reasons. The sovereign credit rating serves as a basis for rating other issuers in the given country. Private issuers generally have lower ratings than the country.
Table 1 (Box) Rating scale
The rating scale is divided into grades ranging from the lowest speculative grade up to the highest investment grade
(source: Fitch, Standard and Poor's, Moody's)
The sovereign rating is based upon numerous quantitative and qualitative indicators, such as government debt and its evolution over time, the condition of, and outlook for, the economy, institutional development and political risks. The rating is a relative risk indicator and thus is not an exact measure of the likelihood of future default. However, rating agencies assess their success, i.e. the frequency of sovereign credit default for various rating grades, on an ex post basis.
The sovereign rating is important for investors in the securities of a given country or the securities of organisations subordinate to it. The higher is the rating, the lower should be the risk of sovereign default, and so the lower, generally, is the yield demanded on government bonds. The rating also serves as a measure of the country’s economic development and its institutional and political stability. It is therefore also an important guide for investors wishing to invest in private businesses in the country.
The first-ever credit rating of the Czech Republic (or rather the former Czechoslovakia) was issued in January 1992 through the rating of the former State Bank of Czechoslovakia, and reached the best speculative grade of Ba1. In March 1993, Moody’s upgraded its rating to Baa3 and the Czech Republic thus became the first post-communist country to obtain an investment grade. Standard and Poor’s and Fitch issued their first ratings to the Czech Republic in July 1994 (BBB) and August 1995 (A-) respectively. Except for the period of monetary turbulence between 1997 and 1998, the Czech Republic’s rating has steadily improved throughout its history (see Chart 1). The latest upgrade occurred this August, when Standard and Poor’s increased the Czech Republic’s rating by two grades to AA-. Estonia, Japan and Saudi Arabia have the same rating.
Chart 1 (Box) The Czech Republic's rating
The Czech Republic's rating has been improving steadily over time with the exception of the monetary turbulence in 1997–1998
(foreign currency long-term sovereign debt ratings; source: Fitch, Standard and Poor's, Moody's)
The improving rating, coupled with inflation declining to low levels, has fostered a downward trend in yields on Czech government bonds. The yields have been falling steadily at all maturities over the past 15 years, except for the period of monetary turbulence and at the start of the financial crisis in 2007–2008 (see Chart 2), and are currently at historical lows.
Chart 2 (Box) The Czech Republic's bond yields
Government bond yields have been falling steadily at all maturities and are currently at historical lows
(yields in % p.a.; CNB calculations; data source: Prague Stock Exchange)