The Czech Republic's credit rating is in danger of dropping

For the first time since 1998, the Czech Republic's credit rating is in danger of falling. Fitch Ratings, one of the Big Three credit rating agencies along with Moody's and Standard & Poor's, affirmed the country's current AA- rating but revised its long-term outlook from stable to negative in a report released this weekend.

The country has maintained or improved its credit rating from each of the Big Three agencies for the past 25 years, but ongoing economic threats could change that going forward. A drop in the Czech Republic's credit rating could have severe impacts on an already-suffering economy.

An important guide for investors, credit ratings assigned by the Big Three agencies 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, as well as the terms of those loans, such as interest rates.

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

Ironically, soaring inflation is one of the key factors in Fitch Ratings' negative outlook, according to the new report. Inflation in the Czech Republic's surged to a 24-year-high of 12.7 percent year-on-year in the first quarter of 2022, while the Czech National Bank's tolerance band for inflation is two percent (plus or minus an additional one percent).

Fitch Ratings projects inflation in the Czech Republic to continue to average 11.5 percent throughout 2022 before declining to 5 percent by the end of the year.

An additional factor in Fitch Ratings' revised outlook for the Czech Republic is the country's reliance on Russian energy. Being cut off from Russian gas due to the war in Ukraine could greatly affect inflation rates and trigger a recession.

A reduction in the Czech Republic's economic growth is another key factor in Fitch Ratings' negative outlook.

Last week, Standard & Poor's affirmed the Czech Republic's AA rating for debt in Czech crowns and AA- rating for foreign currencies, without the negative outlook expressed by Fitch. But the latter has been ahead of the curve in previous years.

According to economist Lukáš Kovanda, the last time the Czech Republic's credit rating dropped was in 1998, when it was downgraded by Standard & Poor's. Fitch Ratings had previously downgraded it in 1997.