Investing.com -- Fitch Ratings has confirmed the Czech Republic's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'AA-' with a Stable Outlook on February 14, 2025. The rating is backed by the country's consistent and credible macroeconomic and monetary policies, a robust institutional framework supported by EU membership, and a strengthening external balance sheet.

The Czech economy saw a growth of 1% in 2024, despite the negative impact of a fiscal consolidation package. Private consumption started to recover due to real wage growth and the relaxing of inflation and monetary policy. However, investment slightly declined in 2024 due to poor performance in manufacturing and construction sectors, as well as weak business confidence.

Fitch predicts that the real GDP growth will increase to 1.9% in 2025, a decrease from the 2.3% projected in August. This revision reflects the expectation of a slower recovery of the Czech Republic's key EU trade partners. Economic activity is expected to pick up as private consumption accelerates and investment growth returns. Fitch anticipates growth to accelerate to its potential of 2.2% in 2026.

Inflation averaged 2.7% in 2024, with services inflation remaining higher due to strong demand and wage growth in the sector. Fitch expects the inflation rate to average 2.5% in 2025 and 2.4% in 2026, slightly above the peer median. The Czech National Bank has resumed the easing cycle and cut the key rate by 25bp to 3.75% in February 2025. Fitch expects the cautious easing to continue and predicts the key rate at 3.25% by the end of 2025.

The general government deficit was reduced to 2.7% of GDP in 2024, from 3.8% in 2023. This was achieved by implementing a fiscal consolidation package, withdrawing energy support measures, and a gradual economic recovery. Fitch projects the budget deficit to narrow further to 2.3% in 2025 due to additional consolidation measures effective from January 2025 and improving growth.

The Czech Republic's public debt to GDP ratio is expected to increase to 44.3% in 2026, from 42.4% in 2023, and then gradually decline to 43.5% in 2029. This is slightly higher than forecasted in August due to a slightly weaker growth outlook. However, the public debt will remain below the projected 'AA' median of 50.7% in 2026.

Fitch anticipates the current account's return to pre-pandemic surpluses to persist in 2025-2026. The net external creditor position is expected to gradually improve to 23% of GDP by the end of 2026, slightly above the 'AA' median of 21.2% of GDP. The net international investment position should improve to -4.3% of GDP by 2026, reflecting an increase in outward investments.

The performance of the Czech banking sector is expected to remain stable in 2025. Despite an increased mandatory reserve requirement, revenue will be supported by loan growth, reduction in funding costs, and rise in fee income. The total non-performing loan ratio stood at 1.7% at the end of 2024, and loan quality is expected to remain largely resilient.

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