(The following statement was released by the ratings agency)
Sept 21 - Fitch Ratings says in a special report issued
today that public finances in the Czech Republic, Hungary and
Poland (the CE3) will continue to worsen as a result of the
economic downturn, with average government debt set to rise by
10 percentage points (pp) of GDP by 2010 compared with their
end-2008 levels.
"The ongoing effects of the global economic and financial
downturn have contributed to a sharp deterioration in the
growth outlook for the Czech Republic, Hungary and Poland,
placing negative pressure on public finances," said David
Heslam, Director in Fitch's Sovereign team. "The marked
deterioration in public finances in these countries could lead
to negative rating actions if they fail to identify and
implement credible medium-term fiscal consolidation programmes.
In all three countries, politics and electoral cycles add to
the risk of fiscal slippage."
Fitch forecasts the Czech Republic's general government
deficit at 6% of GDP in 2009 and 2010, a sharp deterioration
compared with the 2008 deficit of 1.4%. Without amendments to
the draft 2010 budget, the deficit could widen beyond 7% next
year. The Czech Republic's government debt ratio is forecast to
increase by 10.9pp of GDP between end-2008 and 2010, with Fitch
forecasting debt at 40.8% of GDP next year. The government's
relatively low debt stock at the onset of the economic downturn
provides some tolerance to temporarily run higher budget
deficits than peers without considerably weakening its relative
debt position. However, the Czech Republic will not be able to
tolerate deficits considerably wider than peers over a
prolonged period before debt dynamics begin to look
inconsistent with its current Issuer Default Ratings (IDRs).
Uncertainties related to the timing of general elections, the
final size of the 2010 deficit target and ability of the next
government to tighten fiscal policy constitute risks to the
medium-term budget outlook.
Hungary's fiscal policy is already tight, with IMF
estimates pointing to a 3.8pp of GDP improvement in the
structural general government balance in 2009 relative to 2008.
Fiscal policy is likely to continue to be guided by IMF
commitments, with the government targeting a 0.1pp reduction in
the 2010 budget deficit to 3.8% of GDP, which Fitch considers
realistic. Hungary is grappling with the need to implement a
multi-year improvement in its public finances to correct past
fiscal excesses, restore market confidence and prevent a
sharper rise in its already relatively high government debt
burden against the outlook for a prolonged period of weak
economic growth. Hungary's government debt is forecast by Fitch
to rise by 10pp of GDP between end-2008 and end-2010, to 82.5%
of GDP. With its already elevated debt levels, the country has
little room for policy slippage or for absorbing further
negative shocks. Implementation risk is non-negligible as
scheduled general elections approach in April 2010.
Poland's government debt ratio is forecast at 56.3% of GDP
in 2010, a rise of 9.1pp compared with end-2008, which is
broadly in line with the average forecast rise for sovereign's
rated in the 'A' range. This assumes that the government will
largely succeed in realising its ambitious 2010 privatisation
programme, without which debt will rise further. In the absence
of positive shocks, Fitch's forecasts suggest that Poland could
breach the Public Finance Act's 55% of GDP government debt
limit that triggers automatic constraints on the 2012 budget.
However, a credible plan to reduce the deficit from 2011 is
needed to prevent Poland's deficit and debt trends becoming
inconsistent with rated peers and placing negative pressure on
its sovereign ratings. Poland's general government deficit is
forecast at 5.5% of GDP in 2009 and 6.3% in 2010, making a
delay to potential euro adoption beyond Fitch's previous
forecast of 2013 likely. A heavy election schedule, with
presidential elections due in 2010 and general elections in
2011, add to the risks for the medium-term budget outlook.
The full report, entitled "CE3: Deteriorating Public
Finances", is available on www.fitchratings.com
Sovereign Long-term Foreign Currency/Local Currency IDRs
and Outlooks for the CE3 are:
Czech Republic: 'A+' Stable/'AA-' Stable
Hungary: 'BBB' Negative/'BBB+' Negative
Poland: 'A-' Stable/'A' Stable
