UPDATE 1-S&P hikes Czech rating on public finance reforms

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By Jan Lopatka

Rating agency Standard and Poor's raised the Czech foreign currency rating by one notch to 'A' on Tuesday, saying the country's credit rose on the basis of fiscal reforms aimed to bring down the budget deficit.

The hike puts the Czech Republic on a par with neighbouring Slovakia and above Poland with 'A-' and Hungary with 'BBB+'.

"The upgrade reflects the implementation of public finance reform, which will help bring down the Czech Republic's comparatively high government deficits," said Standard & Poor's credit analyst Kai Stukenbrock.

"The ratings are furthermore supported by good economic growth prospects, a well diversified and wealthy economy, and an above-par external position."

The Czech economy grew by 6 percent in the second quarter and analysts expect the expansion to continue at an about 5 percent clip next year.

The crown currency inched up to 27.455 to the euro in an initial reaction to the rating hike from 27.495 earlier. By 1155 GMT, it was back at 27.480 to the euro, flat on the day.

The cabinet pushed through parliament a package of tax changes and spending cuts last month, aimed to cut the overall fiscal gap to 2.95 percent of gross domestic product next year, and to 2.3 percent in 2010.

This year, the government expects a deficit of 3.9 percent, far above the EU's 3 percent limit, due to a raft of spending hikes approved by parliament ahead of the 2006 election.

Budget deficits have forced the Czech to abandon their 2010 euro entry target and the centre-right government, more cautious than its Socialist predecessor, has declined to set a new one.

Prime Minister Mirek Topolanek has said 2012 was the earliest possible date, citing the need not only to meet the nominal criteria for membership but also to conduct wider reforms needed to make euro beneficial for the central European country.

Analysts have said that while those adjustments would reduce the budget gap next year, they would not help in the long-run in the absence of additional measures.

"This (upgrade) is rather an acknowledgement of the fact that something has finally started to be done," said David Marek, chief economist at Patria Finance.

"Also this is expression of optimism that reforms will continue, mainly in the area of bringing down budget the deficit."

The Czech government tapped international markets with two Eurobond issues in 2004 and 2005. It has not excluded an issue this year and 2008 budget documents showed the country was considering returning to the foreign markets next year again.

Marek said the upgrade may help shave a few basis points of the cost of Czech foreign debt.

One Prague trader said there was no immediate reaction in the local debt market. The outstanding Eurobonds also traded little changed, with yields hovering near two-week lows.

The Czech Republic has an 'A' rating from Fitch and 'A1' rating from Moody's. S&P said the outlook for the upgraded rating was stable.

(Additional reporting by Sujata Rao in London)

[PRAGUE/Reuters/Finance.cz]