TEXT-S&P release on Czech Republic

(The following statement was released by the rating agency)

Nov 20 - Standard & Poor's Ratings Services said today it affirmed its 'A-/A-2' foreign currency and 'A/A-1' local currency sovereign credit ratings on Czech Republic.

The outlook is positive.

"The ratings on the Czech Republic are supported by good prospects for economic growth, a well-diversified economy, and an above-par external position," said Standard & Poor's credit analyst Eileen Zhang.

"The challenge of implementing fiscal and social security system reforms, and the need to improve labor market flexibility and the business environment, are the main constraining factors on the ratings."

The Czech Republic has a GDP per capita estimated at $13,000 in 2006, which is high when compared with other 'A'-rated sovereigns.

Its small and increasingly open economy is fully integrated with the EU-25 countries, which are the destination of about 85% of Czech exports. Medium-term economic prospects remain good, with GDP growth projected at above 4% in 2007 and 2008, after reaching about 6% in 2005 and 2006.

Significant foreign direct investment has supported the development of a strong services sector and a well-diversified manufacturing and export base. Exports are expected to continue their robust expansion and to remain the principal contributor to economic growth.

Taking into account both the slowing progress with fiscal consolidation and the domestic political situation, however, Standard & Poor's expects the Czech Republic to join EMU no earlier than 2012.

The current account deficit is projected to remain at 3.0%-3.5% of GDP in the forecast period, given the strong export growth and rebounding domestic demand. FDI inflows, underpinned by reinvested profits and brighter EU-25 economic prospects, should continue to provide full coverage of the external gap. The Czech Republic is expected to remain in a net external creditor position in the foreseeable future.

Standard & Poor's expects that economic reform and fiscal consolidation will gain pace as a stable coalition government settles into power.

In addition, good economic prospects and low external risks will preserve the economy's solid external position.

"If the government progresses with economic and fiscal reforms, for example in the areas of pensions and health care, its creditworthiness would improve," said Ms. Zhang. "Conversely, if no substantial reforms, particularly in the social security system, are enacted in 2007, the outlook would revert to stable." ((New York Ratings Team, Reuters Messaging: caryn.trokie.reuters.com@reuters.net; email: caryn.trokie@reuters.com; Tel: 646-223-6330))