Rating action

Scope Ratings GmbH (Scope) has today affirmed the Czech Republic’s long-term local- and foreign currency issuer and senior unsecured debt ratings at AA-, with Stable Outlooks. The short-term issuer ratings for the Czech Republic have been affirmed at S-1+ in local- and foreign currency, with Stable Outlooks.

The affirmation of the Czech Republic’s ratings reflects its favourable track record of sound macro-economic policies, highlighted by the current gradual economic recovery and expectations of robust annual GDP growth of around 2.3% over 2025-30. The sovereign's comparatively stable fiscal position, characterised by moderate budget deficits and debt levels, contributes to its overall resilience. Challenges include the country's export concentration and reliance on global supply chains and external demand, which expose it to external shocks, alongside the risk of exchange-rate volatility and moderate levels of reserves. Additionally, adverse demographics, elevated military spending, and rising interest costs increase the pressure on public finances over the medium-term.

Key rating drivers

Gradual economic recovery and favourable track record of sound macro-economic policy making. The Czech economy has shown resilience to the global macro-economic developments, including continued subdued economic growth in Germany and US tariffs. After moderate growth of 1.2% in 2024 driven by soft external demand and cutbacks from budgetary consolidation, growth surprised on the upside in the beginning of 2025 with 0.7% QoQ growth in Q1 and 0.5% in Q2. The main impulse stemmed from household consumption, in addition to some front-loading given stockpiling of US importers early in the year in anticipation of higher tariffs.

Scope expects robust growth of 2.3% in 2025 followed by 2.2% in 2026. While risks remain elevated and uncertainties relate especially to the German economy and global economic developments, household consumption is expected to continue to support the recovery. Additionally, strong use of EU funds will contribute to growth in 2026. So far, around 50% of the total EUR 8.4bn in RRF grants allocated to Czechia have already been disbursed, with an additional payment request of EUR 1.83bn approved by the Commission at end-June¹. Headline inflation declined to 2.5% YoY in August, remaining above the 2% target but within the tolerance band. While inflation might trend further towards the target in 2026 as domestic inflation pressures ease and the koruna strengthens, the start of the EU Emissions Trading System 2 (ETS2) in 2027² and possible fiscal loosening following October 2025 parliamentary elections might contribute to an uptick in inflation again.

The Czech Republic's economic resilience is further underscored by its robust external balance sheet. The country maintained a consistent current account surplus before the successive crises of recent years averaging 0.9% of GDP from 2014 to 2020. The current account returned to a surplus reaching 1.7% of GDP in 2024, mostly driven by a surplus in the balance of trade in goods, especially strong growth in exports in the automotive sector. In 2025, the goods balance saw frontloading in Q1, with the expected countermovement in Q2. Key risks continue to stem from the global economic uncertainty hampering investments and exports. However, the country's external liabilities primarily consist of foreign direct investment and equity rather than debt, which enhances its resilience to sudden shifts in investor sentiment.

Additionally, sustainable growth is further supported by the Czech Republic’s diversification of its energy base which helps to secure long-term stable energy supply, also for its key energy-intensive industries. The country has fully eliminated its dependence on Russian oil in the first half of the year and continues diversification efforts, including via nuclear energy as demonstrated by the recently signed contract for the nuclear unit in Dukovany and the agreement with the UK to strengthen the countries’ cooperation on advanced nuclear technologies.

Comparatively stable fiscal position characterised by moderate deficits and debt levels. The Czech Republic’s AA- rating is supported by a strong fiscal policy framework, moderate budget deficits and stable debt levels. Despite the marked rise in public debt following the Covid pandemic, the debt-to-GDP ratio only increased marginally between 2022-2024 and remains favourable compared to peers at 43.6% in 2024. Scope projects general government debt-to-GDP to moderately rise to 44.6% in 2025 and 47.1% by 2030.

Budget deficits moderated last year to 2.2% of GDP, down from 3.8% in 2023, aided by the January-2024 consolidation package and the end of temporary energy price support measures. In addition, the general government balance was supported by the surplus of local governments. Scope expects the general government deficit to reach around 2.3% of GDP this year, supported by the economic recovery and to remain below 3% with an average of 2.2% over 2026-2030. While the consolidation package supports the fiscal trajectory, higher defense spending and the investments in the Dukovany nuclear plant in 2026 weigh on the deficit. To aid financing for defence procurement, Czechia was allocated EUR 2.06bn under the EU’s Security Action for Europe (SAFE) programme. EU and NATO membership anchor the Czech Republic in stable institutional frameworks.

However, potential fiscal loosening after the October parliamentary elections presents a key risk for the forecast. While the government has recently presented a draft budget for 2026, the new parliament will be responsible for debating and approving the 2026 budget following October elections. Consequently, the current draft budget could be amended before approval. Former prime minister and leader of the main opposition party ANO Andrej Babiš has pledged to cap energy prices, lower the pension age again, and reduce taxes for individuals and companies, measures that would significantly increase the government deficit in the absence of counterbalancing measures.

Rating challenges relate to vulnerability to external shocks due to export concentration and reliance on external demand and rising budget pressures resulting from an ageing population.

The Czech Republic’s AA- ratings remain constrained by the country’s reliance on external demand coupled with high product and geographical concentration. This exposes the country to external shocks as shifts in external markets could impact its economic stability. While a gradual diversification of export destinations is ongoing, in 2024, more than half of exports were made to four countries only (Germany, Slovakia, Poland, and France). In terms of products, electrical equipment and machinery accounted for around one third of exports, while the automotive sector contributed more than one quarter³. While the electric transformation of the automotive sector is underway, it remains a key challenge, also with regards to the upcoming implementation of the ETS2. Moreover, the country's vulnerability to international supply chain disruptions, particularly in its energy-intensive automotive sector, which is a key employment and growth driver, poses risks to its growth as demonstrated in recent crises.

Rising military spending, adverse demographics and higher interest costs increase the pressure on public finances. Compared to the pre-pandemic period of 2015-19 when the Czech Republic maintained a primary surplus of about 1.2% of GDP, primary deficits persist and are estimated at around 0.9% of GDP over 2025-2030. Structural fiscal pressures are particularly related to the government’s commitment to increase military spending to 5% of GDP by 2035 in line with NATO targets. Structural labour shortages, especially of skilled workers, persist given an ageing population and weigh on productivity growth. Additionally, Scope expects net interest payments to average 1.3% of GDP, about twice as high compared to the 10-year average from 2014-2023, but still among the lowest levels compared to peers.

The approved pension reform in effect since early 2025 with changes gradually phased in until 2035/56 was a fundamental step in improving long-term budget sustainability. The government estimates the full effect in the long-term to lower the deficit by 1.5ppts of GDP per year. Nevertheless, the ageing population remains a key challenge. Following the pension reform, the pension system is roughly balanced and will remain so until the mid-2030s, however, this is forecast to turn to a deficit of around 1.2% of GDP by 2060⁴.

Rating-change drivers

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. The country’s resilience against external shocks strengthened materially, supporting macro-economic sustainability;
    
2. The economy continues its convergence on EU income averages; and/or
    
3. Fiscal performance were to improve materially, resulting in a material decline in government debt-to-GDP.

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. The fiscal and/or economic outlook weakens materially resulting in elevated budget deficits and increasing government debt;
    
2. Institutional and geopolitical risks increase; and/or
    
3. The economy’s resilience against external shocks were weakened.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘aa-’ for the Czech Republic, which was approved by the rating committee. Under Scope’s methodology, the indicative rating receives no positive adjustment from the methodological reserve-currency adjustment and no negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘aa-’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of the Czech Republic’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified no relative credit strengths for the Czech Republic. Conversely, Scope identified the following QS relative credit weakness for the Czech Republic: environmental factors. On aggregate, the QS generates no adjustment for the Czech Republic’s credit ratings, resulting in final AA- long-term ratings.

A rating committee has discussed and confirmed these results.

Environmental, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

The Czech Republic faces significant environmental challenges, with very high GHG emissions per capita and elevated CO2 emissions per GDP, though it has low natural disaster risk compared to other CEE countries and a moderate ecological footprint of consumption relative to available biocapacity. Scope rates its qualitative adjustment for environmental factors as ‘weak’ due to transition risks associated with its carbon-intensive economy and energy sector. The Czech Republic continues to rely on coal for its energy, with notably high greenhouse gas emissions and relatively slow progress in transitioning to renewables. However, the dependence is on a declining trend and government aims to phase out coal by 2033, earlier than initially planned.

The Czech Republic has favourable scores in the SQM for income inequality and labour force participation but faces challenges with a high old-age dependency ratio. Scope assigns a ‘neutral’ qualitative adjustment for social factors. While a robust labour market contributes to its social-related strengths, challenges from demographic trends persist, with an ageing population expected to strain public finances due to rising pension and healthcare costs.

Finally, the Czech Republic performs strongly under governance factors assessed through the SQM as measured by the World Bank's Worldwide Governance Indicators and furthermore receives no negative indicative-rating adjustment from the model’s separate stand-alone political-risk adjustment. Scope assesses its qualitative adjustment for governance factors as ‘neutral’. Future macro-economic policy making will depend on the outcome of parliamentary elections scheduled for early October. Finally, euro adoption remains highly debated ahead of the elections. Earlier in the year, the government had refrained from setting a date for the adoption acknowledging the joint recommendation by the Ministry of Finance and the Czech National Bank.

Rating driver references
1. European Commission - Press release, 30 July 2025
2. CNB Monetary Policy Report, Summer 2025
3. CNB Monetary Policy Report, Spring 2025
4. Ministry of Finance, Fiscal Forecast of the Czech Republic, May 2025

Rating committee
The main points discussed by the rating committee were: i) budgetary and public-debt outlook; ii) economic outlook and medium-term growth potential; iii) external sector; iv) 2025 parliamentary elections and institutional outlook; and v) peer comparison.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 January 2025), is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign Quantitative Model Version 4.1), available in Scope Ratings’ list of models, published under scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication/. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation    NO
With access to internal documents                                 NO
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Elena Klare, Analyst
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 26 April 2024.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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