The Czech fiscal position remains broadly stable, although underlying imbalances persist. The general government deficit is expected to remain close to 2% of GDP in the near term, reflecting a structural gap in public finances despite solid economic growth. Public debt is projected to rise gradually but remain contained, staying below 47% of GDP over the next few years and well below European peers. While this provides some fiscal space, buffers would remain limited in the event of a major adverse shock.

Market perceptions of Czech sovereign risk remain favorable. Sovereign credit ratings have been maintained at high investment-grade levels with a stable outlook, and government bond markets continue to function smoothly. Financing conditions remain stable, supported by strong domestic demand for government securities and a well-developed local-currency bond market.

However, rising government borrowing has increased the exposure of the domestic banking sector to sovereign debt, strengthening the link between public finances and financial stability. While this does not pose an immediate risk, it could amplify the transmission of fiscal shocks to the financial system under adverse scenarios.

Corporate insolvencies picked up in 2025 (+12% y/y) but are expected to stabilise and edge lower in 2026 at -2% y/y. Overall, financing risks remain moderate but tilted to the downside amid elevated external uncertainty and a gradually rising debt trajectory.

The Czech business environment remains well above average by international standards. According to the 2025 Index of Economic Freedom, Czechia ranks 20th out of more than 180 economies, reflecting strong performance in property rights, judicial effectiveness, tax burden, trade freedom, investment freedom and financial freedom. International governance indicators suggest that the regulatory and legal frameworks are generally business-friendly, although perceived levels of corruption remain a relative weakness compared with some peers.

Over the medium term, structural risks stem mainly from labor market tightness, demographic pressures and relatively slow productivity growth in parts of the manufacturing sector. The gradual pace of technological adoption and limited efficiency gains in some industrial segments could weigh on competitiveness. In addition, the still insufficient diversification of the energy mix increases exposure to external energy shocks. These structural factors may persistently reduce potential growth and raise the vulnerability of the real economy if not addressed.

Political risks have increased moderately following the most recent election cycle, which resulted in a change in government. The new coalition led by ANO, together with SPD and the Motorists, marks a shift toward a more fragmented and pragmatic political configuration. While democratic institutions remain strong and political stability is not in question, the heterogeneity of the coalition could complicate policy coordination and slow decision-making, particularly on structurally sensitive reforms.

The return of Andrej Babiš as Prime Minister signals a change in policy tone compared with the previous government, with greater emphasis on social measures, targeted tax relief and support for households and specific voter groups. This raises uncertainty around reform continuity, notably in areas such as pensions, taxation and medium-term fiscal sustainability. At the same time, the government has reiterated its intention to preserve overall macroeconomic stability and avoid abrupt policy shifts, suggesting a preference for gradual adjustments rather than a sharp fiscal loosening.