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Fitch affirms Slovenia at 'A-', outlook stable

Author Maja Garaca
Fitch affirms Slovenia at 'A-', outlook stable Fitch (Author: fitchratings.com) License: all rights reserved.

LJUBLJANA (Slovenia), February 26 (SeeNews) - Fitch Ratings said it has affirmed Slovenia's long-term foreign- and local-currency issuer default ratings (IDRs) at 'A-', with a stable outlook. 

Slovenia's ratings reflect a high valued-added economy with GDP per capita levels above the median of 'A' category peers, Fitch said in a statement issued late on Friday.

"The ratings are further supported by institutional strengths and a credible policy framework that come with EU and eurozone membership. However, the ratings are constrained by Slovenia's high government debt", the ratings agency explained.

Fitch also said:

"The Slovenian economy is benefiting from a strong cyclical upswing. Economic growth in 2017 reached 5.0%, well above five-year average real GDP growth of 2.5%, and outperforming Fitch's initial forecast of 3.4%. Economic activity was broad-based, supported by favourable labour market developments, rising consumer and business sentiment, as well as positive external demand. We forecast GDP growth of 4.0% in 2018 declining to 2.8% in 2019, in line with estimates of Slovenia's potential growth. Higher than expected absorption of EU structural funds, as well as stronger growth from key external trade partners, are upside risks to Fitch's GDP forecasts in the near term. 

A strong economic backdrop has helped improve Slovenia's fiscal finances. Higher than expected tax receipts have offset higher government spending on salaries, social transfers and investment. As a result, Slovenia's headline fiscal deficit (ESA 2010) at end-2017 is estimated to have fallen to 0.8% of GDP, from 1.9% in 2016, below the median (1.1%) fiscal deficit of its 'A' peers. For 2018, Fitch forecasts Slovenia to attain a modest fiscal surplus 0.1% of GDP. This compares with the government's target for a surplus 0.4% of GDP, and reflects our more conservative estimates of gains to tax receipts from administrative changes. Revenue receipts will benefit from strong economic growth, but we foresee some offset from higher government expenditures in the run-up to parliamentary elections this year. 

General government debt-to-GDP, estimated by Fitch to have reached 75.3% in 2017, sits significantly above the 'A' category median of 46.9%, but will continue to gradually decline under the agency's forecasts, by at least 4pp in 2018-19. However, much of the forecast decline is based on government plans to run down its high level of deposits (11.4% of GDP, end 2017), rather than targeted efforts to curtail spending or raise revenues. Our projections of the decline in the debt ratio may be conservative, as they exclude potential proceeds from privatisation of state assets and/or revenues that may be forthcoming from sale of government-backed distressed assets by Bank Assets Management Company (BAMC). 

Banking sector performance remains stable. Against the positive cyclical upturn, credit growth has picked up significantly, while banking sector resilience continues to gradually improve in areas of funding and asset quality; with deposits by the non-banking sector now up to 73% of total bank liabilities (end-2017) compared with 67% at end-2015, and non-performing exposures (NPE, EBA definition) down to 6.0% from 11.4% in the same period. However, despite significant progress achieved in managing the stock of legacy problems, NPEs in the corporate loan book remain high at 19.9% as of end-2017 (2015: 34.0%).


As part of an agreement with the European Commission, following the approval of state aid into Slovenia's systemically important state-owned banks in 2013, the Slovenian government committed to the sale of 75% of Nova Ljubljanska Banka's (NLB; Slovenia's largest state bank) assets in 2017. This did not occur, and the government has since submitted a formal request to the commission to delay sale of NLB to 2019. 

A competitive export sector continues to support large current account surpluses, which Fitch estimates to have helped rapidly bring down Slovenia's net external debt to 22.7% of GDP by end-2017 from a peak of 46% of GDP in 2013. However, the ratio is still higher than the median net external debt ratio of its category 'A' rated peers of 11.0%. For 2018 and 2019, Fitch forecasts current account surpluses 5.2% of GDP and 4.6%, respectively, supporting a further decline in Slovenia's external liabilities, but at a more modest pace than previous years. 

Slovenian parliamentary elections are due to take place by July 2018. It is unlikely that any major structural reform will take place before the elections. World Bank governance indicators are in line with the 'A' peer median. 

SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Slovenia a score equivalent to a rating of 'A' on the Long-Term FC IDR scale. 

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows:

- External finances: -1 notch, although Slovenia benefits from euro's "reserve currency flexibility", Fitch believes that this status would likely offer Slovenia only limited protection in case of a global or domestic financial crisis. 

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are balanced. The main factors that could, individually or collectively, trigger positive rating action include:
- A further decline in government debt, sufficient to support the rebuilding of fiscal policy buffers.
- Stronger medium-term economic growth prospects, supported by structural reforms.

The main risk factors that could, individually or collectively, trigger negative rating action are:
- A reversal in fiscal consolidation path leading to higher government debt-to-GDP.
- A severe economic downturn that damages fiscal, financial or economic stability.

KEY ASSUMPTIONS
The global economy performs in line with Fitch's Global Economic Outlook.

The full list of rating actions is as follows:

Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'A-'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'F1'
Short-Term Local-Currency IDR affirmed at 'F1'
Country Ceiling affirmed at 'AAA'
Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'A-'
Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'A-'
Issue ratings on short-term debt affirmed at 'F1'"

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