June 21 (SeeNews) - Fitch Ratings said it affirmed Slovenia's long-term foreign-currency Issuer Default Rating (IDR) at 'A' with a stable outlook.
"Slovenia´s ratings are supported by high governance and human development indicators and a credible policy framework supported by EU and eurozone membership. These are balanced against high public debt relative to 'A' rated peers', the economy's small size, and slow progress in implementing structural reforms to address medium-term fiscal and growth challenges associated with an ageing population," Fitch said in a statement on Friday.
The stable outlook reflects the agency's expectations of the economy's resilience to ongoing coronavirus pandemic risks, and the authorities' implementation of policies that are consistent with the medium-term sustainability of the public finances, deriving from a pre-pandemic track record of fiscal prudence and solid institutional credibility, Fitch said.
Here is what else Fitch said in the statement:
"Fitch projects the economy to expand 5.6% in 2021 (versus A peer median of 4.1%), following a milder-than-expected contraction of 5.5% in 2020. Data for 1Q21 (GDP up 2.3% yoy) point to a growing investment and export momentum, underpinned by the resilience of key manufacturing sectors and construction. Household consumption started to grow again in 1Q21 despite ongoing pandemic-related restrictions, due in part to labour-support measures. Domestic demand is expected to gain momentum in 2H21, although we see some risks tied to adverse pandemic developments, including the spread of new variants. A faster release of pent-up demand, reflected in a sharp increase in savings in 2020, is an upside risk.
Investment will remain a key driver of growth over the medium term, supported by various EU programmes. Slovenia is entitled to receive EUR2.4 billion (5.1% of 2020 GDP) in grants from Next Generation EU (NGEU) and has requested EUR700 million in loans from the Recovery and Resilience Facility (RRF). Fitch estimates that the grant component could add up to 0.5pp per year to headline growth in 2022-2025 (assuming a multiplier close to one), with GDP growth averaging 4% in the period. Favourable macroeconomic conditions will limit pandemic-related long-term scarring effects on the labour market, with Fitch expecting unemployment to start falling from 2022, from a modest 5% in 2020-2021.
The authorities plan to implement a series of reforms tied to NGEU on long-standing constraints in the healthcare, pensions, labour and administrative sectors. A reform on long-term care is likely to be approved in 2021 but the rest will take longer as political considerations turn to elections scheduled for 1H22. Reaching agreement on the detail of the reforms could prove challenging given a fragmented political system, and major delays could risk disbursement of EU funds.
Effective implementation of reforms could lead to improvements in productivity and also reduce long-term fiscal costs associated with ageing cost pressures, which are among the most severe in the EU. According to the European Commission's latest ageing report, Slovenia will face an increase in age-related public spending of 6.8pp of GDP by 2045, driven mostly by pensions. This compares with an EU average increase of 2.4pp in the same period.
Fitch projects a budget deficit of 8.2% GDP in 2021, slightly below the 8.6% deficit target and compared with an outturn of 8.4% in 2020, as automatic stabilisers and Covid-19 related support measures (totalling over 2.5% of GDP) are partly offset by improving revenue trends. Most support measures are scheduled to be unwound by 2H21, but we believe the authorities will extend certain elements to the most affected sectors if needed. We expect the budget deficit to narrow more rapidly from 2022 as expenditure is reined in, but in the absence of expenditure or revenue measures it will only shrink below 3% of GDP by 2024. Failure to control expenditure constitutes an important downside risk.
Our baseline projection is for public debt/GDP to fall to 79.9% in 2021 and 78.6% in 2022, still well above the current 'A' peer median of 62.3% for 2021-2022. The reduction will be driven by stronger nominal growth, falling interest costs and the use of cash buffers. Fitch estimates general government deposits totalled close to 23% of GDP at end-2020, which combined with favourable financing conditions (underpinned by the ECB´s large quantitative easing), provide significant liquidity and financing flexibility. The stock of contingent liabilities has remained broadly unchanged (10.7% of GDP in 1Q21) given a low take up of pandemic-related guarantee schemes, and is tied to a diversified portfolio of state-owned companies.
Fitch expects consumer-price inflation to accelerate gradually to an average of 2% in 2021-2022, due to a combination of temporary factors and prospects of higher wages. Faster-than-expected labour market tightness and associated wage pressures, particularly in booming sectors such as manufacturing and construction, constitute an upside risk.
Higher labour costs in recent years have not translated into a loss of external competitiveness. Slovenia posted a record current account surplus of 7.1% of GDP in 2020 and Fitch expects it to moderate only gradually as import demand picks up in 2021-2023. Moreover, ongoing private-sector deleveraging means that the country´s net external debt position should continue to improve over the next two years to an almost balanced position by 2022, compared with the current 'A' median of 4.2%. This should further limit its vulnerability to external shocks.
Banks have maintained high liquidity and sound capital ratios during the crisis, while asset-quality metrics remained largely unchanged in 2020 due to forbearance measures. We expect a modest increase in the ratio of non-performing exposures/gross exposures (from 1.8% in March 2021) as moratoria schemes expire. Combined with a projected slowdown in credit growth, this will put pressure on bank profitability, which remains a structural challenge for Slovenian banks.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Public Finances: Failure to reduce general government debt/GDP as the pandemic recedes, for example, due to a more pronounced and longer period of fiscal loosening, and/or a materialisation of contingent liabilities.
-Macro: Significant deterioration in medium-term growth prospects compared with Fitch's current expectations, for example, due to a failure to implement structural reforms or prolonged and persistent damage to key economic sectors from the pandemic.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
-Public Finances: Downward trend in government debt/GDP over the medium term, sufficient to bring the ratio closer to the peer median, for example, through a post-coronavirus-shock fiscal consolidation.
-Macro/Structural: Implementation of structural reforms to improve the business environment and lift medium-term growth potential above Fitch's current expectations, and to reduce longer-term public debt sustainability pressures associated with an ageing population.
Sovereign Rating Model (SRM) and Qualitative Overlay (QO)
Fitch's proprietary SRM assigns Slovenia a score equivalent to a rating of 'A' on the LTFC IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LTFC IDR.
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 LTFC 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.
Best/Worst Case Rating Scenario
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Key Assumptions
The global economy performs broadly in line with Fitch's latest Global Economic Outlook published in June 2021. Eurozone real GDP is forecast to recover 5% in 2021 and 4.5% in 2022.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Slovenia has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators (WBGI) have the highest weight in Fitch's SRM and are highly relevant to the rating and a key rating driver with a high weight.
Slovenia has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGI have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Slovenia has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as strong social stability and voice and accountability are reflected in the WBGI that have the highest weight in the SRM. They are relevant to the rating and a rating driver.
Slovenia has an ESG Relevance Score of 4 for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Slovenia, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity."