November 14 (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, improving external finances, and a credible policy framework anchored by EU and eurozone membership. These strengths 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.
Here is what else Fitch said in the statement:
"Solid Macro Performance: Fitch now expects GDP growth to reach 5.5% in 2022, from 8.2% in 2021. The economy has continued to perform better than we expected in 1H22, driven by solid momentum in private consumption in line with strong labour market dynamics, fiscal support and release of pent-up demand. Consumer confidence has weakened substantially in recent months and external demand is weakening, but manufacturing output and spending have proven more resilient, meaning that a sharp slowdown this year remains unlikely.
Weaker Growth Outlook: High inflation and weak eurozone prospects will act as major headwinds to growth next year, with GDP growth slowing to only 1.3%. Our forecast is subject to significant downside risks, in particular tied to European energy developments and its spill-over effects on Slovenia. The authorities have put in place efforts to shield households and firms from recent increase in prices, but gas supply concerns will persist, given challenges in diversifying supplies (Russian gas still accounted for over 50% of total in the first eight months of 2022) and lack of domestic storage capacity. Energy bottlenecks can be particularly problematic for energy-intensive industries, with potential spill-over effects to wider manufacturing and investment dynamics. However, Slovenia's energy mix is fairly diversified with gas accounting for only 14% of total energy consumption
Investment and Reform Focus: Absorption of EU funds will remain an important growth driver over the medium term, and could accelerate reform implementation. So far Slovenia has been slow to meet Recovery and Resilience Facility (RRF) milestones, in part due to a change in government in 2Q22, with the first payment request submitted only in October. The authorities plan to focus the policy agenda around RRF requirements to speed absorption and investment starting next year. The stable majority of PM Golob reduces risks around policy instability, although some of the reforms, including the critical pension reform which is due by 2024, will still prove politically difficult.
Fiscal Support to Increase in 2023: We forecast a modest narrowing of the fiscal deficit to 3.6% of GDP in 2022, broadly in line with the government's revised targets and compared with the 'A' median of 4.1%. This reflects strong revenue performance and some under-execution in spending, including in capital expenditure. The authorities approved a series of support measures earlier this year with modest fiscal impact (0.5%) and have pledged much higher support for the coming quarters in terms of energy caps, increases in public wages and transfers. Around 2pp of GDP has been budgeted in emergency measures for 2023, but we believe total expenditure will be lower, in line with recent performance. Consequently, we expect a more modest widening of the deficit next year (4.1% of GDP versus 5% budget), although weaker growth could put more pressure on revenue.
Lower Debt: Under our baseline scenario, the government will pursue fiscal consolidation from 2024, which combined with a recovery in GDP growth will help support debt dynamics and reduce risks around higher financing costs. We forecast the ratio of public debt/GDP to fall from 74.5% in 2021 to 68.6% in 2024, still above the 'A' median of 58.1%. Faster debt reduction could be possible if there is a wider use of vast cash deposits (estimated at 16% of GDP) but the authorities have been conservative in the use of deposits in the past, so we expect only a very modest fall in GDP terms in 2022-2024.
Sound debt management and long average maturities (10 years) significantly reduce financing risks. We believe the main fiscal risk is around streamlining support measures in the event that inflation pressures are more persistent or energy challenges worsen, increasing policy-trade-off challenges.
Inflation Dynamics: Fitch projects that harmonised inflation (HIPC) will average 8.7% in 2022, the highest rate in two decades, before moderating to 5.1% in 2023. Annual inflation rose steadily in 1H22 but started to moderate over the summer as government extended support measures, including reducing the rate of VAT on energy items from September (until end-May 2023).
The additional energy caps, plus base effects, mean that inflation should start to come down more rapidly by end-2022, but significant risks remain. Food inflation is of particular concern, given the risks of persistent higher global prices, as well as accelerating core inflation. Nevertheless, at present wage increases remains very modest (wages are forecast to go up by up to 6% this year) and there are no signs of wage-price spirals.
External Sector: We forecast a deterioration of Slovenia's current account position in 2022 due to the terms of trade shock, weakening of the euro (which accentuates costs of higher commodity prices) and strong import demand. The moderation in external energy prices, plus weaker domestic demand, should contribute to weaker import growth and a gradual stabilisation of the trade and current account positions from 2023, even as external demand weaknesses persists. An area of concern is the potential implications for external competitiveness in Slovenia and in key eurozone partners if energy prices remain high, which might affect industrial export sectors.
Overall, we expect Slovenia's external balance sheet position to continue to improve, given stable non-debt creating inflows, with the country set to become a net external creditor over the next years (according to our forecasts) from a debt position of 43.9% of GDP in 2012.
ESG - Governance Slovenia has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Slovenia has a high WBGI ranking in the 78th percentile, reflecting its track record of stable and peaceful political transitions, well established rights for participation in the political process, high institutional capacity, effective rule of law and a moderate level of corruption
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
-Macro: A large adverse macroeconomic shock, for example due to energy rationing, which would materially lower medium-term growth prospects compared with Fitch's current expectation
-Public Finances: Persistent upward trend in general government debt/GDP, for example due to a prolonged period of fiscal deterioration in response to the energy crisis, and/or a materialisation of contingent liabilities.
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 fiscal consolidation
-Macro/Structural: Implementation of structural reforms to improve the business environment and lift medium-term growth potential, 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 Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC 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 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.
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.
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 have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Slovenia has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
Slovenia has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators 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. As Slovenia has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.
Slovenia has an ESG Relevance Score of '4[+]' for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Slovenia has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.
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. As Slovenia has a track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.
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. For more information on Fitch's ESG Relevance Scores,visitwww.fitchratings.com/esg."