"Slovenia's ratings are supported by high governance and human development indicators and a credible policy framework anchored by EU and eurozone membership," Fitch said in a statement on Friday.
The strengths are balanced against high, albeit declining, 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 macroeconomic challenges associated with an aging population, Fitch noted.
Here is what else Fitch said in the statement:
"Stable Deficits Despite Flood Costs: The general government deficit was 2.5% of GDP in 2023, much lower than planned due to under-execution of flood-related capex and better revenue performance in 4Q23. We expect the deficit to widen to 2.8% in 2024, as flood reconstruction picks-up, but it should return to 2.5% of GDP in 2025. About 1.7% of GDP is allocated for flood-related expenditures in 2024, partially financed through temporary solidarity contribution (temporary adjustment to personal income tax and corporate income tax formula) and the banking tax. Slovenia has also access to EUR400 million from the EU Solidarity Fund for flood-reconstruction.
If the deficit exceeds 3% of GDP due to flood-related spending, we would not expect Slovenia to face a deficit-driven Excessive Deficit Procedure, as this spending will likely be classified as a one-off. In 2024 and 2025, we expect some underlying consolidation with the phasing out of energy-related support and control of other current spending.
Gradual Public Debt Decline: Slovenia's public debt/GDP ratio is high relative to the 'A' median (51.0% for 2023), but it is declining. It stood at 69.2% of GDP in 2023 and Fitch expects a fall to 67.6% of GDP in 2024 and 66.4% in 2025. Debt reduction will be supported by a modest drawdown of general government deposits, which at 16.8% of GDP in 2023 are large relative to peers. Government interest/revenue at 2.9% in 2023 was close to the 'A' median of 3.1%, but a long average debt maturity of around 10 years will slow the pass-through of higher refinancing costs, with interest/revenues projected at 3.2% in 2025 ('A' median of 4.2%).
Some Progress on Key Reforms: A number of structural reforms to address the medium- and long-term impact of an aging population on public expenditure are planned. Long-term care reform was enacted in 2023 and pension and health care reforms are being prepared. These reforms are important since under current policies Slovenia would have one of the highest long-term fiscal cost increases stemming from population aging in the EU, as estimated by the European Commission. The reforms are tied to milestones under the National Recovery Plan, but they may prove politically contentious so that their timing and implementation is uncertain.
Gradual Growth Recovery: GDP growth is forecast at 2.4% in 2024 and 2.5% in 2025, supported by the recovery of consumption and solid investment, as inflation declines and real disposable incomes of households and corporates rise. Risks to our forecast are to the downside and stem from weaker-than-expected external demand, and persistent labour shortages. Annual GDP growth stood at 1.6% in 2023, reflecting weak private consumption. The negative impact of the floods was small, and reconstruction efforts had a positive effect on investment.
Inflation Declining; Pressures Remain: Headline HICP inflation fell rapidly from 7.1% yoy in September to 3.4% in March due to base effects on energy and most food prices. Core inflation has also declined, but remains elevated (4.2% in February), due to a tight labour market and strong demand for services. We expect inflation to moderate further in the coming months but then pick up again later this year due to base effects and the phasing out of some energy measures. On average, we expect inflation of 2.8% in 2024 and 3.2% in 2025.
Current Account to Remain in Surplus: Fitch expects the current account surplus (CAS) to narrow to around 2% of GDP in 2024 and 2025 after a 4.4% surplus in 2023, which reflected a decline in energy imports and improved terms of trade. The narrowing of the CAS in 2024 and 2025 reflects weak external demand, deterioration in price and cost competitiveness, and the recovery of domestic consumption. Slovenia's net external debt stood at -6.8% of GDP in 2023 (using IMF IIP data, higher than the 'A' median of -2.7%).
Stable Banking Sector: The Slovenian banking sector remains stable with a capitalisation of 20.3% (end-2023) and improving profitability (return on equity of 20.6% in 2023). The ratio of non-performing exposures (NPE) to total loans to non-financial corporates stood at 1.8% at end-2023, while the household NPE ratio was 1.7%. New lending was restrained by relatively weak economic growth and high inflation and interest rates. Private sector credit/GDP ratio fell from 41.1% in 2022 to 36.9% in 2023.
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. 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 at 77th percentile, reflecting its track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Public Finances: A sustained increase in general government debt/GDP ratio, for example, due to a looser fiscal policy and/or failure to implement structural reforms to address fiscal challenges related to aging population
-Macro/Structural: A deterioration in medium-term growth potential, for example, due to persistent labour shortages and/or decline in labour productivity
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-Public Finances: Substantial reduction in general government debt/GDP, for example, through faster fiscal consolidation, and implementation of structural reforms that reduce fiscal pressures related to aging population
-Macro/Structural: Improvement in medium-term growth potential, for example, through the implementation of structural reforms that would reduce labour shortages and boost labour productivity
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.
The Country Ceiling for Slovenia is 'AAA', 5 notches above the LT FC IDR. This reflects very strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.
Fitch's Country Ceiling Model produced a starting point uplift of +3 notches above the IDR. Fitch's rating committee applied a further +2 notches qualitative adjustment to this, under the Long-Term Institutional Characteristics pillar reflecting the sovereign's membership of the eurozone currency union and the associated reserve currency status. The agency views the risk of the imposition of capital or exchange controls within the eurozone as exceptionally low but not negligible."
