July 22 (SeeNews) - Fitch Ratings said that it has upgraded Slovenia's long-term foreign-currency issuer default ratings (IDRs) to 'A' from 'A-', with a stable outlook.
The upgrade reflects improvement in Slovenia's public debt sustainability, robust, above-trend growth in economy, as well as improvement of external finances, Fitch said in a statement late on Friday.
Fitch also said in the statement:
"Public debt sustainability has improved, due to a combination of primary surpluses, strong growth dynamics and asset sales. The ratio of government debt to GDP has already fallen from its peak of 82.6% of GDP in 2015 to 70.1% at end-2018. We expect the ratio to fall further to 64.5% in 2019 and 57.8% in 2021, although this will still be well above the forecast 'A' category median of 46.5%. In June, the Slovenian state sold a further 10% of the shares of Nova Ljubljanska Banka d.d. (NLB; BB+/Stable), and agreed the sale of Abanka d.d. (BB+/Positive) to Nova Kreditna Banka Maribor (BB+/Positive). These sales yielded around EUR550 million (1.2% of GDP), and 90% of proceeds will be used to pay down government debt. The proceeds from last November's sale of 65% of NLB shares will also reduce debt this year.
Robust, above-trend growth in the Slovenian economy led to a substantial improvement in the general government balance in 2018, to a surplus of 0.7% of GDP, from zero in 2017. Despite the introduction of expenditure-raising measures at the end of last year, still strong revenue dynamics will leave the balance broadly unchanged for 2019, at 0.8% of GDP and we expect similar surpluses in 2020 and 2021. Interest payments have fallen from 3.0% of GDP in 2014 to 2% in 2018, and are expected to decline further. The combination of primary surpluses, lower interest payments and a lengthening of the duration of the debt stock (currently above nine years) has lowered borrowing requirements.
Slovenia's external finances have improved markedly. The current account surplus remained positive in 2018 for the eighth consecutive year, at 7.0% of GDP on the basis of IMF International Financial Statistics data, higher than the current 'A' median of 2.3% of GDP. We expect export growth to slow over the years ahead while solid domestic demand will keep import growth up, and this will lead to a narrowing of the current account surplus. Current account surpluses, which reflect private sector deleveraging, have brought about a substantial fall in external indebtedness, with net external debt as a share of GDP declining from 47.7% in 2012 to 13.7% in 2018, broadly in line with the current 'A' median of 12.8%. The net international investment position remains negative, at -25.9% of GDP in 2018.
Slovenia's IDRs also reflect the following key rating drivers:
The Slovenian economy expanded by 4.5% in real terms in 2018, with domestic demand the main driver of growth. However, we expect growth to normalise, partly because the slowdown in some of Slovenia's main trading partners will translate to lower export growth over the next three years, and partly due to above-trend growth reducing spare capacity in the economy. Investment will continue to grow but at a slower pace than in the past two years. Overall we forecast real GDP growth to be 3.1% this year, and growth to slow to 2.8% and 2.7% over 2020 and 2021, which would imply growth easing back towards trend.
Above-trend growth has brought about a substantial decline in unemployment, as employment growth has outstripped growth in the labour force despite a recent pick-up in immigration and the participation rate has increased. The unemployment rate fell from 5.8% at the end of 2017 to 4.8% by 1Q19. Falling unemployment and a rising number of vacancies are translating to upward pressure on wages. Growth in wages per employee picked up from 2.7% in 2017 to 3.4% in 2018. Further rises not matched by productivity growth would impact unit labour costs, potentially affecting external competitiveness. Despite upward pressure on wages, consumer price inflation has not accelerated substantially this year, with HICP inflation averaging 1.6% in January to June, compared with 1.9% over 2018. We expect inflation to average 1.8% this year, before edging up to 2.0% in 2020 and 2021.
The government has already introduced measures aimed at boosting labour supply and limiting the eligibility period of unemployment benefits from 2020. The government has identified broad areas of priority for policy intervention, including pension reform, improving labour market participation and healthcare provision. The degree of progress which the government - a five-party minority coalition - will achieve in these areas is uncertain.
Increasing house prices have led to an increase in household debt since 2016, but strong nominal growth in the economy means that the household debt to GDP ratio has remained low, averaging just over 30% in 2018. Non-financial corporations' debt has continued to edge down as a share of GDP, with the debt ratio averaging 88.4% in the four quarters to 1Q19, down from 91.4% in the four quarters to 1Q18.
Banks' asset quality continues to improve. However, Fitch's Banking System Indicator (the weighted Viability Rating of Fitch-rated banks) for Slovenia is weak compared with peers, at 'bb'. The ratio of non-performing loans (NPLs) declined to 6.0% at end-2018 from a high of 22.8% at end-2014. Bank of Slovenia data indicates that around two-thirds of banks' non-performing exposures are in the non-financial corporate sector. Banks' capitalisation ratios remain high with sector average Tier 1 ratio of 19.4% at end 2018.
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 adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:
- External finances: -1 notch, to reflect Slovenia's that commodity dependence and high current-account surpluses feeding into the SRM understate the economy's vulnerability to external shocks.
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 main factors that could, individually or collectively, lead to positive rating action include:
-Increased resilience to external shocks.
-Further reduction in the government debt/GDP ratio
-Strengthening of medium-term growth potential.
The main factors that could, individually or collectively, lead to negative rating action include:
-A failure to further reduce public sector indebtedness, for example, through fiscal policy loosening.
-A deterioration in medium-term growth prospects or the emergence of macroeconomic imbalances.
KEY ASSUMPTIONS
Fitch assumes that the global economy performs in line with the June Global Economic Outlook.
In Fitch's government debt sensitivity analysis, we assume over the next 10 years an average primary balance of 0.9%, with the primary balance falling to zero by the end of the horizon, average real GDP growth of 2.7%, an average effective interest rate of 2.3%, and whole-economy inflation of 2.2%. On the basis of these assumptions, the government debt-to-GDP ratio would decline to 46.7% by 2028."