September 26 (SeeNews) - Fitch has upgraded Slovenia's long-term foreign and local currency issuer default ratings (IDR) to 'A-' from 'BBB+' with a stable outlook, the global ratings agency has said.
The issue ratings on Slovenia's senior unsecured foreign- and local-currency bonds have also been upgraded to 'A-' from 'BBB+', while the country's ceiling has been revised up to 'AAA' from 'AA+' and the short-term foreign currency and local currency IDRs have been upgraded to 'F1' from 'F2', Fitch Ratings said in a statement late on Friday.
The ratings on Slovenia's senior unsecured short-term foreign and local currency issues have also been upgraded to 'F1' from 'F2'.
Fitch also said in the statement:
"KEY RATING DRIVERS
The upgrade of Slovenia's IDRs reflects the following key rating drivers and their relative weights:
MEDIUM
The general government deficit declined to 2.9% of GDP in 2015 from 5.0% in 2014 and 15.0% in 2013, marking the country's exit from the European Union's (EU) Excessive Deficit Procedure. The strong fiscal consolidation has been supported by structural reforms and GDP growth recovery since 2014. It also reflects the completion of the state support package to the banking sector, which cost the budget 10.0% of GDP in 2013 and 0.9% in 2014. Fitch expects the government deficit will continue to decline, to 2.3% in 2016 and 1.6% by 2018, mainly as a result of stronger economic growth.
The agency believes the approval of expenditure ceilings and deficit targets by parliament for the next three years (the latter at 1.6% of GDP in 2017, 1.0% in 2018 and 0.4% in 2019), as part of the new fiscal rule, will support fiscal discipline. The rule also enshrines into law a reduction of the structural deficit by 0.6% of GDP in 2016 and 2017. However the efficiency of the new budgetary framework still needs to be tested. Its implementation could be affected by delays in setting up a fiscal council to monitor compliance with the rule.
Fitch expects that general government debt will start falling to 80.5% of GDP in 2016, from a peak of 83.1% at end-2015. Assuming gradual fiscal tightening, a recovery in nominal GDP to around 4% and continued low yields, we forecast that general government debt will be 72% by 2022. The debt dynamics will benefit from the proceeds from privatisation (EUR250m in 2016, 90% of which should go to debt reduction) and the gradual reduction of state cash reserves (currently very high, at 16% of GDP). However, gross and net government debt ratios remain well above the 'A' median levels of 43.9% and 42.0%, respectively.
The banking sector's health has improved markedly following government interventions and restructuring. Banks' average capital adequacy ratio was 18.9% in 1Q16 and funding is now more stable, with deposits accounting for about 70% of liabilities. However, the sector remains fragile with non-performing claims (over 90 days in arrears) remaining high, at 7.3% of gross claims in July 2016, albeit down from a peak of 18.1% in November 2013. Deleveraging is ongoing with credit to the private sector contracting 7.2% yoy in July 2016, although we expect credit growth to stabilise in 2017. Banks will continue to face pressures on profitability driven by the low interest rate environment and shrinking business volumes.
The large pre-2008 current account deficit has become a substantial surplus. The current account surplus was equivalent to 5.2% of GDP in 2015 from 6.2% in 2014. The strong performance reflects improved trade and services balances thanks to stronger cost competitiveness, corporate debt deleveraging, the fall in commodity prices and tighter fiscal policy. The current account surplus is supporting a decline in net external debt to 30.8% of GDP in 2015 from 47.6% in 2012. The agency forecasts it will be 19.6% by 2018.
Slovenia's 'A-' IDRs also reflect the following key rating drivers:-
Slovenia benefits from a high value-added economy as illustrated by income per head at purchasing power parity and GDP per capita higher than the 'A' peers' median.
EU and eurozone membership support economic and financial stability and institutional strength. EU funds have been a major source of foreign inflows. This will continue in the coming years, although disbursements will slow in 2016 and 2017.
Slovenia's GDP growth performance has been weaker than the 'A' peers in recent years as the country was exposed to the eurozone crisis and suffered its own banking crisis. Growth has recovered since 2014 and Fitch expects it will be 1.9% in 2016 and slightly above 2% in the medium term. Domestic demand will benefit from an improving labour market (unemployment rate was 7.9% in July 2016, down from a peak of 10.8% in 2013). Private investment should recover as the banks' deleveraging process come to an end.
The centre-left coalition has a narrow majority and unites parties (SMC and two junior ruling partners DeSuS and SD) with different political agendas. It has been able to agree on key reforms, such as the fiscal rule. However, after the adjustments already made in recent years, major structural reform, including on pensions, seems unlikely in the run-up to the 2018 general election.
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 LT FC IDR by applying its QO, relative to rated peers, as follows:
- External finances: -1 notch, to reflect the fact that although Slovenia benefits from for the euro's "reserve currency" flexibility, we believe that this status would likely offer Slovenia only limited protection in case of a global or domestic financial crisis. Net external debt is high relative to the rating peers' median.
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 evenly balanced. Nonetheless, the following risk factors could, individually or collectively, trigger positive rating action:
-An acceleration of government deficit reduction and/or a faster decline in government debt that supports the rebuilding of fiscal policy buffers.
-Stronger economic growth performance in the medium term, supported by structural reforms.
The main factors that could trigger negative rating action are as follows:
-A reversal in the fiscal consolidation path and/or failure to achieve a decline in the government debt to GDP.
-A severe economic downturn that damages fiscal, financial or economic stability.
KEY ASSUMPTIONS
Given the uncertainties involved, Fitch does not assume a contribution from the realisation of returns on distressed assets held on the bad bank's balance sheet for its government debt projections. Likewise, Fitch does not take into account potential debt reduction from future privatisation proceeds.
Fitch expects GDP growth in the eurozone, Slovenia's main trade partner, to reach 1.4% in 2017 and 2018, down from 1.6% in 2016."