LJUBLJANA (Slovenia), June 18 (SeeNews) – Standard & Poor's Global Ratings said it has raised its long- and short-term foreign and local currency sovereign credit ratings on Slovenia to 'AA-/A-1+' from 'A+/A-1’, with a stable outlook.
The stable outlook takes into account the upside potential from faster income convergence toward the eurozone average, but also possible higher-than-expected external risks to economic growth, public finances, and financial stability, and the potential for buildup of macroeconomic imbalances, the ratings agency said in a statement late on Friday.
Slovenia continues to post strong gross domestic product (GDP) and employment growth, alongside fiscal and external surpluses, it added.
"We project Slovenia's net general government debt will decline further to about 40% of GDP over 2019-2022,” the rating agency also said.
S&P also said:
"We could raise the ratings on Slovenia if sustainable economic growth propels Slovenia's income in GDP per capita terms further toward the eurozone average.
Conversely, we could lower the ratings on Slovenia if we observed the re-emergence of macroeconomic imbalances, for example emanating from external weaknesses, significant reversal of the country's budgetary position, or potential imbalances in the labor or housing markets threatening sustainable economic growth or financial stability.
The upgrade reflects our expectation that Slovenia will continue to achieve solid economic and fiscal results, while also running substantial net external surpluses with the rest of the world. We expect government debt to GDP to remain on a downward path. Moreover, we think the last nine years of private sector deleveraging and a decline of government debt to GDP since 2015 give Slovenia substantial buffers in the event of an external shock.
Slovenia's recent fiscal gains have been underpinned by the economy's cyclical recovery, as well as the underlying structural improvement sustained by government spending restraint, including a structural reduction of the interest bill. As a result, the general government fiscal position has rapidly improved since 2013, leading to a budget balance in 2017 and a surplus in 2018. General government debt as a share of GDP has declined by 12 percentage points since its peak in 2015 (80.2% of GDP) to about 68% in 2018, while contingent liabilities, including from guarantees to the state-owned enterprise (SOE) sector, have also declined. Following rapid growth in 2017-2018, we project that Slovenia's economy will continue to expand at a more moderate rate of slightly below 3% in 2020-2022. Slovenia is heavily integrated into core European supply chains but we think that weaker economic activity in the eurozone will have a moderate impact on growth, since we expect domestic demand will remain robust.
Slovenia's recovery has been coupled with high current account surpluses, which helped reduce net external debt to 14% of GDP in 2018 from 40% in 2014. At the same time, economic growth has been balanced, without emergence of macroeconomic imbalances. The tightening labor market has thus far not harmed Slovenia's external competitiveness, with Slovenia's market share in world trade increasing by more than 25% since 2011. At the same time, price and wage inflation has been broadly in line with that of trading partners and financial sector soundness has improved following a substantial effort in repairing banks' balance sheets, including banks' recapitalization by the government.
Our ratings on Slovenia take into account the benefits from the country's eurozone membership and its strong external and fiscal performance. We also factor in high GDP per capita levels in an international comparison and the broad effectiveness of the institutional framework.
We project the Slovenian economy will expand by 3.4% in real terms this year. Growth will moderate to an average of slightly below 3% over 2020-2022, compared with brisk expansion over the past two years when growth reached almost 5% on average. We expect domestic demand to be the key driver of growth in the coming years. This reflects growing disposable incomes on the back of rising wages and tightening labor market, as well as slowly accelerating household borrowing, benefiting from favorable financial conditions. We therefore think that private consumption will pick up in 2019, despite Slovenian households' high savings rate. At the same time, we project investments will expand at 7% in 2019-2022 in real terms, albeit slightly down from over 10% in 2017-2018. Corporates' high capacity utilization, continuing real estate construction and infrastructure projects, supported by the corporates' much-improved balance sheets with substantial self-financing capacity and eased monetary conditions, will drive investment growth and sustain domestic demand during our projection horizon through 2022. We note that the economic growth is characterized by an absence of meaningful credit growth, which suggests that the currently strong economic expansion is not resulting in an increase in risks related to financial sector stability.
At the same time, uncertainties remain on external demand for Slovenian exports. For example, the weakness in the German car manufacturing sector at the beginning of 2019 is of high relevance for Slovenia because of its high level of supply chain integration. Despite these concerns, we note that export growth reached almost 8% in the first quarter of 2019. Nevertheless, if European manufacturing softens beyond what we currently expect, it would likely have an adverse impact on Slovenian exports.
Despite this, we believe that Slovenia's ability to withstand external shocks has significantly improved compared with the period before the 2009-2013 economic and financial crisis. The current account is in a substantial surplus and we expect external debt will continue declining. While the construction sector has started recovering, this has not been fueled by a rapid credit expansion. Upcoming large public infrastructure investments--such as the second railway track to the port of Koper--would likely support growth if the economy slowed down more than expected, for example due to an external shock. The country's export-oriented manufacturing sector has not faced cost competitiveness pressures, partially because of the import of labor from neighboring countries, which contributed the lion's share of rising employment. More recently, we believe this also facilitated the extension of production capacities while holding back investment until the economic outlook in the eurozone becomes more certain. However, the real wage bill is rising, and brings to the forefront the need for productivity-enhancing structural reforms."