SLOVAKIA’S hopes of an upgrade in its credit rating now look more realistic after international rating agency Standard & Poor’s (S&P) revised its outlook for Slovakia to positive from stable. At the same time the agency affirmed its A+ long-term sovereign credit rating for Slovakia, and said its short-term rating also remains unchanged at A-1.

“The ratings on Slovakia reflect our view of the sovereign’s decade-long track record of economic and fiscal reforms, its strong growth potential, and its moderate, although slowly rising, debt burden,” the agency said in a statement. “These strengths are offset by Slovakia’s high level of structural unemployment and its wealth levels, which still lag those of eurozone peers.”

Prime Minister Iveta Radičová said that the improved rating outlook is good news for Slovakia.

“It is a confirmation that responsible policies by the government do bear fruit,” Radičová said, as quoted by the SITA newswire.

S&P noted that Slovakia’s ruling coalition government, led by Radičová, pledged to “reverse recent fiscal slippage and bring the deficit below 3 percent of GDP by 2013” when it took office in July 2010, replacing the government of Robert Fico. The 2011 budget targets a deficit of 4.9 percent of GDP in 2011, down from an average of 8 percent of GDP for the past two years, said S&P, adding that it expects to achieve this goal through a combination of expenditure cuts and revenue-enhancing measures.

“Our base-case scenario forecasts that the government will manage to narrow the fiscal deficit to 4 percent of GDP by 2013; in other words, we expect the deficit to fall at a slightly slower rate than the government itself is forecasting,” said S&P in its release. “Should the government achieve its own fiscal targets, this would support its sovereign creditworthiness.”

The agency sees risks on the fiscal side as being weaker-than-expected economic performance, along with political opposition to proposed austerity measures and negative responses by the public.

“Although there is a possibility of early elections, we understand that all major parties would enact fiscal tightening,” the agency said. “Any deviation would put at risk investor confidence, which is key for Slovakia’s convergence with its eurozone peers.”

Radičová said that her government would continue behaving responsibly during the adoption of the state budget for the upcoming years and was ready to discuss a constitutional law on budgetary responsibility.

The Slovak Finance Ministry also welcomed the S&P announcement, adding that it is determined to keep up with its consolidation plans despite the agency’s forecast of slower consolidation.

“We welcome the agency’s praise for the recovery efforts of the new government and confirmation of Slovakia’s leadership position within the central European region,” said ministry spokesman Martin Jaroš, as quoted by SITA. “The Finance Ministry is not giving up on its plan to squeeze the public finance deficit to 3.8 percent of GDP in 2012,” he added.”

Chief analyst with Volksbank Slovensko, Vladimír Vaňo, interpreted the S&P move as an expression of the agency’s confidence in the ability of the Slovak government to restore the public finances.

“The reduction of the deficit has to be the foremost priority of Slovak economic policy, although at the cost of painful and unpopular steps,” Vaňo said, as quoted by SITA.

According to ČSOB bank analyst Marek Gábriš, it is natural that with signs of deteriorating economic development in western Europe, questions are being raised about developments in Slovakia and how it will achieve its fiscal consolidation objectives.

“I expect the budget to be revised, as in the normal process it undergoes at least one autumn round when parliamentary committees evaluate it,” Gábriš told SITA, adding that the 2013 deficit will depend on the extent of the slowdown and on how eurozone members resolve their debt problems.

S&P said that the positive outlook reflects the likelihood of an upgrade if the Slovak government reduces “its currently high fiscal deficit in line with our expectations, stabilises the government debt as a share of GDP, and continues to reform the labour market and the business environment”.

“We anticipate that these steps would promote sustained, strong, and balanced economic growth and could therefore help close the wealth gap within Slovakia and between it and the other eurozone countries,” S&P concluded in its statement. “Conversely, if the government fails to halt rising government debt levels, or there is significant stagnation on the proposed structural reforms, ratings could stabilise at current levels.”

Moody’s Investors Service confirmed Slovakia’s long-term rating of A1 with regard to its foreign obligations and domestic currency on May 17 and added that the outlook is stable. The Moody’s announcement came in response to government plans to take several measures to strengthen fiscal consolidation, such as reducing public sector wage costs by 10 percent in 2011, limiting waste in public procurement, freezing public investments and increasing the overall effectiveness of public sector expenditure.

On June 6, 2011, Fitch stated that Slovakia’s long-term foreign and local currency Issuer Default Ratings (IDRs) would remain at ‘A+’, with the outlook also remaining stable, the SITA newswire reported.

“Slovakia’s rating continues to be supported by the economy’s track record of strong growth, low inflation and a relatively strong banking sector,” SITA quoted Fitch’s Douglas Renwick as saying. “However, with a budget deficit of 7.9 percent in 2010, the government will need to implement sustained fiscal consolidation to prevent downward pressure on the rating.”