Ladislav Kamenický (source: SITA)
The Fitch Ratings agency, as the first renowned rating agency, downgraded Slovakia’s rating upon the deterioration in public finances and the unclear path for their recovery. This step can substantially increase the cost of running the state, as investors tend to raise interest rates when the rating is downgraded.
“The government’s consolidation strategy remains uncertain and in our baseline scenario we do not expect the debt to stabilise over the next few years,” the agency wrote as cited by the SITA newswire.
During the second half of November, Standard & Poor’s and Moody’s maintained their Slovakia rating.
The Fitch Ratings agency has downgraded Slovakia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'A-' from 'A'. The outlook is stable, the Finance Ministry informed the TASR newswire on Friday, December 8.
Previously, Slovakia had an A grade with a negative outlook. The A- grade is Slovakia’s worst since 2004, the Council for Budget Responsibility reminded for the SITA newswire.
A- is the seventh grade on the agency’s scale, three grades from the line where the so-called investment grade band ends. By comparison, the Czech Republic’s grade is three notches better on the Fitch rating" AA-. Poland, Spain and Chile now have the same rating as Slovakia, noted the Denník N daily.
Fitch's forecast
The agency maintains its forecast of modest growth amounting to 1.3 percent of GDP in 2023, which is below the ‘A’ median of 2.0 percent; but above the eurozone median, due to rising public investment as the absorption of EU funding ramps up and strong foreign trade.
In 2024-2025, Fitch expects growth to gradually pick up as private consumption recovers, supported by positive real wage growth. Investments are forecasted to remain solid as Slovakia continues to absorb EU funds, in particular Recovery and Resilience Facility grants. Fitch analysts, therefore, see GDP growth at 2.3 percent in 2024 and 2.8 percent in 2025.
Fitch Ratings estimates that the public debt will reach 62.1 percent at the end of 2025, up from 57.8 percent at the end of 2022. Furthermore, the trajectory indicates a persistent upward trend over the medium term.
The agency emphasises that the anticipated deficits for the next two years, estimated at 6 and 6.5 percent respectively, significantly exceed the median when compared to deficits in other countries.
Fitch downgraded Slovakia’s rating before the government published the draft budget, with only a fiscal package worth almost €2 billion presented. It was supposed to be consistent with election-campaign pledges of a 0.5 percentage points (p.p.) consolidation in 2024. The Robert Fico government published the draft of the general government and state budget for the next three years only on Sunday, December 10.
Kišš: Very bad news for Slovakia
MP for Progresívne Slovensko, Štefan Kišš, pointed out that the agency, among the main reasons, cited the unclear trajectory of public finance recovery and the related increase of debt in the coming years.
“It is the obvious reaction to the government’s first steps and very bad news for Slovakia,” said Kišš as cited by SITA. “The downgraded rating is a calling card for the irresponsibility of the Robert Fico government. It fails to convince the markets that it will manage public finances in responsible manners in the next four years.”
Kišš says that the disruption of the rule of law that the coalition has triggered is also alarming for the markets. The government’s actions show that the rule of law does not matter to the government. For the markets, this is a bad sign of uncertainty and political instability. Fitch also mentions this in its reasoning for the downgrade.
“We have warned both the finance minister and the prime minister that the consolidation presented is unambitious and that it will be not strong enough to stabilise the situation,” said Kišš. “The prestigious rating agency has confirmed this.”
PM Fico claims that previous governments are to blame for the downgrade of Slovakia’s rating by the Fitch agency.
