SLOVAKIA can add another gold star to its collection of praise the country has received for its reform policies.
International ratings agency Fitch upgraded Slovakia's long-term foreign and local currency ratings to A- and A+, respectively, and affirmed its short-term rating at F2. The country's outlook has been revised to "stable".
The Fitch Report puts Slovakia at the same level as its neighbours, the Czech Republic and Hungary.
The upgrade from Fitch comes shortly on the heels of an announcement in early September from the World Bank that Slovakia was the most reformist country in 2003, and leads the world in creating the most beneficial conditions for doing business.
The recent ratings boost reflects Slovakia's success in implementing structural and fiscal reforms, which have greatly improved macroeconomic fundamentals, increased labour market flexibility, simplified the tax system, and reduced the amount of time required to start new businesses, the Fitch Report said.
The report lists Slovakia as one of the most attractive business climates in the region and indicates that the country's ongoing efforts to create a supportive business climate will allow the country's economic performance to remain robust.
"It is becoming clearer that the government's bold fiscal program is bearing fruit. Slovakia is now more firmly on track to meet the Maastricht fiscal deficit target of 3 percent in 2007, and to adopt the euro in 2009," David Heslam, an associate director in Fitch's Sovereign Group, told the news agency SITA.
"The credibility of Slovakia's fiscal plans stands out within the region," he added.
Despite costs related to EU membership and pension reforms, Heslam said that Slovakia should achieve its target deficit of 3.9 percent of GDP both next year and in 2006, thanks to an improvement in underlying revenue performance and effective expenditure controls from fiscal reforms.
The Fitch agency expressed support for the government's policies to unify value added tax and income taxes for individuals and corporate entities to 19 percent as well.
The agency warned that political instability still plagues the minority administration, although it acknowledges there has been some improvement since the beginning of 2004.
While it is assumed that pressure to increase spending in the run-up to the 2006 elections will continue, strong GDP growth and robust revenues will give the government some room to manoeuvre.
Slovak financial analysts agree that the recent ratings upgrade reflects payoff from implemented structural reforms, which made the Slovak business environment one of the most attractive in the region.
Senior Analyst Zdenko Štefanides with the Všeobecná úverová banka (VÚB) believes that an improved business climate boosts not only foreign direct investment but also local entrepreneurship and thus lays the foundation for strong and sustainable economic growth.
"Besides, unlike its regional neighbours, Slovakia has made bold steps in fiscal reform, steps that should help bring the public finance deficit to the Maastricht ceiling in 2006, and thus allow the country to adopt the euro in 2009," he told The Slovak Spectator.
Bank analysts are watching the Slovak currency to see what impact the new ratings will have and whether it is a clear signal for the Slovak crown to firm.
"Higher ratings themselves do not produce a stronger crown. Rather, it is the improved fundamentals themselves that have a lasting impact," Štefanides said.
The analyst explained that Slovakia's reforms and gains in technology associated with foreign direct investment have put Slovakia on a trajectory to outpace its major trading partners in productivity gains, especially those within the Eurozone.
"Productivity outperformance calls for real exchange rate appreciation of the koruna in the longer term," Štefanides said.
However, analysts expect the National Bank of Slovakia (NBS) to respond directly to outperformance by reducing key interest rates in case the crown starts growing too strong.
NBS spokesman Igor Barát told the news wire TASR that the central bank sees no reason at the moment to comment on the crown's development.
"On September 24, the Bank Board will be assessing the current interest rates," Barát noted. He added that NBS considers the Fitch Ratings upgrade as "good news" and an appropriate response to the most recent trends in the economy.
According to Silvia Čechovičová, macroeconomic analyst with the ČSOB bank, the higher rating, previously expected due to the reforms, has already informed the current rate.
"In the long term, it is possible that the ratings improvement will further increase Slovakia's appeal to foreign investors, which will then impact the inflow of foreign investments and further strengthen the crown," Čechovičová told The Spectator.
Kai Stukenbrock told Reuters that the new EU member's fiscal and growth outlook was positive, and that risks associated with tax reform, one of the factors constraining its ratings, had not materialised.
In March, Standard and Poor's changed Slovakia's foreign currency rating, raising it from BBB. Its local currency rating now stands at A- with a stable outlook.
S&P is presently keeping Slovakia's foreign currency rating unchanged, but an upgrade is possible if positive economic development continues, an S&P analyst at the rating agency told Reuters news wire on September 22.
In late May, the International Monetary Fund praised Slovakia's reforms and economic performance. Although the general Slovak public appears reform-weary and polls rarely reflect the enthusiasm of international institutions, Slovakia remains attractive to foreign direct investment.
In early September, in its analysis "Doing Business in 2005," which evaluates laws and reforms of 145 countries, the World Bank concluded that Slovakia's ambitious reforms in the tax system, labour market and social system ranked Slovakia highest among twenty leading world economies in creating the most beneficial conditions for doing business.
