28. October 2024 at 20:13

Slovakia’s fiscal plan wins a rating agency’s endorsement

S&P affirms A+ rating, yet agency warns of hurdles and risks to EU funds.

Finance Minister Ladislav Kamenický. Finance Minister Ladislav Kamenický. (source: TASR - Martin Baumann)
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Slovakia’s public finance recovery plan has passed its first significant test, with S&P Global reaffirming the country’s A+ rating and a stable outlook.

The rating, on par with Japan and Estonia but a notch below the Czech Republic, follows the parliament’s approval of a fiscal consolidation package aimed at cutting the budget deficit by over 1 percent of GDP.

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S&P highlighted the resilience of Slovakia’s economy, expecting the government to mend ties with the EU, crucial for preserving EU funding. Some reforms, particularly in the area of rule of law, were viewed unfavourably by the European Commission, but despite delays, all requested payments from the recovery plan were ultimately approved.

“Preserving the flow of EU funds and maintaining good working relations with the EU remains a key policy priority of Slovakia’s government,” writes the agency.

For Prime Minister Robert Fico’s government, convincing rating agencies of its commitment to fiscal health is essential to avoid borrowing cost hikes. Fitch and Moody’s will review Slovakia’s creditworthiness in December, with Fitch’s rating currently two notches below S&P’s.

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Slovakia’s rising debt and widening deficit—expected at 5.8 percent of GDP this year—demanded drastic fiscal measures, including a VAT hike, to rein in the budget. The Finance Ministry projects a gradual deficit reduction, aiming for the EU’s 3 percent threshold by 2027. However, the agency expects the consolidation process may face setbacks, projecting a deficit of 3.5 percent of GDP by 2027. The government has yet to outline its fiscal plans beyond next year.

After Russia’s invasion of Ukraine, Slovakia’s risk premiums rose, exacerbated by its reliance on Russian gas. The approval of the package has already helped lower the risk premium on Slovak government bonds to around 1.05 percentage points, down from the 12-month average of 1.2 points, writes Denník N. The European Central Bank has also contributed by cutting interest rates again.

S&P warned that the rating could be downgraded if fiscal performance falters or judicial independence is threatened, risking EU funding freezes.

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