Fitch affirmed Slovakia’s rating at ‘A’, but revised its outlook to negative from stable on August 19, 2022. (source: TASR)
Fitch has become another agency that affirmed Slovakia’s rating as ‘A’, but revised its outlook to negative from stable.
The agency announced the rating on Friday, August 19.
Fitch strongly believes that Slovakia can still pay its financial commitments, though there are conditions that may affect the country’s capacity to do so.
Moody’s, another rating agency, already changed the outlook on Slovakia to negative already in early August.
Uncertain long-term energy security
Fitch justifies its decision to revise the outlook on Slovakia citing its forecast, which says Slovakia’s GDP growth is expected to fall to 2 percent this year and to 1.9 percent next year.
This year, the country’s economy rose by 3.1 percent in the first quarter and slow down to 1.7 percent in the second quarter, according to the Statistics Office data.
In 2021, Slovakia’s economy grew by 3 percent.
Rising inflation that can discourage people from spending, supply chain disruptions, and weak foreign demand in Slovak products are all forecast to affect this year’s GDP. Money from EU funds can somewhat help, according to the rating agency. Yet, the country has long struggled to draw money efficiently.
“We forecast a growth of 3.1 percent in 2024 but this will rely on the effectiveness on public spending,” Fitch said.
Just like Moody’s, Fitch sees a problem in Slovakia’s high dependence on Russian energy. A potential complete shut-off of Russian gas pipelines could force Fitch to revise Slovakia’s GDP forecast.
Nonetheless, the rating agency has noticed that Slovakia is trying to fill its gas storage facilities and buy gas from Norway and Qatar to reduce its dependence on Russia.
“Although these factors should help the country get through the coming winter without significant rationing or demand reduction, it is unclear how it can achieve medium-term energy security, in particular if gas reserves are exhausted by early 2023,” Fitch asked in its commentary.
Another factor that has made Fitch to revise its outlook on Slovakia to negative is the inflation rate, which is forecast to reach 11.3 percent this year despite the government’s announced effort to help households with energy costs.
The agency emphasises that it is the highest inflation rate in two decades.
Inflation is expected to fall to 8.5 percent next year and to 3.6 percent in 2024 if the global energy market does not face further grave shocks.
Failing car industry
On the other hand, Fitch decided to affirm the country’s rating at ‘A’ because of Slovakia’s EU and eurozone membership, stable exports and foreign direct investments.
“The rating is constrained by long-term fiscal and growth challenges associated with an aging population and vulnerabilities linked to the country’s fairly high dependence on the automotive manufacturing sector,” Fitch noted.
The car industry, the most important sector in Slovakia, has not performed well in the first two quarters of 2022 and has failed to support the country’s economic growth, unlike households.
At the start of the summer, the government announced the arrival of the fifth car maker, Volvo, to Slovakia.
Fitch, moreover, warns against rising expenditure pressures. Teachers have been promised higher salaries and the government is also meaning to support some families with its package of temporary and permanent economic measures.
The package is one of several reasons behind a political crisis in Slovakia.
Regardless, Fitch expects debt dynamics to be stable and external pressures to be moderate.
(source: slovak.statistics.sk)
The country’s recovery plan, which includes many reforms, may help increase its competitiveness, the agency also noted. However, Fitch is aware of the current political crisis that may result in a minority government in September and warns against political instability.
