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Fitch applauds economic headway

In moving Slovakia's sovereign rating of BB+ to a positive outlook, ratings agency Fitch IBCA February 20 confirmed the opinions of the other two international ratings agencies, Standard & Poor's and Moody's, that the government is continuing to make impressive macroeconomic headway, and is creating a positive image abroad as a potential investment destination.
With both Moody's and Standard & Poor's raising their outlooks in November last year, analysts had expected a similar move by Fitch. "By moving to the same [outlook] level as the two other agencies, it only confirmed the country's positive macro-economic moves" said Ľudovít Ódor, analyst at ČSOB bank. "It is a signal [for investors] to direct [their] interest toward Slovakia," he added.

In moving Slovakia's sovereign rating of BB+ to a positive outlook, ratings agency Fitch IBCA February 20 confirmed the opinions of the other two international ratings agencies, Standard & Poor's and Moody's, that the government is continuing to make impressive macroeconomic headway, and is creating a positive image abroad as a potential investment destination.

With both Moody's and Standard & Poor's raising their outlooks in November last year, analysts had expected a similar move by Fitch. "By moving to the same [outlook] level as the two other agencies, it only confirmed the country's positive macro-economic moves" said Ľudovít Ódor, analyst at ČSOB bank. "It is a signal [for investors] to direct [their] interest toward Slovakia," he added.

In a news release announcing the change, the agency praised the fact that since the parliamentary elections in 1998, Mikluáš Dzurinda's coalition government has launched reforms (including a 100 billion crown - $40 million - programme to restructure the banking sector) which have restored macroeconomic stability, and also recently pledged itself to an ambitious privatisation programme that should improve the efficiency of the economy by putting more companies in private hands.

Fitch also noted that Slovakia's net external debt had dropped from 40% of current account receipts in 1999 to an estimated 27% in 2000, and that a current account deficit of 10% of GDP in 1998 had come down to an expected 3.4% in 2000. It said that FDI prospects were encouraging enough to suggest these improving trends would continue.

However, as had Moody's and Standard & Poor's, Fitch warned that divisions within the ruling coalition were a reminder to investors that political risk remains in putting money into Slovakia.

Edward Parker, Fitch's director of sovereign ratings, explained that following an annual visit to Slovakia last December and discussions with government officials and independent experts, Fitch felt confident that the rise in its outlook for Slovakia was merited.

"Our placing Slovakia's outlook rating on 'positive' should give investors further confidence that the country is now clearly heading in the right economic direction and is making good progress," Parker told The Slovak Spectator.

A step away from 'investment'

Sovereign rating measures the risk attached to the state's meeting its financial commitments. Slovakia's present sovereign rating of BB+ puts it in the highest category of speculative-grade status, a category that indicates a possibility of credit risk developing. The rating is only one step below investment-grade status, indicating a very low expectation of risk, which thus plays a vital role in attracting investors.

Slovakia's neighbours, Poland and the Czech Republic, already enjoy investment-grade status, rated in the lowest of ten separate categories within the grade (BBB+). Hungary is in an even higher category at A- (see chart below). But, while Fitch has said that Slovakia could be moved to investment grade if it continues with recent success, it still has a lot to do to reach that stage.

"They [Poland and Hungary] have been much more consistent reformers, and both are further advanced in the EU accession process. One of Poland's strengths is its vibrant private sector and strong growth record, while the Czech Republic has virtually no public sector external debt. Both have strong track records of attracting FDI," said Parker, pointing out that by implementing strong economic policies, Slovakia could move up to the level of its regional neighbours reasonably quickly.

The implicit support for the government's economic programme in the ratings of all three international agencies sets a foreseeable goal for the Slovak government to climb the rating scale, the government has said. "Now we are looking forward to gaining investment status," said Vladimír Tvaroška, advisor to Deputy Prime Minister for Economy Ivan Mikloš. "We expect to gain it by the end of this year."

However, some analysts said a raise before the next parliamentary elections, scheduled in 2002, was not realistic. "To give a country investment grade is a crucial decision. They [the agencies] would not change ratings before elections. Moreover, Slovakia has to pass the so called 'Huntington test', and have a democratic government in power twice. Then, the agencies will comment on the change [of government after an election] and by making a [ratings] decision would then influence an investor's decision on Slovakia," said Peter Pažitný, an analyst with the think-thank MESA 10.

In spring 1998, Slovakia lost investment grade status as the three ratings agencies realised an economic boom, fuelled by the racking up of massive debt through the economic policies of the government of Vladimír Mečiar, was unsustainable.

Political pressures

Analysts are also sceptical of the coalition's prospects of completing the reform programme it pledged when it came to power in October 1998, including reform of the health care and pension systems, public administration, and the privatisation of many major state firms. "Their goals were too high. Every day [they meet a reform deadline now] is already too late. The commitments they set for themselves were too ambitious," said Ivan Chodák, analyst with CAIB Securities.

The government last week managed to push through constitutional amendments after weeks of political in-fighting within the coalition, reaching a consensus on what political analysts have said is one of the most difficult reforms this current administration will face. Mikloš has pledged the privatisation of $3 billion worth of state property before the next election, including the sale of the world's second largest gas distributor, SPP.

Independent economic experts believe this target will be met, but are less certain that pension and health care reform will be carried out before the next election.

Even though Fitch has said that expectations are genuine of a continuing improvement in Slovakia's sovereign credit fundamentals which could see it regain investment-grade status sometime in the next year, Parker said that lagging reforms rather than a split within the coalition were more likely to endanger a future ratings rise.

"In Fitch's view, the main political risk is not that reforms will be so ambitious as to break apart the coalition, but that the price of maintaining the coalition will delay reforms and weaken fiscal discipline," said Parker.

However, according to Tvaroška, the recent approval of the constitutional changes has highlighted an encouraging degree of political stability within the coalition. "The coalition's agreement on the constitution is a significant plus for Slovakia, one which should improve the country's status at Fitch," he said.

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