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Ratings agencies cautious on upgrade

Ratings agencies Moody's and Standard & Poor's have said that they will not raise Slovakia's rating to investment grade before the end of the year, citing political instability as a bar to upping their assessment of Slovakia.
The news on the ratings - which affect the cost of state credit from abroad and investor confidence in a country - came as a blow to the government's chief economic ministers, Finance Minister Brigita Schmögnerová and Deputy Prime Minister for the Economy Ivan Mikloš. Both had said they were confident the agencies would lift the ratings before year-end following improving macroeconomic outlooks and the country's September invitation to join the Organisation for Economic Cooperation and Development (OECD).

Ratings agencies Moody's and Standard & Poor's have said that they will not raise Slovakia's rating to investment grade before the end of the year, citing political instability as a bar to upping their assessment of Slovakia.

The news on the ratings - which affect the cost of state credit from abroad and investor confidence in a country - came as a blow to the government's chief economic ministers, Finance Minister Brigita Schmögnerová and Deputy Prime Minister for the Economy Ivan Mikloš. Both had said they were confident the agencies would lift the ratings before year-end following improving macroeconomic outlooks and the country's September invitation to join the Organisation for Economic Cooperation and Development (OECD).

"This is a very clear signal," said Schmögnerová October 16. Referring to a November 11 referendum on early elections, the minister added: "The names of political parties are not important, but what they say is. Opposition party statements have not evoked any certainty that if they were to take power, they would take sufficient steps to carry on with reforms. Moody's has identified certain risks that Slovakia would be faced with if there were a change in political power."

Moody's has said that it is "closely observing political developments". Despite visiting the country in the first two weeks of October, neither agency is expected to release final reports on their findings before the end of the year. "I expect that both agencies will await further developments and will not publish their assessments earlier than the beginning of next year," Schmögnerová said.

The announcement has confirmed that concern is growing abroad over the outcome of the early elections referendum. Initial polls had suggested that the referendum would not draw the required 50% quorum of registered voters it needs for its results to be valid. However, recent statements by the popular (15.4% support) non-parliamentary Smer party that its supporters should vote on November 11, combined with what analysts fear is a government failure to persuade its supporters to stay away from the referendum, has fuelled economists' fears over an impending change in political power.

"Memories of the [former Prime Minister Vladimír] Meeiar era are still strong enough to make people worry, and until there is a 100% assurance that that era will not return, the agencies will need to be cautious in their ratings," said Eric Fine, analyst at Morgan Stanley in London.

"The ratings agencies are traditionally conservative, but you cannot argue that there isn't something behind their decision," he added.

The coalition has so far won praise from international financial institutions such as the IMF and World Bank for its progress with economic and structural reforms and reversing dubious privatisation processes and massive foreign debt characteristic of the previous Meeiar-led government.

"Looking at Slovakia purely on a credit level, it deserves to be investment grade. The market has already voted by itself to upgrade the country," said Fine, referring to growing foreign investments and the relative success of government and state bond issues this year. "This statement [on the ratings] is based on the political environment generally [regarding the HZDS and Meeiar] and not on this government alone. This coalition has made some huge strides, and politically and policy-wise Slovakia is at a better investment level than it was when it had an investment grade [in 1998]."

Analysts, though, have warned that this hard work may be undone if Meeiar were to return or if the government were not allowed to see its term through to 2002.

"The level of concern has increased. All investments would be hurt in a pro-early election vote," said Jaroslav Vitazka, assistant portfolio manager at Schroders in London. He added, though, that not all reforms or privatisations would be immediately stalled following a vote in favour of early elections.

"There are firms that have been - and will remain - strategic to any government in Slovakia," he said. "And the referendum is not expected to be approved by parliament, even if voters ask for new elections."

Some ruling coalition parties have suggested that if the referendum results were to fall in favour of early elections, they would vote in parliament according to the preferences of their supporters, meaning that the majority of MPs would likely vote against a return to polling booths next year.

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