In its annual report on the country, Moody's Investors Service explains the negative outlook for Slovakia's country ceilings, citing "a host of domestic problems, significant short-term debt, and a more volatile international environment."
Slovakia's country ceiling for foreign currency bonds and notes is at Ba1, and the ceiling for foreign currency bank deposits at is Ba2. Local currency bonds are rated at Baa2.
The consistently high fiscal and current account deficits of the last two years have been increasingly financed by foreign (especially, short-term) borrowing. The debt service burden has increased, and the interest rate differential has forced firms and banks to finance their operations and investment needs abroad, according to Moody's.
The new coalition government has inherited a difficult situation. It plans an austerity program of price deregulation, fiscal cuts, and tight monetary policy to lower the current account deficit and ameliorate the debt burden. The fact that its members span the political spectrum complicates policy formulation and coherence, Moody's says.
Ivan Chdák, an equity analyst with CA IB Securities, said that the lack of apparent government unity on economic reform was one of the most worrying factors for Moody's.
"The question is whether or not the coalition will be willing and able to apply additional measures," he said. "Given the way things currently look, this is far from certain."
In Moody's opinion, it will take several years to untangle the institutional legacy resultant from the nationalist and statist leanings of the previous government.
The next two-to-three years will see a major slowdown in domestic demand and economic growth. "The dangers lie in the possibility that the corrective policies will lead to a hard landing and/or that the government will lose its political will or cohesiveness in the face of mounting economic difficulties," Moody's reports.
The large trade deficit is structural in nature, and Moody's believes that there is a need for corporate restructuring and export diversification over the next several years. Similarly, banking sector restructuring and privatization have lagged. Both the export and banking sectors would benefit from foreign direct investment, according to the rating agency.