Thomson Bankwatch, a Thomson financial services company, downgraded Slovakia's sovereign risk rating to BB from BB+ on May 4, citing the country's fiscal deficit and external debt problems.
"The sovereign Risk Rating downgrade is based on the country's persistent deficits on both fiscal and external accounts, which are being financed by short-term foreign borrowing. Fuelled by strong domestic demand, the Slovak economy faces a lack of local financing to cover continued high public spending and costly import bills," wrote Betty J. Starkey, Thomson BankWatch Director of Sovereign Risk, in a statement.
Slovakia's gross foreign debt totalled $9.9 billion at the end of last year. The country's budget deficit at the end of 1997 was 37 billion Sk ($1.7 billion).
"As a result of low tax revenues and poor corporate tax collection, Slovakia is forced to borrow from abroad at high prices. This has made the Slovak economy susceptible to external shocks and swings in public confidence in the local currency," Starkey continued.
Thomson is the fourth international agency to say that it was worried about Slovakia's macroeconomic preformance. Last March, Moody's Investors Service downgraded Slovakia's ceiling for foreign currency bonds to one notch below investment grade at Ba1, citing the rising costs of debt servicing, high levels of public spending, rapidly growing short-term foreign currency debt, foreign trade problems and attempts to curb central bank independence as the most crucial reasons for the downgrade.
Standard & Poor's followed hard on Moody's heels, cutting Slovakia's ratings outlook from stable to negative while affirming its BBB- foreign currency rating. Business information group Dun & Bradstreet announced on April 15 it had downgraded Slovakia's risk indicator to DB4d from DB4b, citing "several inauspicious economic and political developments" as the reason behind the move.
In order to fight worsening fiscal and macroeconomic indicators, the National Bank of Slovakia had been pursuing a tight monetary policy since early 1997 to protect the Slovak crown from speculative assaults. As a result, interbank interest rates have been hovering between 15 and 25%.
But that policy seems to have come to the end of its rope. In line with the overall cut, Thomson also cut the ratings of Všeobecná Úverová Banka (VÚB), Slovakia's largest commercial bank, Ľudová Banka, a subsidiary of Austrian Volks- bank, and Prvá Komunálna Banka, a municipal bank, all to BB from BB+, citing developments on the interbank market as the primary reason.
"High interest rates, which are unlikely to come down in the near future, combined with continued pressure on the crown, do not bode well for the performance of Slovak banks," said Paul Jennings, Thomson Bankwatch Vice-President. "If current conditions continue to prevail, we expect to see significant asset quality deterioration in the entire banking system as customers find it increasingly difficult to service their debts."