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Moody’s finds Slovakia’s outlook stable

SLOVAKIA’S deep economic and financial integration with core Europe, moderate government debt ratios, high debt affordability and a receptive domestic debt market are the credit strengths underpinning the A2 government bond rating with a stable outlook, Moody’s informed in its report issued on October 31.

SLOVAKIA’S deep economic and financial integration with core Europe, moderate government debt ratios, high debt affordability and a receptive domestic debt market are the credit strengths underpinning the A2 government bond rating with a stable outlook, Moody’s informed in its report issued on October 31.

These factors offset competitiveness challenges from export concentration, labour market rigidities, an ageing population as well as slowly stabilizing debt dynamics in a low-growth environment, the rating agency added.

“Slovakia’s impressive macroeconomic and income convergence with the rest of the EU is expected to continue, with real performance going forward based on a more balanced mix between domestic and external demand contribution,” the agency stated.

Moreover, it informed that skilled, highly educated and competitive labour force, close in proximity to core Europe as well as the systematic overhaul of its institutions following the implementation of the acquis communautaire, which have made the country an attractive target for foreign direct investment, mainly in the automotive sector, still remain elements attracting foreign capitals, in direct and portfolio investment, the report reads.

The agency expects the country’s real GDP growth to stand at 2.2 percent in the end of the year and accelerate to 3.1 percent in 2015. Regarding Slovakia’s integration into the EU supply chain, however, the economic recovery and economic growth outlook “remain susceptible to a slowdown of its main EU trading partners, mainly Germany”, the agency said.

Nevertheless, it forecasts a continued gathering in momentum of the domestic demand that “will be able to compensate for the lower net export contribution to growth”. Additionally, declining unemployment and slowly reverting consumer price growth will further support real wages and consumption.

Moody’s further stated that the authorities stay committed to ensuring the sustainability of public finances. The exit of the European Commission’s Excessive Deficit Procedure (EDP) in June 2014 will however cause the fiscal consolidation is set to slow down, back-loading the efforts to 2016 and 2017.

“The prudent liability management, available fiscal liquidity buffers and very low borrowing needs in the near term combined with the nascent recovery are expected to support the consolidation efforts in 2015, on which the risk of fiscal slippage lingers from the incoming electoral cycle,” the rating agency claimed.

The final effect on public debt metrics will be a stabilising one in 2014 and 2015, while the consolidation efforts of 2016 and 2017 will lead to a debt over GDP declining trajectory. The affordable debt burden and the low financing requirements pose very low government liquidity risk, with Slovak government bonds yields also expected to benefit from the current European Central Bank (ECB) monetary stance, according to Moody’s.

“Political stability granted by a single-party majority, a sound, well capitalised and liquid banking system, as confirmed by the ECB comprehensive assessment results, and structural changes driving positive developments on the external accounts, are the factors supporting a low exposure to event risk,” the agency stated.

Regarding the Russian-Ukrainian conflict, it does not represent a significant event risk for the Slovak economic system, according to Moody’s.

Source: Moody’s website

Compiled by Radka Minarechová from press reports

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