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Standard & Poor’s improves Slovakia long-term ratings to A+ with stable outlook

STANDARD & Poor’s Ratings Services raised its long-term foreign and local currency credit ratings of Slovakia to A+ from A on July 31, 2015. It also confirmed A-1 short-term credit ratings; with a stable outlook.

Finance Minister Peter Kažimír (Source: TASR)

As the reasons behind the rating, S & P cites Slovakia’s “accelerating growth momentum, expected to lead to continued improvement in the fiscal metrics, especially a gradually decreasing public debt burden and a lower interest burden, over its 2015-2018 forecast horizon”.

Other indexes supporting the rating are Slovakia’s low external indebtedness, strong growth that is becoming increasingly broad based, and improving fiscal metrics. The domestic demand – a tax-rich component of growth – is seen as increasingly fuelling more robust economic growth which is expected to average just over 3 percent in 2015-2018, while also contributing to a reduction in the general government deficit and debt, according to Standard & Poor’s. The rating is constrained by persisting structural challenges to the Slovak economy, such as high structural and youth unemployment, as well as wide regional disparities.

Slovak policymakers are seen as continuing to gradually consolidate government finances and lower the debt burden.

On the other hand, the rating agency further sees some downside risks to growth prospects – due to Slovakia’s strong export dependence; “particularly if the recovery in the eurozone, where Slovakia directs most of its exports, faltered or if the Russia-Ukraine conflict escalated further”.

The general government deficit in 2015 is foreseen as remaining below the 3-percent threshold. “In the following years, stronger growth prospects and, in turn, increased revenue intake, will give the government breathing room to rely less on unconventional fiscal measures,” S & P’s wrote. “As a result, we expect the deficit will narrow to below 2 percent of GDP in 2018.”

Medium-term risks to fiscal forecasts are broadly balanced; while downside risks mostly stem from the political cycle, with elections scheduled for March 2016 and potential claims from the European Commission to recover misused EU funds.

“Prime Minister Robert Fico has already announced two social packages entailing a reduction of the value-added tax (VAT) rate on certain food items, an increase in the minimum wage, and cuts in copayments for medicine, among others,” the agency wrote, adding that “the third and largest social package will likely be introduced at the beginning of 2016 and could be worth roughly €500 million (0.6 percent of 2015 GDP). The impact of these packages on public finances has been relatively minor and is largely compensated for by better revenue intake.”

According to Standard & Poor’s, increased health-care spending and an ageing society could put a strain on public finances, especially in light of the repeated opening of the second pension pillar which has been opened for the fourth time this year.

The improvement of Slovakia’s rating by S&P is a welcomed reward for Slovakia having put its public finances in order in a sustainable manner, Finance Minister Peter Kažimír stated on August 2, adding that Slovakia now has the ninth best rating from among 19 eurozone members.

Returning the credit rating to the level seen before the crisis is, according to Kažimír, a clear expression of trust in the achievements of the economic and budgetary policy of the Slovak government. Increasing the rating in a time of lingering problems in Europe and geopolitical risks is not commonplace, he stressed. The minister reminded that Slovakia is, together with Spain and Cyprus, only the third country to have its rating improved by S & P, since it had down-graded it in January 2012 due to impacts of the crisis. 

Topic: Economics

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