Fitch confirms rating for Slovakia

FITCH Ratings agency confirmed Slovakia’s long-term foreign and local currency Issuer Default Ratings (IDRs) as being A+ with a stable outlook.

Illustrative stock photoIllustrative stock photo (Source: AP/TASR)

The issue ratings on Slovakia’s senior unsecured foreign- and local-currency bonds are also confirmed as being A+. The Country Ceiling is confirmed to be AAA and the short-term foreign currency IDR to be F1, the TASR newswire reported, citing the agency’s website.

Slovakia’s A+ ratings relate on the one hand to robust institutions, including the country’s membership of the eurozone, which has helped attract foreign investment, while on the other, to fairly high GDP volatility that reflects sector and market concentration. Public finances have deteriorated since the 2009 financial crisis, but Fitch expects the debt to stabilise in 2015 before slowly declining thereafter. Net external debt (35 percent of GDP in 2014) is high, but expected current account surpluses to help reduce it.

Fitch expects real GDP growth to reach 3.2 percent in 2015 and 3.3 percent by 2017 (after 2.4 percent in 2014), supported by growing domestic demand. Declining unemployment (12.4 percent in first quarter of 2015, down from 14.1 percent in the previous quarter) will support household consumption. Investment will benefit from favourable financing conditions. The contribution of net trade, negative in 2014, will gradually increase in line with stronger European activity (85 percent of exports, the eurozone at 50 percent, Germany at 20 percent.

Fitch expects the budget deficit to remain broadly flat at 2.5 percent of GDP by 2017, compared to 2.9 percent in 2014. While tax revenues will benefit from an improvement in economic conditions and firmer compliance, the general election due to be held in March 2016 limits the scope for structural fiscal adjustments. After a steep increase in the government debt between 2009-13, political parties broadly agree on the need to tighten public finances and Fitch does not expect any changes in the fiscal stance following the elections.

The state debt will peak at 54.1 percent of GDP in 2015, up from 53.6 percent in 2014 (and 29 percent in 2008) and gradually decline thereafter in line with a shrinking deficit and growing nominal GDP, according to Fitch. Contingent liabilities as a share of GDP are among the lowest in the European Union (5.3 percent in 2013, based on Eurostat data) and the banking sector is foreign owned, which limits a potential negative spillover from banks to public finances.

The share of non-resident holdings of the state debt has risen markedly, from 23 percent of the total in 2010 to 63 percent in 2014. While this supports fiscal financing flexibility, including lower interest rates and longer debt maturities, it also increases the exposure of state finances to global financial volatility, according to Fitch.

Slovakia has been running a current account surplus since 2012 due to improvements in the trade and services balance, reflecting primarily the expansion of its automotive industry (25 percent of exports) and slower domestic demand after the financial crisis. The current account surplus was 0.1 percent of GDP in 2014 and is expected to grow to 0.8 percent by 2017, supported by stronger external demand, low oil prices and fiscal tightening. Although declining, net external debt will remain high relative to peers over the medium term.

The World Bank governance indicators on the rule of law and control of corruption are weaker than the median for A rated peer.

The stable outlook reflects Fitch’s assessment that positive and negative risks to the rating are evenly balanced. Nevertheless, the following risk factors could individually or collectively trigger negative rating action: a severe economic downturn, for example, affecting the automotive industry that damages fiscal, financial or economic stability, and a failure to stabilise and, ultimately, reduce the public debt/GDP ratio.

The main factor that could trigger positive rating action is a significantly lower public debt/GDP ratio supported by a tighter fiscal stance and stronger GDP trend growth.

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