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Rating agencies are watching Slovakia closely

They point out the dependence of Slovakia's economic growth on EU funds.

The protest 'For a decent Slovakia' in SNP Square, Bratislava, March 16.(Source: SITA)

Rating agencies are closely watching the political developments in Slovakia but for now, they do not expect any sharp shift in economic policy.

“Slovakia’s political crisis has increased near-term political uncertainty but we think sharp changes to economic or fiscal policy are unlikely,” Fitch Ratings wrote in its press release on March 16. “While the political consequences remain unclear, fiscal policy is anchored by domestic and European provisions, and economic policy settings have supported favourable growth.”

It remains to be seen whether the resignation of prime minister Robert Fico defuses the crisis, in which the interior minister has resigned and a junior member of the three-party coalition government called for early elections, Fitch observed.

“We would not expect any early elections [the next general election is due in 2020] to change current economic policy settings significantly,” Fitch wrote. “The economic policy framework is robust and credible, and the role of foreign investment [notably from EU funds and the car industry] in boosting growth incentivises any government to promote macro-economic stability.”

Fitch forecasts a real GDP growth for Slovakia of 3.6 percent this year and 3.9 percent next year.

Fitch affirmed the ‘A+’/Stable rating for Slovakia on 2 February. It reflects sound macroeconomic performance, supported by sustained foreign capital inflows and EU and eurozone membership.

Moody’s affirmed Slovakia’s A2 rating and maintained a positive outlook on March 9. Nevertheless, it stressed that the well-publicised murder of a journalist and his partner, and underlying concerns regarding transparency and accountability in the use of EU funds, have triggered a political crisis.

“This crisis narrowly raises the risk of the coalition government not completing its four-year term, which would place in doubt the government’s continued commitment to economic and fiscal reform,” it wrote. “At a deeper level, recent events, and the related long-standing problems concerning the utilisation of EU funds raise doubts regarding the control of corruption and the strength of voice and accountability in overall governance.”

Moody’s decision to affirm the A2 ratings partly reflects the rating agency’s view that the coming months will provide further insights regarding the implications of recent events for Slovakia’s institutional strength and the future direction of economic and fiscal policy.

“Downward pressure that could lead to a stable outlook and eventually a downgrade of the rating could develop if Slovakia’s current political tensions were to escalate, resulting in policies that would undermine confidence in economic growth and fiscal consolidation,” wrote Moody’s. “Given the dependence of Slovakia’s growth on EU funds, marked worsening of relations with the EU would also put downward pressure on the rating.”

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