Slovakia maintains its rating, but its outlook worsens

Corruption and budget issues are behind the worsened outlook.

Slovakia cannot hope for a better rating anytime soon.

The Moody's Investors Service agency confirmed Slovakia's A2 rating, but worsened its outlook from positive to stable.

The reasons are the absence of material improvements to Slovakia's institutional strength, the deterioration in long term fiscal sustainability due to the partial reversal of past pension reforms; the expected slowing pace in reducing the government's debt burden and Slovakia's economic strength, which despite improvements remains low.

The agency would consider upgrading the country's outlook if it saw efforts to tackle some structural weaknesses, including the education system and corruption.

The opposition has already announced that they would convene an extraordinary session of the finance committee in the parliament. OLaNO MP Eduard Heger went as far as saying that the Moody's report shows that Slovakia risks the "disruption of public finances".

Corruption and rule of law

The affirmation of Slovakia's A2 ratings balances government fiscal metrics that "remain strong in a global comparison against a level of institutional strength that, although high in a broader international comparison, continues to be constrained by long-standing issues related to the rule of law and control of corruption," the report said.

It also reflects the country's relatively high wealth levels and "solid track record of sustained economic growth."

Moody’s, however, pointed out that Slovakia lags behind other countries with the same rating in the evaluation of corruption and rule of law. It also said that institutional challenges contribute to the very high value of payments of EU funds where "fraudulent and non-fraudulent irregularities" have been detected. For the period 2014-2018, the financial impact of such irregularities was 19.3 percent of total payments, against 2 percent for the EU as a whole.

“Such issues limit the ability of EU funds to function as an effective catalyst for growth, for instance in areas such as research and innovation,” said the report.

Protests mentioned

Public concern over corruption and the rule of law were also an important underlying factor behind the public protests sparked by the murder of an investigative journalist and his partner in February 2018, the report continues.

Read alsoPolice conclude investigation of Kuciak and Kušnírová murder Read more 

While some efforts have been made to seek to remedy institutional challenges in recent years, such as the introduction of a whistleblower protection act in 2015 that was recently reinforced, sustained reform efforts and enforcement of regulations over time will be needed to materially improve the quality of the institutional environment in Slovakia.

Another factor when shifting Slovakia ratings from positive to stable is the development of fiscal sustainability.

Read also:No balanced budget this year Read more 

The Slovak parliament in March this year passed a constitutional amendment capping the retirement age at 64 years. Following reforms enacted in 2012, the statutory pension age was previously set to increase with life expectancy without an upper limit, the report reads.

“While the fiscal impact of this change will be relatively muted until the mid-2030's, it will nonetheless have a clear negative impact for long-term fiscal sustainability,” the agency commented.

Slovakia's very high degree of economic openness and a relatively high degree of concentration with regard to export products and destinations "leaves the economy vulnerable to changes in the external environment", the report noted.

Room for improvement

Moody's analysts would consider assigning a positive outlook on Slovakia's A2 ratings and eventually upgrading Slovakia's rating to A1 "if we were to see significant progress on tackling structural weaknesses related, for instance, to the education system and institutional environment, which constrains the economy's longer term productivity and growth potential."

Efforts to address corruption-related issues and rule of law would also support a potential upgrade, as would a significant reduction of the government debt burden, "which brings it more in line with that of A1 rated peers."

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