August 25, 2017 / 8:07 PM / a month ago

Fitch Affirms Slovenia at 'A-'; Stable Outlook

(The following statement was released by the rating agency) PARIS/LONDON, August 25 (Fitch) Fitch Ratings has affirmed Slovenia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A-' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS Slovenia's 'A-' ratings are supported by a high value-added economy and high GDP per capita relative to the 'A' peer median. European Union (EU) and eurozone memberships have supported institutional strength and investment. The ratings are constrained by a high level of government debt (78% of GDP in 2017 vs. 49% for the 'A' peer median). Net external debt (NXD) of 17% of GDP in 2017 is also higher than the 'A' peer median of 2%, but is declining quickly due to strong current account surpluses (5.3% of GDP in 2016). The improved resistance of banks to shocks following their restructuring, recapitalisation and transfer of impaired assets to a bad bank also support the rating. Slovenia's 'A-' IDRs also reflect the following key rating drivers: Fitch has raised its expectation of real GDP growth to 3.4% in 2017 and 3.1% in 2018. This acceleration from 2.5% in 2016 will be driven by higher investment, supported by a ramp up in EU funds' disbursements and a recovery in banks' lending to corporates after several years of debt deleveraging. Growth will also benefit from a mutually reinforcing improvement in the labour market (the unemployment rate was 7.1% in June 2017 compared with 8.0% in 2016). A further strengthening of investment and demand from EU partners pose upside risks to the growth forecasts, balanced by potential downside risks associated with uncertainties from Brexit negotiations and protectionism in the US. Fitch expects the government deficit will decline to 1.1% of GDP in 2017 from 1.8% in 2016 as the budget benefits from strong growth in revenues (+9% y/y in 1H17 for the cash state budget) related to the improved macro environment. The upcoming 2018 general election poses some risk of fiscal slippage. The agency believes this risk is mitigated by the recent appointment of an independent fiscal council, which should contribute to increased compliance with the national fiscal rules. Fitch expects the deficit will remain around 1% of GDP through 2019. Fitch expects government debt should decline to 73.0% of GDP by 2019 from 79.7% in 2016 primarily thanks to tighter deficits. Based on Fitch's long-term projections, debt will decline to 68.0% by 2026. Given the uncertainties involved, Fitch does not assume a contribution from the use of potential proceeds from the privatisation of state assets (that would by law be allocated to debt reduction), bad bank revenues from the sale of distressed assets or government deposits (EUR6.6 billion in June 2017, 16% of GDP). Our projections are therefore conservative, and there is positive risk from materialisation of these factors. The government debt maturity profile has markedly improved following active liability management, reducing refinancing risks. Banks' ability to resist shocks has improved. The average capital ratio of banks was 20.7% in March 2017. Non-performing claims were down to 7.7% in May 2017 (EBA definition, including all credit exposure) from 8.5% at end-2016 and 14.2% in June 2015. Banks' funding and liquidity have improved markedly after a steady inflow of local deposits that has replaced foreign funding over the last couple of years. After a long period of debt deleveraging, banks' credit to the non-financial corporate sector is growing again, at +5.8% y/y in June, although longer term loan growth prospects remain uncertain. Slovenia has recorded strong current account surpluses in recent years, primarily reflecting sharp debt deleveraging and the associated fall in investment level as well as stronger exports supported by a fall in unit labour cost. This has allowed a rapid reduction in NXD. Rising domestic demand and completion of the deleveraging process will lead to some decline in the current account surplus, although it should remain high, forecast at around 5% of GDP by 2019. Fitch expects NXD will decline to 6% of GDP by 2019 from 24% in 2016. Fitch expects the coalition government will hold until the June 2018 general election. Major structural reform, including around pensions, seems unlikely to happen in the run-up to the election. World Bank governance indicators are in line with the 'A' peer median. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Slovenia a score equivalent to a rating of 'A' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: - External finances: -1 notch, although Slovenia benefits in the SRM from the euro's "reserve currency" flexibility, Fitch believes that this status would likely offer Slovenia only limited protection in case of a global or domestic financial crisis. In addition, NXD is high relative to the 'A' peer median. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are evenly balanced. Nonetheless, the following risk factors could, individually or collectively, trigger positive rating action: -Sustained shrinkage of government deficit or a faster decline in government debt that supports the rebuilding of fiscal policy buffers. -Stronger medium-term economic growth prospects, supported by structural reforms. The main factors that could, individually or collectively, trigger negative rating action are as follows: -A reversal in the fiscal consolidation path or failure to achieve a decline in the government deb to-GDP. -A severe economic downturn that damages fiscal, financial or economic stability. KEY ASSUMPTIONS Fitch expects GDP growth in the eurozone, Slovenia's main trade partner, to be 2.0% in 2017, 1.8% in 2018 and 1.4% in 2019, versus 1.8% in 2016. The full list of rating actions is as follows: Long-Term Foreign-Currency IDR affirmed at 'A-'; Outlook Stable Long-Term Local-Currency IDR affirmed at 'A-'; Outlook Stable Short-Term Foreign-Currency IDR affirmed at 'F1' Short-Term Local-Currency IDR affirmed at 'F1' Country Ceiling affirmed at 'AAA' Issue ratings on long-term senior-unsecured foreign-currency bonds affirmed at 'A-' Issue ratings on long-term senior-unsecured local-currency bonds affirmed at 'A-' Issue ratings on short-term senior-unsecured local-currency bonds affirmed at 'F1' Contact: Primary Analyst Arnaud Louis Director +33 1 44 29 91 42 Fitch Ratings S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Kit-Ling Yeung Associate Director +44 20 3530 1527 Committee Chairperson Stephen Schwartz Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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