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Fitch Affirms Slovakia at 'A+'; Outlook Stable
February 10, 2017 / 9:08 PM / 10 months ago

Fitch Affirms Slovakia at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON, February 10 (Fitch) Fitch Ratings has affirmed Slovakia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at 'A+' with a Stable Outlook. The issue ratings on Slovakia's senior unsecured foreign and local currency bonds have also been affirmed at 'A+'. The Country Ceiling has been affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1+'. The ratings on Slovakia's senior unsecured short-term local currency issues have also been affirmed at 'F1+'. KEY RATING DRIVERS Slovakia's 'A+ ratings reflect its robust and credible economic framework including its solid banking sector, eurozone membership and proven ability to attract foreign investment. GDP volatility has been higher than peers, reflecting concentration in the car industry (44% of industrial production and 35% of exports in 2016) and high external openness. The rating is also constrained by high net external debt (NXD), equivalent to 38% of GDP in 2016, although recent improvement in the current account should support a decline in NXD in the medium term. Slovakia's 'A+' IDRs also reflect the following key rating drivers: Fitch expects GDP growth will be higher than the 'A' peers' median, at 3.3% in 2017 and 3.5% in 2018 from 3.3% in 2016. After a contraction in 2016, investment will benefit from the recovery in EU-fund disbursement, which will total EUR15.6bn (20% of 2015 GDP) over the current financial perspective (2014-2020) and continued foreign investment in the automotive industry, including EUR1.4bn by Jaguar Land Rover over 2016-2018. Falling unemployment (9.0% in November from 10.9% a year ago) will support growth in households' consumption. Given Slovakia's economic openness (current account receipts are equivalent to 100% of GDP) and integration within the German supply chains, the main risk to the outlook stems from potential lower than expected external demand. Exports to the EU account for 80% of total exports, including 23% to Germany. Exposures to the UK and the US are primarily indirect as those two countries account for 4% and 2% of total exports, respectively. Fitch expects the government deficit will decline to 1.8% of GDP in 2017 and 1.0% in 2018 from 2.2% in 2016. The main driver of the tightening will be the improved cyclical position, which will support revenues. Government investment will increase in line with EU-fund cycle. The two priorities are the Bratislava highway bypass and the industrial park near Nitra. According to Fitch's debt dynamics long-term analysis, government debt stabilised in 2016, at 52.5% of GDP, and should decline gradually to 44% of GDP by 2026. The authorities are considering potential changes in the constitutional Fiscal Responsibility Act (FRA), which set debt brakes and associated corrective actions. The FRA proved an efficient instrument to keep debt under control in 2014. In Fitch's view, any change that would open the way for political interference in the definition of the debt threshold would likely weaken the efficiency of the rule. Favourable financial and macro conditions have led to fast lending growth to households (+13% in 2016). The central bank has tightened macro prudential policy in response, with more stringent loan-to-value ratios on new loans and increased capital requirements for banks, including a new 0.5% countercyclical capital buffer from August 2017. Fitch expects total credit to the private sector to decelerate somewhat to 6% yoy by 2018 from 8% in 2016. Banks are strongly capitalised and liquid. Non-performing loans are moderate, at 4.3% in 2016. Increased car production capacity has allowed Slovakia to record current account surpluses in recent years, at an estimated to 0.4% of GDP in 2016 from 0.2% in 2015. Fitch expects the current account will remain in a small surplus by 2018. Higher domestic demand and increased oil prices will push up imports, but higher exports of cars will support external receipts. Current account surpluses combined with foreign investment and some recovery in EU funds will support a continued reduction in NXD, to 36% of GDP by 2018 from 38% in 2015. The regional elections, due in autumn 2017, will be a test of the stability of the coalition government. The coalition has remained stable since it has taken power in March 2016, despite including a wide spectrum of political leanings. However, some coalition parties are expected to compete in the upcoming elections, potentially challenging candidates from the senior Smer party which currently holds power in six of the eight regions. This would likely fuel tensions. A potential break-up of the coalition could lead to early general elections. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Slovakia a score equivalent to a rating of 'A+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR. 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 rating are evenly balanced. The following risk factors could individually or collectively trigger positive rating action: -A firm decline in government debt supported by tightening deficits. -A decline in net external debt that would reduce external vulnerabilities. -Over the medium term, stronger GDP per capita growth supported by economic reforms. The main factors that could trigger negative rating action are: -Relaxation in the fiscal stance and/or increase in the debt/GDP ratio in the medium term. -An economic shock that would affect demand for Slovak exports, including cars, and damage economic and fiscal stability. KEY ASSUMPTIONS Fitch assumes that under financial stress, support for the foreign-owned Slovakian banks would be forthcoming from their parent banks. Contact: Primary Analyst Arnaud Louis Director +33 1 22 29 91 42 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Christopher Findlay Analyst +44 20 3530 1342 Committee Chairperson Michele Napolitano Senior Director +44 20 3530 1882 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1018876 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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