January 21, 2010 |
|Fitch Ratings-London-21 January 2010: Fitch Ratings has today affirmed Slovenia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AA' with Stable Outlooks respectively. Fitch has also affirmed Slovenia's Short-term foreign currency IDR at 'F1+' and its Country Ceiling at 'AAA'. |
"A track record of fiscal consolidation has afforded Slovenia room for manoeuvre in tackling an unexpectedly steep recession and its public finance ratios have remained in line with 'AA' medians, despite wider deficits and rising public debt," says Chris Pryce, Director in Fitch's Sovereign team. "Nonetheless, a renewed drive for fiscal consolidation will be essential beyond 2011 to stabilise and reduce public debt."
An abrupt decline in Slovenia's main euro area export markets, particularly Germany, had a heavy impact on exports and subsequently investment which caused GDP to fall by over 7% in 2009. This marked an unprecedented contraction in the country's near 20 years of independence. The actual decline in GDP although concentrated was short-lived, straggling Q408 and Q109. As the core euro area economies began to recover towards the middle of 2009 so too did Slovenian exports and output. Slovenia has subsequently experienced two quarters of moderate growth, which Fitch expects to continue and strengthen over the next few years, providing Slovenia can continue to develop higher value substitutes for low tech exports such as textiles and furniture which have been in continuing decline. Official awareness of this need is high and the country has successfully developed alternative high tech goods and services in the past. Slovenia's current account deficit had widened to over 6% in 2008 before being virtually eliminated in 2009.
Slovenia's fiscal policy has been a clear rating strength throughout the post independence years and the country entered the recession from a position of budget balance in 2007 and one of the lowest levels of public debt (23% of GDP) in the EU. The newly-elected government took the view that it could afford to adopt strong counter recessionary policies, adopting a package of expansionary measures and allowing automatic stabilisers to work unhindered. This added about 4% of GDP to the overall government deficit which rose to about 5.5% in 2009. Fitch forecasts that the overall deficit will remain at this level in 2010.
The government's fiscal package was supplemented by support for the banking system, mostly in the form of an unlimited guarantee for retail depositors up until the end of 2010. It also made up to EUR12bn available to guarantee new issues by banks and a separate EUR1.2bn available to guarantee loans to non-financial companies. So far only two banks have availed themselves of the state guarantee for new issues, for a combined sum of EUR2bn. The company scheme is also under subscribed, and only EUR185m has so far been guaranteed.
Fitch does not expect fiscal consolidation to take hold firmly until 2011 although the government has taken steps to reduce public sector wage increases and state pension payments, including the deferral and cancellation of previously negotiated agreements. Public debt has reflected these developments, rising to 34% at the end of 2009. Fitch expects it to rise further to about 44% at end-2011. A robust programme of fiscal consolidation will be necessary thereafter, if the government is to meet its target of reducing the fiscal deficit to 3% of GDP by 2013 and reversing what will have been a comparatively sharp rise in public debt over just three years.
One continuing challenge to the long term sustainability of public finances is the rapid ageing of the population, which requires early and forceful action by the government to put the state pension system on a sound financial basis. This will present some painful choices for the government and political parties, including reduced indexation of pension payments, a higher retirement age and possibly higher social security contributions from the working population.
Slovenia's sovereign ratings continue to be underpinned by its reasonably well-diversified economy and a stable and transparent political system that has delivered effective coalition governments with working majorities and coherent economic policies. Foremost among their achievements have been EU and euro area membership which have played to Slovenia's public finance and sovereign rating strengths.
|Full company name||Republic of Slovenia|
|Country of risk||Slovenia|
|Country of registration||Slovenia|