August 4, 2017 / 8:12 PM / 14 days ago

Fitch Affirms Slovakia at 'A+'; Outlook Stable

(The following statement was released by the rating agency) PARIS/LONDON, August 04 (Fitch) Fitch Ratings has affirmed Slovakia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) 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 ratings reflect its sound macro-economic performance, supported by foreign capital inflows and European Union (EU) and eurozone membership. Government debt (51% of GDP in 2017) is slightly higher than the peer median (49%) but Fitch expects it to decline in the medium term supported by faster nominal GDP growth and lower deficits. High sectoral and geographical concentration of exports increases exposure to potential economic shocks. The rating is also constrained by high net external debt (NXD). Fitch expects GDP growth will be 3.3% in 2017, rising to 3.8% by 2019. The continued fall in unemployment (8.1% in May 2017) will boost consumption and investment will benefit from the ramp-up in EU fund disbursements from 2017 and projects in the automotive industry. Stronger growth in countries in the EU, its main trade partners, will also support the Slovak economy, although the expected tightening in monetary conditions could affect domestic demand. The main risk to the outlook is lower external demand. The agency forecasts the general government deficit will fall to 1.3% of GDP in 2017 and 0.7% in 2019 from 1.7% in 2016. The decline primarily reflects the strengthening in Slovakia's economy and its positive impact on government revenues. This will more than offset the increased capital spending in line with higher disbursements of EU funds. The main risks to the forecasts are lower-than-expected growth or potential fiscal measures that would increase spending or decrease revenues, including a new "social package". Fitch expects the debt to GDP ratio to decline to 51.0% by end-2017 and to 48.5% by end-2019 from 51.9% in 2016, thanks to lower government deficits and acceleration in nominal GDP. The authorities are considering potential changes in the constitutional Fiscal Responsibility Act, which defines debt "brakes" that have proved a strong fiscal anchor in the past. Fitch does not expect any change would have a marked effect on the conduct of future fiscal policy. Fast lending growth to households (14% yoy in 1Q-2017 and above 10% yoy over the last three years) have pushed household debt to about 60% of revenues in 2016 from 40% a decade ago, increasing potential sensitivity to a change in financial or macro conditions. Fitch's macro prudential indicator is '2', indicating that credit growth to the private sector is above its long-term trend. The central bank has introduced macro prudential measures in response, but the extent of a slowdown in credit growth will also depend on the European Central Bank's monetary policy. Increased car production capacity allowed Slovakia to record current account surpluses in 2012-2015. The current account balance was slightly negative in 2016 (-0.6% of GDP) and Fitch expects it to narrow slightly through 2019. Higher domestic demand and increased oil prices will push up imports, but higher exports of cars and disbursements of EU funds will support external receipts. Stronger current account balances combined with non-debt foreign capital inflows will support some reduction in NXD, to 23% of GDP by 2019 from 27% in 3Q16. Regional elections due in November this year could lead to new political alliances and potentially weaken the ruling coalition. A potential break-up of the coalition could lead to early general elections. The next general election is due in 2020. 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 lower 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 of the fiscal stance or an increase in the debt/GDP ratio in the medium term. - A significant economic shock that would affect demand for Slovak exports, including cars. KEY ASSUMPTIONS Fitch assumes that under financial stress, support for the foreign-owned Slovakian banks, which account for 99% of total assets in the country, 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 Jan Friederich Senior Director +852 2263 9910 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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