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Fitch Affirms Slovenia at 'A-'; Stable Outlook
March 10, 2017 / 9:05 PM / 9 months ago

Fitch Affirms Slovenia at 'A-'; Stable Outlook

(The following statement was released by the rating agency) PARIS/LONDON, March 10 (Fitch) Fitch Ratings has affirmed Slovenia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'A-' with a Stable Outlook. The issue ratings on Slovenia's senior unsecured foreign- and local-currency bonds are also affirmed at 'A-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'AAA' and the Short-Term Foreign and Local Currency IDRs at 'F1'. The ratings on Slovenia's senior unsecured short term local currency issues have also been affirmed at 'F1'. KEY RATING DRIVERS Slovenia's 'A-' ratings are supported by a high value-added economy and high GDP per capita. European Union (EU) and eurozone memberships have supported institutional strength and investment. The ratings are constrained by the high level of government debt (80.2% of GDP in 2016) compared with the 'A' peer median, which partly reflects the legacy of the 2009 global economic crisis on the economy and the domestic banking sector. Net external debt (NXD, 24% of GDP in 2016) is high but declining rapidly, due to strong current account surpluses since 2012. Slovenia's 'A-' IDRs also reflect the following key rating drivers: GDP growth performance has been weaker than 'A' peers in recent years (at 0.8% on average in the last five years versus 2.9% for the 'A' peer median) although growth has picked up since 2014. Fitch expects annual real GDP growth to accelerate to 3% in 2017 and 2018, from 2.5% in 2016. Consumption will continue to drive growth, reflecting a strong labour market (the unemployment rate fell to 7.5% in December 2016 from 8.4% a year ago). A ramp-up in EU-fund disbursements should support a recovery in investment. Given Slovenia's economic openness, the main risk to the outlook is lower-than-expected external demand. In the medium term, Fitch expects annual GDP growth of around 2%. Fitch expects the general government deficit to narrow to 1.6% of GDP in 2017 and 1.4% in 2018, from 1.9% in 2016. The smaller deficit will primarily be driven by higher revenue from a supportive macro environment. The general election in 2018 poses some risk of fiscal slippage, including upcoming negotiations on wages in the civil service. In Fitch's view, this risk is partially mitigated by Slovenia's new fiscal framework even though the "fiscal rule" is still largely untested as it only dates from 2015. Fitch estimates government debt to have totalled 80.2% of GDP in 2016, significantly higher than 'A' peer median (52%). Debt would decline to 76% by 2018, due to the narrowing government deficit and acceleration in nominal GDP growth as inflation gradually recovers towards 2%. Active liability management led to an increase in the average weighted maturity to eight years in 2016 from 5.7 years in 2014, reducing refinancing risk. Following restructuring, recapitalisation and transfers of impaired assets to a bad bank, the capacity of the banking sector to resist shocks has improved significantly. The average capital ratio was 21.4% in 3Q16. Non performing claims (over 90 days overdue) were down at 6.5% in November 2016, from a peak at 18.1% in November 2013. The pace of contraction of banks' credit to corporates has slowed to 1% y/y in December 2016. Lending to households has been positive (4.1% y/y for housing loans in December 2016). Slovenia has recorded strong current account surpluses in recent years (estimated at 6.8% of GDP in 2016), primarily reflecting sharp corporate debt deleveraging and an associated fall in investment as well as stronger exports. This has allowed rapid reduction in NXD, which is forecast to reach 15.7% of GDP by 2018 from 24% in 2016. However, NXD is still well above the 'A' peer median (-12.4%). Fitch expects the government coalition will hold until the June 2018 general election as no party seems likely to benefit from an early election and there is no major tension between governing parties. After the fiscal consolidation in recent years, further structural reform, including supporting the sustainability of the pension system in the long-term, seems unlikely before 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 Foreign Currency IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows: - External finances: -1 notch: although Slovenia benefits 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 employees 18 variables based on three year-centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign Currency 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 debt-to-GDP; -A severe economic downturn that damages fiscal, financial or economic stability. KEY ASSUMPTIONS Given the uncertainties involved, Fitch does not assume a contribution from the realisation of returns on distressed assets held on the bad bank's balance sheet for its government debt projections. Likewise, Fitch does not take into account potential debt reduction from future privatisation proceeds. Fitch expects GDP growth in the eurozone, Slovenia's main trade partner, to be 1.7% in 2017 and 1.6% in 2018, versus 1.7% in 2016. 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: 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=1020426 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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