DBRS Assigns A Ratings to Republic of Slovenia, Stable Trend

DBRS Ratings Limited assigned Long-Term Foreign and Local Currency Issuer Ratings of A and Short-Term Foreign and Local Currency Issuer Ratings of R-1 (low) to the Republic of Slovenia. The trends on all ratings are Stable.

The ratings are underpinned by Slovenia’s comparatively wealthy and high value-added economy, its effective debt management and judicious fiscal framework, and its membership of the European Union (EU) and Euro area. The country has emerged from the global financial crisis with stronger external and financial sector shock-absorbing buffers. The ratings are principally constrained by the high stock of public sector debt. While the fiscal balance has broadly been repaired, rising age-related costs are expected to place structural pressure on public expenditures. This could limit long-run debt reduction in the absence of healthcare and pension reform.

Slovenia’s economic outlook is positive. Following the double dip recessions from 2008-2012 and the timely macroeconomic policies since 2013 that helped stabilize the economy, growth averaged 2.8% from 2014-2016. Slovenia benefits from a large export sector with strong integration into key regional supply chains, such as high value-added component parts for machinery and transport equipment, electronics, and pharmaceuticals. In recent years, the economy had been supported by more favourable external demand. More recently, domestic demand has gradually strengthened due to sustained wage and employment gains and capital formation. As a result of stronger than expected growth in consumption and investment, recent EC forecasts increased growth projections to 4.7% this year and 4.0% in 2018.

Fiscal consolidation since the crisis has been significant. Due to a menu of corrective temporary and structural measures, Slovenia exited the European Commission’s Excessive Deficit Procedure after 2015. The consolidation accelerated last year when the headline deficit reached 1.9% of GDP due to economic over-performance. Strong revenue growth is expected to narrow the deficit to 0.8% this year. While the 2018 parliamentary election cycle could imbed a fading political appetite for further fiscal consolidation, the introduction of a fiscal rule and fiscal council – considered more stringent than EU rules – could create guardrails against future fiscal slippage.

The strength of public debt management is evident by the Ministry of Finance’s effective pre-funding strategy, its diversified investor base, and the long maturity profile. Thanks in part to expansionary ECB policy and confidence in Slovenia’s debt management, market bond yields have remained below 1.0% throughout 2017. Liquid assets worth €5.1 billion as of November 2017 also helps smooth public sector financing operations. Improved fiscal and economic conditions and a comfortable funding profile have placed debt as a share of GDP on a firm downward path. The government expects the debt ratio to decline by roughly 3 percentage points per year through 2020. DBRS excludes assumptions around privatization proceeds in its analysis of debt reduction.

Despite favourable debt dynamics, Slovenia’s public debt burden is high when compared against its peers. Crisis-related deficits and one-off bank recapitalization measures caused a nearly fourfold increase in public liabilities from 2008 to 2015, when debt to GDP peaked at 82.6%. Such a high debt stock limits the country’s shock absorption capacity if confronted with another large external crisis and redirects public funds towards debt servicing. Despite low bond yields, interest costs increased from 1.1% of GDP in 2008 to 3.0% last year.

Demographic challenges also generate some structural fiscal uncertainty. The Slovenian population is set to peak in 2020. The rapidly increasing life expectancy along with a very low fertility rate places significant pressure on the median age and the dependency ratio over the next 20 years. In the absence of structural changes to pension and healthcare services, the long-run increase in age-related spending is estimated as the largest among EU countries. An aging population not only increases public expenditures but can also limit labour inputs into the economy that weigh on growth potential.

The state has a strong presence in many sectors of the economy and progress on SOE privatization is ongoing. According to the OECD, there are over 650 public enterprises across many economic sectors. Indeed, state ownership can help safeguard certain strategic sectors and there is evidence that SOE performance is improving. The injection of private capital into the economy could nevertheless increase corporate governance and operational efficiency. Of the fifteen SOEs slated for privatization in 2013, nine have been sold, yet privatization of the largest SOE (Telecom Slovenia) and the largest state bank (NLB) have confronted impediments. Given reoccurring complications, DBRS is of the view that privatizations will likely be delayed at least until after the parliamentary election.

RATING DRIVERS

The Stable trend reflects DBRS’s neutral view on risks to the ratings. A sustained commitment to fiscal consolidation that strengthens fiscal buffers and reduces the government debt burden faster than current projections would create upward pressure on the ratings. Furthermore, structural measures that strengthen medium-term growth prospects, without generating large macroeconomic imbalances, could also warrant upward rating action. Conversely, the ratings could face downward pressure if the downward trend on debt dynamics reverses, due to material underperformance of the economy, fiscal slippage, or a realization of contingent liabilities.

Notes:
All figures are in EUR unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include the Ministry of Finance, Bank of Slovenia, European Commission, Statistical Office of the European Communities, IMF, World Economic Outlook, UNDP, OECD, World Bank, Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is the first DBRS rating on this issuer.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Jason Graffam, Vice President
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer
Initial Rating Date: November 17, 2017
Last Rating Date: Not applicable as no last rating date.

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