DBRS Confirms Republic of Slovenia at A, Stable Trend

DBRS Ratings Limited has confirmed the Republic of Slovenia’s Long-Term Foreign and Local Currency – Issuer Ratings at A and its Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (low). The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS

The confirmation of the ratings and trends reflect DBRS’s balanced view of Slovenia. The impressive growth performance of the Slovenian economy in recent years has accelerated the repair of fiscal accounts and has improved debt dynamics. With its wealthy and high value-added economy comparative to A-level regional peers, effective debt management and a judicious fiscal framework, and its membership of European institutions, Slovenia has emerged from the global financial crisis with strong external and financial sector shock-absorbing buffers.

Nonetheless, the ratings are principally constrained by the high stock of public sector debt. The government expects general government debt to decline to 70% of GDP this year, a noteworthy 13 percentage point reduction since 2015 if accomplished, but still well above regional peers. Notwithstanding the balanced headline fiscal position in 2017, rising age-related costs in a context of poor demographic trends are expected to place structural pressure on public expenditures. This could limit long-run debt reduction in the absence of healthcare and pension reform.

RATING DRIVERS

DBRS considers Slovenia secure in the A category and would need to see sustained evidence of large fiscal buffers, greater convergence towards EU income levels, and significant debt reduction before moving the country into the AA rating category. Positive ratings pressure could emerge within the A category if (1) the government debt burden declines faster than current projections, or (2) structural reform measures strengthen medium-term growth prospects, without generating large macroeconomic imbalances. Conversely, the ratings could face downward pressure if the descending trend on debt dynamics reverses due to a shock to Slovenia’s small and open economy that causes (1) significant economic underperformance, (2) material fiscal slippage, or (3) a substantial realization of contingent liabilities.

RATING RATIONALE

Domestic and External Demand Support Slovenia’s Impressive Economic Expansion

The impressive performance of the Slovenian economy in recent years has been broad-based. Following the double dip recessions from 2008-2012 and the stabilizing macroeconomic policies since 2013, growth averaged 2.8% from 2014-2016, supported in large part by external demand. Growth reached 5.0% in 2017, due to strengthened domestic demand from increased investment, improved labour market developments, and sustained wage and employment gains. Growing disposable incomes, upbeat consumer confidence, and the steady resurgence of capital formation from improved private sector balance sheets and the delivery of EU funds should support strong near-term GDP growth results. DBRS sees upside to the EC’s 4.2% growth projection this year and its 3.5% growth forecast for 2019.

External performance is expected to remain sturdy. Slovenia is fully integrated into the regional supply chain and manufactures a diverse range of high value-added component parts for machinery and transport equipment, electronics, pharmaceuticals, and other sectors. Since export growth bottomed out in 2009, the combination of improved cost competitiveness and a strong pick-up in external demand caused a steady rise in trade volumes. This supported the recovery and helped correct the large crisis-related current account imbalance. DBRS expects the strong current account surplus position, at 6.2% of GDP as of the third quarter of 2017, to continue to narrow the net international investment position, at -31.3% of GDP as of the third quarter of 2017.

Despite Slovenia’s Improved Fiscal and Debt metrics, Structural Weaknesses Remain in Slovenia’s Public Finances

Fiscal consolidation since the crisis has been significant due to a menu of corrective temporary and structural measures. The consolidation accelerated in recent years due to some expenditure control, strong revenue growth from economic over-performance, and a reduction in the interest burden. The headline deficit narrowed to 1.9% of GDP in 2016 and reached balance last year. The 2018 parliamentary election cycle does not appear to have reduced the political appetite for further fiscal consolidation. The government expects a small headline surplus result this year, where it is expected to remain in 2019.

Improved fiscal and economic conditions and a comfortable funding profile have placed debt as a share of GDP on a firm downward path. After peaking in 2015 at 82.6%, the government forecasts an aggressive debt reduction through the end of the decade. The ratio declined to 73.6% last year due to strong economic performance, improvement in the fiscal deficit, and a reduction in public sector cash buffers. The EC expects the debt ratio to reach 67.5% by 2020. Debt appears more contained net of the government’s €5.8 billion in liquid assets, or 12.3% of GDP, as of the first quarter 2018.

Despite strong headline fiscal outcomes and favourable debt dynamics, Slovenia’s public finances face medium-term challenges. The EC calculates a structural deficit of 1.6% of potential GDP in 2018. While the government’s calculations are more benign, Slovenia’s structural fiscal performance is weighed by increasing age-related costs from deteriorating demographic trends. Further progress on healthcare and pension reforms are likely necessary for Slovenia to comply with its structural objectives over the medium term. Moreover, the public debt burden is high when compared against peers of similar economic size. The country’s high debt stock limits it’s shock absorption capacity and redirects public funds towards debt servicing. Despite low bond yields, interest payments increased from 1.0% of GDP in 2007 to 2.3% in 2017.

Improved Financial Sector Indicators, but Delayed Banking Sector Privatization

The banking sector has worked through its crisis-legacies and is broadly in repair. In the context of strong economic performance, credit growth has returned to positive in the non-financial private sector. Loans to households have been particularly strong. Banking sector resilience is evident by improved capital and funding positions and the dramatic improvement in asset quality. Claims with arrears over 90 days to total claims declined from 18.1% at the end of November 2013 to 3.7% in 2017. Despite the progress on reducing system-wide non-performing loans, non-performance in the corporate sector remains high.

Successful sale of government-owned banks as part of an agreement with the EC remains uncertain. Following the approval of state aid to Slovenia’s state-owned banking sector, the government committed to sell three-quarters of Nova Ljubljansa Banka’s (NLB), the largest state bank, assets in 2017. Instead, the government requested to delay the sale and pending negotiations with the EC is now slated for partial privatization later this year. Privatization of state-owned bank Abanka is scheduled for 2019. Slovenia’s has a track record of bank takeovers and mergers dating back to the early 2000s, but negotiations tend to be drawn out and acquisitions are regularly blocked or delayed. In DBRS’s view, this casts uncertainty around current privatization plans meant to reduce the state’s presence in the economy and its contingent liabilities.

Notwithstanding Fractured Politics, Slovenia has a Stable Policy-Making Anchor

No Slovenian Prime Minister (PM) in a decade has completed his full term in office. PM Miro Cerar resigned his post in March 2018, following public sector protests over wage negotiations and a Supreme Court ruling that annulled the positive results of a referendum held in 2017 to go ahead with a large railway infrastructure project. Cerar deemed the project an important part of his mandate and resigned once it was voided. Since 2008, two PMs have resigned and two were removed from office by votes of no confidence. Elections are scheduled for June 3, 2018, early by only one week. Recent polls show none of the main political parties appear on course to take more than a fifth of the votes, suggesting a high likelihood of another fragmented outcome.

In spite of the political volatility, Slovenia has strong institutional backing. The country benefits from its membership of both the EU and Euro area, which functions as a stability anchor for macroeconomic policy. Slovenia also benefits from a healthy inflow of EU structural fund investments directed towards productive areas. The country’s credible policy framework is underpinned by its strong performance on the World Bank’s Governance Indicators when compared with its peers, particularly the Rule of Law and Government Effectiveness. The main policy challenge facing the next few governments will be how it manages the fiscal and economic consequences of its aging population.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the A to BBB (high) range. The main points discussed during the Rating Committee include the outlook for fiscal policy, SOE and bank privatizations, economic performance, and debt management.

KEY INDICATORS

Fiscal Balance (% GDP): 0.0 (2017); 0.4 (2018F); 0.4 (2019F)
Gross Debt (% GDP): 73.6 (2017); 74.1 (2018F); 72.0 (2019F)
Nominal GDP (EUR billions): 43.3 (2017); 45.5 (2018F); 47.8 (2019F)
GDP per Capita (EUR): 20,932 (2017); 21,983 (2018F); 23,051 (2019F)
Real GDP growth (%): 5.4 (2017); 4.2 (2018F); 3.5 (2019F)
Consumer Price Inflation (%): 1.6 (2017); 1.8 (2018F); 2.0 (2019F)
Domestic Credit (% GDP): 124.7 (Sep-2017)
Current Account (% GDP): 6.4 (2017); 5.4 (2018F); 5.9 (2019F)
International Investment Position (% GDP): -31.3 (2017)
Gross External Debt (% GDP): 100.4 (2017)
Governance Indicator (percentile rank): 83.7 (2016)
Human Development Index: 0.89 (2015)

Notes:

All figures are in EUR unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development. Gross Debt forecasts for 2018 and 2019 are from European Commission.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.

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

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: Thomas R. Torgerson, Co-head of Global Sovereign Ratings
Initial Rating Date: November 17, 2017
Last Rating Date: November 17, 2017

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