DBRS Morningstar Confirms Republic of Slovenia at A (high), Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) confirmed the Republic of Slovenia’s Long-Term Foreign and Local Currency – Issuer Ratings at A (high). At the same time, DBRS Morningstar confirmed the Republic of Slovenia’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (middle). The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS

The confirmation of the A (high) ratings and Stable trends reflect DBRS Morningstar’s assessment of Slovenia’s credible macroeconomic policy framework, even when confronted with the current health and economic crisis. The shock to the global economy brought on by the Coronavirus disease (COVID-19) and the associated restrictive measures have significantly contracted the Slovenian economy in 2020 and deteriorated its public finances. However, Slovenia arrived to the crisis following consecutive years of budgetary surplus and the public debt ratio on a firm downward trajectory. Slovenia thus had ample capacity at the onset of the crisis to support the economy. Whether the crisis causes lasting deterioration in Slovenia’s credit quality is contingent on its duration.

Slovenia’s credit strengths stem from its wealthy and high value-added economy compared to A category regional peers, its effective debt management and judicious fiscal framework, and its membership of European institutions. However, the ratings are principally constrained by the country’s still high stock of public sector debt, and the small and open nature of the Slovenian economy that makes it vulnerable to enduring external shocks. Notwithstanding the noteworthy reduction in the public debt ratio in recent years, government debt is expected to have returned to previous highs in 2020, and long-run debt reduction could be challenged by rising age-related spending. To accompany the current crisis-related costs, unfavourable demographic trends are expected to place structural pressure on public expenditures.

RATING DRIVERS

Ratings could be upgraded once the crisis has passed if strong economic performance and prudent fiscal management cause the government’s debt ratio to materially decline. Passage of policy measures that strengthen medium-term growth prospects or address rising age-related spending would also be credit positive.

The ratings could be downgraded if the health and economic crisis proves more durable and causes a deterioration in debt dynamics well beyond current expectations. This could result from significant and lasting economic underperformance, material fiscal deterioration, or substantial realization of contingent liabilities.

RATING RATIONALE

Despite Comparatively Better Control of the Virus Early in the Year, Slovenia’s 2020 Economic Contraction was Severe

COVID-19 cases and deaths in Slovenia increased markedly in the final quarter of 2020. Early in the epidemiological crisis, the number of confirmed cases and deaths were appreciably lower in Slovenia than in larger European countries. This led the government in May 2020 to declare an end to the epidemic. The health situation in Slovenia has since deteriorated. Slovenia now has one of the highest COVID-19 mortality ratios of deaths per 100,000 people in Europe. To alleviate the negative consequences of the pandemic, several rounds of relief measures were adopted in 2020 at the national and European level to help households and businesses mitigate losses.

The Institute of Macroeconomic Analysis and Development (IMAD) expects the economy to have contracted by 6.6% in 2020. The economic contraction was due to the implementation of strict measures to contain the spread of the virus in Slovenia and around the world. The shutdown of non-essential activity early in the year hampered domestic activity, while measures put in place across Europe deteriorated external demand for Slovenia’s manufactured goods and its travel and tourism services. Interruption to international supply chains following the second wave that began in October 2020 has been more limited. Economic activity should recover in 2021, assuming increasing control of the virus, loosening of mobility restrictions, accommodative monetary policy, and the delivery of public sector and EU-level relief and stimulus measures. The EU’s Recovery and Resilience Facility commits EUR 1.6 billion (3.3% of GDP) in grants to Slovenia through 2023. IMAD expects GDP to recover by 4.3% in 2021 and return to pre-COVID levels in 2022.

Years of Budget Consolidation and Debt Reduction Opened Fiscal Space for Slovenia’s Policy Response to the Crisis

The COVID-19 crisis reversed years of progress repairing Slovenia’s public finances. Fiscal consolidation since the deficit was 5.5% of GDP in 2014 was due to favourable economic conditions, strong revenue growth, and a steady decline in interest expenditure. From 2017 to 2019, Slovenia averaged primary surpluses of 2.5% of GDP. As a result of this fiscal performance and strong economic growth, the debt ratio was for many years on a firm downward trajectory. The debt-to-GDP ratio declined by 17.1 percentage points from 2015 to 2019, when the ratio reached 65.6%.

To offset the health and economic effects of the crisis the government has passed seven rounds of budgetary support measures since mid-March. The spending measures are directed towards healthcare, the preservation of employment, tax exemptions, monthly basic incomes, tourism vouchers, and other protections to vulnerable households and industries. The government has also implemented loan guarantees and loan payment deferrals for borrowers. The government expects the deficit to widen to 8.6% of GDP in 2020 and narrow to 6.6% in 2021. Debt is expected to have increased in 2020 to 82.4% of GDP.

The EC expects public accounts to improve only gradually over the forecast period. Absent the current crisis, Slovenia’s weak demographic outlook and the associated increase in age-related costs are likely to weigh on the country’s long-term fiscal performance. DBRS Morningstar makes a negative qualitative assessment in the “Fiscal Management and Policy” building block to account for risks to the fiscal outlook stemming from the COVID-19 shock.
Slovenia Started 2020 having Improved Financial Sector Indicators and having Progressed with Privatisations

The banking sector worked through its legacy challenges prior to the onset of the COVID-19 crisis. Banking indicators at the start of 2020 showed improved liquidity, capital and funding positions, and an improvement in asset quality. Nonperforming exposures as a share of total exposures declined from 11.4% in 2015 to 2.2% in 2019. That ratio was 1.9% in October 2020. However, the longer the current crisis persists, the greater the private sector financial difficulties and the more pressure will mount on the banking sector.

The completed sales of Nova Ljubljanska Banka (NLB) and Abanka were important achievements. The government relinquished 65% of NLB, Slovenia’s largest bank, following an IPO in late 2018 and another 10% in June 2019. It then completed the sale of Abanka, the third largest bank, in February 2020 to previously privatised bank Nova KBM (NKBM). DBRS Morningstar considers the divestment of these banks to be an important step in the government’s efforts to reduce the historically high direct involvement of the state in the economy and to reduce the government’s exposure to potential calls for capital to support these banks.

Slovenia’s Strengthened External Position in Recent Years Helps Absorb the External Shock

Despite the significant shock to cross-border trade, Slovenia has not seen deterioration in its strong external surplus. The coronavirus shock affects Slovenia’s external position mainly via the service balance, due to the decline in the export of travel and transport services. Conversely, the balance of goods trade improved as a consequence of a larger decline in the import of goods than of exports and improvements in terms of trade. The current account has been in strong surplus since 2012 and has improved during the COVID-19 crisis, increasing to 6.8% of GDP in November 2020.

The strong external savings position has in recent years narrowed the net international investment position, which improved to -17.3% of GDP as of the third quarter 2020, from -44.0% in 2012. The performance of Slovenia’s external sector in the years to come will depend in large part on the recovery of key trading partners such as Germany and Italy. Slovenia is integrated into the regional supply chain and manufactures a range of high value-added component parts.

Despite the Political Volatility, Slovenia has Stable Policy-Making Institutions

In January 2020, Marjan Sarec announced his resignation as Prime Minister, after failing to secure parliamentary support for healthcare legislation. Fresh elections were avoided when Janez Jansa of the Slovenian Democratic Party formed an unexpected coalition in March 2020. This is the third time Jansa leads a government. In December 2020, the Democratic party of Pensioners of Slovenia withdrew its government support, reducing the minority coalition to three parties with 41 of 90 parliamentary seats. It remains uncertain whether elections are brought forward from the polls scheduled in 2022.

Despite the political volatility, Slovenia has strong institutions. 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.

ESG CONSIDERATIONS

Human Rights and Human Capital (S) were among the key ESG drivers behind this rating action. Slovenia’s per capita
GDP is relatively low at $26,000 in 2019 compared with its euro system peers. This factor has been taken into account within the Economic Structure and Performance building block.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.
https://www.dbrsmorningstar.com/research/372363

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in EUR unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The principal methodology is the Global Methodology for Rating Sovereign Governments (27 July 2020) https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments

The sources of information used for this rating include the Ministry of Finance (Draft Budget 2021), Bank of Slovenia (Macroeconomic Developments November 2020), Institute of Macroeconomic Analysis and Development (Winter Forecast 2020), European Commission, Statistical Office of the European Communities, Republic of Slovenia Statistical Office, OECD, IMF, World Bank, Bank for International Settlements, European Central Bank, UNDP, Haver Analytics. DBRS Morningstar 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.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/372362.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.
Lead Analyst: Jason Graffam, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Co-Head of Sovereign Ratings
Initial Rating Date: November 17, 2017
Last Rating Date: August 21, 2020

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