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 caused the Slovenian economy to contract by 5.5% in 2020 and deteriorated its public finances. Following a surplus position in 2019, the fiscal deficit reached 8.4% of GDP last year and public debt increased to 80.8% of GDP. 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. The strength of the 2021 recovery will depend on the vaccine rollout and control of the virus in Slovenia and across Europe.

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 in 2020 returned to previous highs, 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 lasting deterioration in debt dynamics. This could result from significant and prolonged economic underperformance, material fiscal deterioration, or substantial realization of contingent liabilities.

RATING RATIONALE

Following Slovenia’s 2020 Economic Contraction, A Strong Recovery Is Expected In 2021 And 2022

Slovenia’s economy contracted by 5.5% in 2020, less severe that initially anticipated and comparatively better than the 6.6% euro area contraction. Even while COVID-19 cases began to surge in October 2020, fourth quarter growth was supported by better adaptation of households and businesses to the pandemic, more targeted containment measures, and strong external demand. The Institute of Macroeconomic Analysis and Development (IMAD) expects the economy to grow by 4.5% on average over the next two years, supported by the improving epidemiological situation. EU fund disbursement will also support economic activity. The EU’s Recovery and Resilience Facility (RRF) commits EUR 2.5 billion (5.2% of GDP) to Slovenia, of which EUR 1.8 billion are grants. A large part of the spending will be directed towards the green and digital transition, health care, and social security.

Slovenia’s current account surplus improved to 7.1% of GDP in 2020 from 5.6% in 2019. The coronavirus shock affected 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. Terms of trade were also favourable due to large drops in global energy and commodity prices. Slovenia has recorded current account surpluses of 4.8% on average since 2012. The strong external savings position has narrowed the net international investment position, which improved to -16.3% of GDP in 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 its key trading partners and the return of international tourists.

Eight Rounds Of COVID-Related Budget Support Measures Significantly Increased Deficit and Debt Ratios

The government has passed eight anti-coronavirus spending packages since mid-March 2020 to mitigate the consequences of the epidemic. The support measures have been directed towards improving healthcare, the preservation of employment, tax exemptions, monthly basic incomes, tourism vouchers, and other protections to vulnerable households and industries. This deficit reached 8.4% of GDP in 2020, and the gradual phasing out of support measures together with expansionary fiscal policy particularly supporting investment will result in a still high 8.6% deficit in 2021. DBRS Morningstar expects a return to budget repair once crisis conditions have passed. Slovenia’s success prior to the crisis in repairing its public finances allowed it the counter-cyclical fiscal space for the large policy response at the onset of the crisis. The 2021 Stability Programme does not expect the budget balance to consolidate to below 3% before 2024.

The cost of the crisis increased debt to GDP by roughly 15 percentage points. Reversing years of a persistent downward sloping debt trend, debt to GDP reached 80.8% in 2020, from 65.6% in 2019. Despite the crisis-related increase in the debt ratio, Slovenian debt management is a strength. Favourable financing conditions (interest payment to GDP declined to 1.7% in 2020, from 2.9% in 2014) and the average debt maturity profile (8.1 years at the end 2020) mitigate risks arising from the elevated debt levels. The EC expects the debt ratio to decline to 79% in 2021 and to 77% in 2022.

Risks Stemming From The Financial Sector Appear Manageable

Slovenia’s banking sector entered the COVID-19 crisis with sound capital and liquidity positions. Nonperforming exposures (NPE) as a share of total exposures declined from 11.4% in 2015 to 2.2% in 2019. However, the unfavourable macroeconomic environment is expected to have an impact on banks’ asset quality. The expiration of loan moratoria will likely increase NPEs, especially in sectors of the economy hardest hit by the pandemic. According to the Bank of Slovenia, 7.8% of total bank exposures were under moratoria as of the first quarter 2021. In addition, DBRS Morningstar views favourably the government’s recent divestments of large banks. The government’s sales of Nova Ljubljanska Banka (NLB) and Abanka reduced its exposure to potential calls for capital to support these banks.

Despite The Political Volatility, Slovenia Has Stable Policy-Making Institutions

In March 2020, Janez Jansa, the leader of the Slovenian Democratic Party (SDS) was appointed Prime Minister. 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. Jansa’s SDS remains the most popular party in Slovenia, consistently garnering around 30% of voting intentions. That said, the current government appears fragile. Jansa recently survived an impeachment motion, and anti-government protests demand that the 2022 elections be brought forward. As Slovenia takes over the EU presidency in July 2021, Jansa has come under EU scrutiny over allegations of media pressure after state funding was cut for Slovenia’s news agency STA.

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 $ 25,210 in 2020 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 can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/380029.

EURO AREA RISK CATEGORY: LOW

Notes:
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.

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

The principal methodology is the Global Methodology for Rating Sovereign Governments, https://www.dbrsmorningstar.com/research/364527/global-methodology-for-rating-sovereign-governments (July 27, 2020). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (February 3, 2021).

The sources of information used for this rating include Ministry of Finance (Stability Programme 2021), Bank of Slovenia (Financial Stability Review April 2021, Monthly Bulletin May 2021), Institute of Macroeconomic Analysis and Development (Spring Forecast of Economic Trends 2021, Slovenian Economic Mirror May 2021), European Commission (European Economic Forecast Spring 2021, Integrated National Energy and Climate Plan of the Republic of Slovenia, Assessment of the final national energy and climate plan of Slovenia ), Statistical Office of the European Communities, Republic of Slovenia Statistical Office, OECD, IMF, World Bank, Bank for International Settlements, European Central Bank, Social Progress Imperative, UNDP, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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/380027.

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, Global Sovereign Ratings
Initial Rating Date: November 17, 2017
Last Rating Date: January 15, 2021

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