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 that Slovenia’s credible macroeconomic policy framework before the pandemic has mitigated the impact of the COVID-19 crisis. The Slovenian economy contracted in 2020, although much less than initially anticipated. The economy rebounded strongly in the first three quarters of 2021 and economic activity is now above the pre-pandemic level. As health conditions once again deteriorate, and as the Omicron variant adds to uncertainties, the strength of the recovery will depend on how the evolution of the pandemic affects mobility restrictions and supply-chain disruptions. On public finances, government support measures to cushion the impact of the COVID-19 crisis on households and business resulted in a significant deterioration in the fiscal balance. However, Slovenia arrived to the crisis having repaired its fiscal position and with the public debt ratio on a firm downward trajectory.

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 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, the pandemic has returned it 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

Strong Recovery Is Expected In 2021 And 2022, Risks Are Linked To The Pandemic

Following a 4.2% drop in real GDP in 2020, growth of the Slovenian economy has been steady. Seasonally adjusted quarter-over-quarter growth expanded by 1.6% on average each quarter this year. High value added sectors such as manufacturing, financial services and information and communication have already reached their pre pandemic levels, while services sectors like travel, food and accommodation are experiencing a slower recovery. The European Commission (EC) Autumn 2021 forecast sees the economy growing by 6.4% in 2021 and by 4.2% in 2022. EU funds constitute an upside risk for the economy. 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. Downside risks to the outlook stem from the evolution of the pandemic, whether labour shortages and supply bottlenecks are quickly resolved, and the possible negative consequences of price pressures that remain higher for longer than expected. Slovenia is registering a high incidence of new COVID cases and 56% of Slovenians were fully vaccinated as of December 6, 2021, a low vaccination rate compared to European peers.

Slovenia’s external savings position is expected to remain strong. The current account surplus improved to 7.4% of GDP in 2020 from 6.0% in 2019, mainly due to the improvement in the balance of goods trade 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. Strengthening domestic demand, elevated energy and commodity prices, and higher demand for imports should moderate Slovenia’s current account surplus. The strong price pressures in the international environment and exceptionally strong domestic demand have already narrowed the surplus in recent months. The annualized current account surplus stood at 5.0 % of GDP in September 2021. Years of strong external savings has narrowed the net international investment position, which improved to -7.5% of GDP in June 2021 from -44.0% in 2012.

COVID-Related Support Measures Increased Deficit And Debt Ratios, But Gradual Improvement Is Expected

The government has implemented nine aid packages to mitigate the consequences of the pandemic, with a tenth introduced in November 2021. 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 7.7% of GDP in 2020 and fiscal policy remains accommodative. Since support measures only gradually phase out this year, the EC forecasts a 7.2% deficit in 2021, declining to 5.2% in 2022. 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. DBRS Morningstar expects that Slovenia will gradually repair its fiscal position once crisis conditions have passed.

The costs of the COVID-19 pandemic reversed the downward trend of the public debt ratio since 2014. The economic contraction and the increased financing needs to cushion the crisis impact increased the debt ratio from 65.6% in 2019 to 79.8% of GDP in 2020. Despite the crisis-related increase in the debt ratio, Slovenia’s prudent debt management and the ECB’s accommodative policies have led to a further decline in the ratio of interest payment to GDP to 1.6% in 2020 from 3.2% in 2014. Almost all government debt is at fixed rates and in euros. The average debt maturity profile increased to 10 years in 2021 from 5.7 years in 2013, mitigating risks from the elevated debt levels. According to the 2022 Draft Budget, the debt ratio is projected to decline marginally in 2021 to 78.5%, before falling below 75% in 2024.

Risks Stemming From The Financial Sector Appear Manageable

Financial stability risk stems from COVID-related challenges to corporates and elevated property prices. The expiry of loan moratoria will likely increase the ratio of non-performing exposures (NPEs), especially in sectors most affected by the pandemic. Likewise, household income growth and general optimism around residential construction led property prices to increase by 9.9% in the second quarter compared to a year earlier. The Slovenian central bank identifies evidence of overvaluation of the real estate market relative to price fundamentals. However, these risks appear manageable. Slovenia’s banking sector entered the COVID-19 crisis with sound capital and liquidity positions and asset quality remains strong, the NPE ratio was 1.3% in September 2021, lower than in 2019. Specific sectors hardest hit by COVID restrictions have been more affected. The NPE ratio in the food and accommodation sector increased to 12.6% in September 2021. Conversely, the NPE ratio in manufacturing, which accounts for over a quarter of the NFCs bank loan book, remains low at 2.1%. Further containing systemic risk, bank exposure to the construction and real estate sectors remains low.

Despite A Fragmented Political Environment, 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 the lead up to parliamentary elections in April 2022, Jansa’s SDS remains the most popular party in Slovenia, consistently garnering around 25-30% of voting intentions. The new government will once again require a broad multi-party coalition. The current SDS-led government had come under EU scrutiny over allegations of media pressure after state funding was cut for Slovenia’s news agency STA. A new funding agreement with the press agency was reached in November 2021. Despite political fragmentation, Slovenia has strong institutions. The country benefits from membership of the EU and the Euro area. Both anchor macroeconomic policy making. 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 $ 25,549 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/389528.

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 euros (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/381451/global-methodology-for-rating-sovereign-governments (July 9, 2021). 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 (Draft Budgetary Plan 2022, Stability Programme 2021), Bank of Slovenia (Financial Stability Review October 2021), Institute of Macroeconomic Analysis and Development (Autumn Forecast of Economic Trends 2021, Slovenian Economic Mirror November 2021), European Commission (European Economic Forecast Autumn 2021, Integrated National Energy and Climate Plan of the Republic of Slovenia, Assessment of the final national energy and climate plan of Slovenia, Analysis of the recovery and resilience plan of Slovenia July 2021 ), Statistical Office of the European Communities, Republic of Slovenia Statistical Office, OECD, IMF (Article IV May 2021), World Bank, Bank for International Settlements, European Central Bank, Social Progress Imperative, UNDP, Our World In Data. 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/389533.

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: June 11, 2021

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