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 mitigates credit risk from ongoing external challenges. Government support and strong domestic demand helped the Slovenian economy accelerate out of the pandemic in 2021. The government has also helped offset rising costs to households and businesses from the pandemic and Russia’s invasion of Ukraine. Support will likely keep public sector expenditures high. The fiscal deficit is unlikely to decline to below 3% of GDP until 2023. Slovenia nevertheless arrived to the crisis having repaired its public finances, and DBRS Morningstar expects gradual fiscal consolidation and debt reduction as crisis conditions pass.
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 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 external shocks. The pandemic forced the public debt ratio back 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 and rising age-related costs are expected to place structural pressure on public expenditures.
Ratings could be upgraded if the government effectively implements policy measures that strengthen medium-term growth prospects or that address rising age-related public spending, and in doing so cause the government’s debt ratio to materially decline.
The ratings could be downgraded if prolonged economic underperformance, material fiscal deterioration, or substantial realization of contingent liabilities cause lasting deterioration in debt dynamics.
Strong Economic Recovery In 2021; Russia’s Invasion of Ukraine And Price Pressures Cloud The Economic Outlook
The Slovenian economy recovered by 8.1% in 2021, from the 4.2% contraction in 2020. Public support measures, robust employment, wage growth, reduction of high private sector savings, and strong investment in machinery and equipment were the domestic demand components that facilitated the strong rebound. Looking ahead, Slovenia’s economic performance is complicated by the impact of Russia’s invasion of Ukraine and inflation dynamics. Inflation in Slovenia expanded by 8.7% in May 2022 compared to a year earlier, increasing production costs and weakening consumer purchasing power. The European Commission (EC) expects the economy to grow by 3.7% in 2022 and by 3.1% in 2023. At the same time, Slovenia’s Recovery and Resilience Plan constitutes upside risk to economic growth. The EU’s Recovery and Resilience Facility (RRF) commits EUR 2.5 billion (4.8% of 2021 GDP) to Slovenia. EUR 1.8 billion are grants. In addition, Slovenia will benefit from EUR 3.5 billion (6.7% of 2021 GDP) in EU cohesion funds for the period 2021-2027. The economic plan includes investments to accelerate the green and digital transitions. It also includes important reforms to pension, healthcare, and the long-term care systems. Successful execution of the plans could increase Slovenia’s economic productivity and strengthen its growth potential.
Slovenia’s Strong External Surplus Narrowed Due To Strong Domestic Demand And High Import Costs
Slovenia’s strong 7.4% of GDP current account surplus in 2020 declined to 3.3% in 2021. This is primarily due to the lower surplus in the balance of trade in goods of non-energy sectors and higher cost of imports, energy in particular. While Slovenia’s direct trade links to Russia and Ukraine are broadly limited, Slovenia has sourced much of its fossil fuels for energy consumption from Russia. The fuels and energy component of the consumer price index increased by 21.1% in May 2022 compared to a year earlier. The EC expects the current account surplus to decline to 1.7% of GDP in 2022 as import costs remain elevated. Yet from a stock perspective, Slovenia has made much progress over the last decade in reducing external imbalances. According to the IMF, the country’s net international investment position improved to -7.1% of GDP in 2021 from -44.0% in 2012 due to years of strong external savings.
Fiscal Policy Will Remain Expansionary, But Forecasts Point To A Gradual Improvement Of Public Finances
The government implemented ten support packages in 2020-21 to mitigate the adverse effects of the pandemic. Public support was designed to improve healthcare, strengthen social security, and protect vulnerable households and industries via tax exemptions, furlough schemes, monthly basic incomes, and tourism vouchers among other measures. The fiscal deficit reached 7.8% of GDP in 2020 and declined to 5.2% in 2021. COVID-19 support measures will be phased out gradually this year. Still, higher public investment and additional measures to counter higher energy prices will keep fiscal policy expansionary. The government’s Stability Programme (SP) forecasts a 4.1% of GDP deficit in 2022 and a deficit below 3% by 2023. Given Slovenia’s weak demographic outlook and age-related costs, DBRS Morningstar considers the planned pension and healthcare reforms important for the long-term health of Slovenia’s fiscal accounts.
Extraordinary crisis-related spending increased Slovenia’s debt-to-GDP ratio to 79.8% of GDP in 2020, from 65.6% in 2019. The rise in debt was not accompanied by a deterioration in credit quality due to Slovenia’s effective debt management in recent years together with the European Central Bank’s (ECB) accommodative policies. From 2015 to 2019 – the years following the last crisis and in the lead up to the pandemic – Slovenia’s debt ratio declined by17 percentage points of GDP. Furthermore, the SP anticipates interest payments to GDP at 1.2% in 2022, from 3.2% in 2014, and an average debt maturity profile of 10 years in 2022, from 5.7 years in 2013. Nearly all government debt is at fixed rates and in euros. This mitigates risk from elevated debt levels. According to SP estimates, higher nominal GDP growth and the decline in high liquidity reserves will facilitate a reduction in the public debt ratio back below 70% by 2024.
Slovenia’s Banking System Has Weathered Recent Shocks Relatively Well
The banking system maintained sound capital levels and good liquidity positions throughout the pandemic, in part due to public support measures and the strong economic recovery. Non performing exposures (NPEs) stood at 1.2% in the first quarter of 2022, although remain high in the accommodation and food services sectors severely affected during the COVID-19 restrictions. Furthermore, DBRS Morningstar views the direct risks to the Slovenian banking system stemming from Russia’s invasion of Ukraine as limited. To further reduce banking links with Russia, Slovenia’s largest bank Nova Ljubljanska Banka (NLB) acquired the only Russian bank with presence in Slovenia, a Sberbank subsidiary which represented 4% of the total banking assets in Slovenia.
The Bank of Slovenia (BoS) flagged in its most recent Financial Stability Review risks inherent to elevated real estate prices. Household income growth and supply constraints caused prices to rise by 11.5% in 2021, and the BoS identifies evidence of overvaluation of the real estate market relative to price fundamentals. However, the house price index has advanced broadly in line with strong nominal GDP growth, and risks from rising prices are offset by limited bank exposure to the construction and real estate sectors.
A New Multi-Party Coalition; Slovenia Has Stable Policymaking Institutions
Following the parliamentary elections in April 2022, Robert Golob, the leader of the green-liberal Freedom Movement (GS) party was appointed Slovenia’s Prime Minister in May 2022. Golob’s GS became the most popular party in Slovenia, garnering 34.5%, while outgoing PM Janez Jansa’s Slovenia Democratic Party (SDS) came second with 24.9% of the vote. The GS reached an agreement with the Social Democrats (9.9% of the vote) and the Left (9.3% of the vote) to form a coalition government. According to the preliminary agreement, the new government will focus on accelerating the green and digital transitions as well as pension and healthcare reform. Slovenia benefits from membership of the EU and the Euro area – both anchor macroeconomic policymaking – and benefits from a healthy inflow of EU structural fund investments. The country’s credible policy framework is underpinned by its strong performance on the World Bank’s Governance Indicators when compared with its peers.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social (S) Factors
Human Rights and Human Capital (S) factor were among the key ESG drivers behind this rating action. Slovenia’s per capita
GDP is relatively low at $ 29,200 in 2021 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/398281.
EURO AREA RISK CATEGORY: LOW
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022].
The sources of information used for this rating include Ministry of Finance (Stability Programme 2022, Investor Presentation May 2022), Bank of Slovenia (Financial Stability Review October 2021, Review of Macroeconomic Developments March 2022, Monthly Report on Bank Performance April 2022), Institute of Macroeconomic Analysis and Development (Spring Forecast of Economic Trends, Slovenian Economic Mirror No. 4, Vol. XXVIII, 2022,), European Commission (European Economic Forecast Spring 2022, 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, 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/398282.
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: December 10, 2021
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