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 balances Slovenia’s credible macroeconomic policy framework against the consequences of the ongoing energy price crisis. Following the COVID-19-induced contraction in 2020, the economy expanded by 8.2% in 2021 thanks to government support, a rebound in manufacturing, and strong domestic demand. The government has also helped offset rising costs to households and businesses from Russia’s invasion of Ukraine. Support to the public will persist into next year, temporarily reversing this year’s fiscal improvement. Slovenia nevertheless arrived to the crises having repaired its public finances, and as crisis conditions pass, DBRS Morningstar expects Slovenia to revert to its trend of gradual fiscal consolidation and debt reduction. The government’s 2023 Budget estimates the deficit to fall below 3% of GDP by 2024.

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.

RATING DRIVERS
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.

RATING RATIONALE
The Economic Outlook Has Clouded, Following Strong Recoveries In 2021 And 2022

The Slovenian economy recovered rapidly following the 4.3% contraction in 2020. Real GDP grew by 8.2% in 2021 and by 9.0% through the first half of 2022. 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. The registered unemployment rate declined to 5.5% in August 2022 from 7.1% in August 2021, due to strong domestic demand and labour shortages. High prices started to dampen economic sentiment in the second half of 2022. High inflation, the harmonized index of consumer prices was 10.8% in November 2022 compared to a year earlier, increases production costs and weakens consumer purchasing power. The European Commission (EC) forecasts the economy to grow by 6.0% in 2022, before slowing to 0.8% in 2023 and 1.7% in 2024. Slovenia’s Recovery and Resilience Plan constitutes upside risk to economic growth.

The EU’s Recovery and Resilience Facility commits EUR 2.2 billion (4.2% of 2021 GDP) to Slovenia. The plan consists of 83 measures, 50 investments, and 33 reforms primarily focused in the green and digital transition. Slovenia will receive EUR 1.49 billion in grants and EUR 705 million in loans. In addition, Slovenia will benefit from EUR 3.2 billion (6.1% of 2021 GDP) in EU cohesion funds for the period 2021-2027. The economic plan includes investments to accelerate the green and digital transitions. The plan 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 Current Account Reverts To Deficit Due To High Import Costs And Weak External Demand

Slovenia’s external position strengthened significantly in the years prior to the pandemic. Strong export performance supported an average annual current account surplus of 4.5% of GDP during 2012-19. More recently, higher imports prices and weaker trade performance of the non-energy goods sectors forced the current account surplus to decline to 3.8% of GDP in 2021 from 7.6% in 2020. While Slovenia’s direct trade links to Russia are limited, accounting for 2.2% of total exports in 2021, Slovenia has relied on imports of energy and metals from Russia and Ukraine. The EC expects Slovenia to record a 0.6% of GDP current account deficit this year due to the increases in import costs and lower foreign demand for Slovenian exports. From a stock perspective, Slovenia has made much progress over the last decade in reducing external imbalances. According to the IMF, years of strong external savings improved the country’s net international investment position to -4.0% of GDP in June 2022 from -44.0% in 2012.

Fiscal Policy Will Remain Expansionary In 2023

The economic contraction and the fiscal measures to counter the impact of the pandemic on businesses and households resulted in a fiscal deficit of 7.7% of GDP in 2020, up from small surpluses recorded in 2018-19. The government implemented ten support packages in 2020-21 to improve healthcare, strengthen social security, and protect vulnerable households and industries. Support consisted primarily of tax exemptions, furlough schemes, monthly basic incomes, and tourism vouchers. The economic recovery improved the deficit to 4.7% of GDP in 2021, and the 2023 Budget expects a 3.8% result in 2022. Spending demands linked to the energy crisis will keep fiscal policy expansionary in 2023. The government measures to address rising prices will amount to roughly 1.0% of GDP this year, and an additional 2.0% of GDP next year. The 2023 Budget forecasts the headline deficit to increase to 5.0% of GDP in 2023 before declining to 2.2% in 2024. Uncertainty to the fiscal outlook supports DBRS Morningstar’s negative qualitative adjustment for the “Fiscal Management and Policy” Building Block. The balance of risk over the medium-term is to the downside given Slovenia’s weak demographic outlook and increasing age-related costs. The planned pension and healthcare reforms are important for the longstanding health of Slovenia’s fiscal accounts.

Slovenia’s Debt-to-GDP Ratio Has Reverted Back To A Downward Trend

Slovenia’s debt-to-GDP ratio increased to 79.6% of GDP in 2020, from 65.4% in 2019, due to the pandemic shock. The rise in debt was not accompanied by a deterioration in credit quality, in part because of Slovenia’s effective debt management and debt reduction prior to 2020. From 2015 to 2019 – the years following the last crisis and in the lead up to the pandemic – Slovenia’s debt ratio declined by seventeen percentage points of GDP. The debt ratio returned to its downward path last year and crises notwithstanding Slovenia’s key debt management metrics are strong. Debt-to-GDP declined to 74.5% in 2021 and is estimated to reach 71.5% in 2022. Despite the increase in interest rates, the 2023 Budget estimates interest payments to GDP of 1.2% in 2022, from 3.2% in 2014. The average debt maturity profile in 2022 has increased to 10.2 years, from 5.7 years in 2013. Nearly all government debt is at fixed rates and in euros. These factors mitigate the risks from elevated debt levels. The 2023 Budget estimates the debt ratio will decline to 70.0% by 2024.

Slovenia’s Banking System Has Weathered Recent Shocks

The Slovenian banking system’s strong financial metrics before the pandemic have helped it weather the impact of the pandemic. Banks have maintained sound capital levels and good liquidity positions. Non performing exposures (NPEs) in the non-financial corporations portfolio stood at 1.8% in the third quarter of 2022, although NPEs remain high in the accommodation and food services sectors severely affected during the COVID-19 restrictions. Nevertheless, high inflation and rising interest rates could deteriorate the asset quality of household and business loan books. Real estate prices grew by 11.5% in 2021, amid the strong economic recovery and supply constraints. The Bank of Slovenia in its most recent Financial Stability Review identifies evidence of overvaluation in the real estate market relative to price fundamentals. Risks are mitigated by a moderate level of private sector indebtedness. The household debt-to-GDP ratio in particular is low, reaching 27% in the second quarter of 2022.

Slovenia Has Stable Policymaking Institutions

Slovenia has a stable political system and strong institutions. Membership of the EU and the Euro area anchor macroeconomic policymaking. The country’s credible policy framework is underpinned by its strong performance on the World Bank’s Governance Indicators when compared with its peers. 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 23.5% of the vote. The GS reached an agreement with the Social Democrats (6.7% of the vote) and the Left (4.5% of the vote) to form a coalition government, whose plan is to focus on accelerating the green and digital transitions as well as pension and healthcare reform.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Social (S) Factors
The Human Capital and Human Rights factor affects Slovenia’s ratings. Slovenia’s per capita GDP is relatively low at USD 29,298 in 2021 compared to its euro area peers. Nonetheless, DBRS Morningstar notes the improvement in Slovenia’s per capita GDP in recent years. This factor has been taken into account within the Economic Structure and Performance building block.

There were no Environmental and Governance factors that had a significant or relevant effect on the credit analysis

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. (May 17, 2022)

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments. https://www.dbrsmorningstar.com/research/407077.

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in euros 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/401817/global-methodology-for-rating-sovereign-governments (August 29, 2022). In addition, DBRS Morningstar uses 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) in its consideration of ESG factors.

The sources of information used for this rating include Ministry of Finance (Draft Budgetary Plan 2023, Investor Presentation October 2022), Bank of Slovenia (Financial Stability Review May 2022, Review of Macroeconomic Developments September 2022, Monthly Report on Bank Performance October 2022), Institute of Macroeconomic Analysis and Development (Spring Forecast of Economic Trends, Slovenian Economic Mirror No. 7, Vol. XXVIII, 2022,) European Commission (European Economic Forecast Autumn 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, IFS, 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/407078.

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 10, 2022

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81
Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.