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 Stable trends reflect DBRS Morningstar’s view that Slovenia’s credible macroeconomic policy framework has helped the economy effectively navigate a series of adverse global shocks. After contracting 4.3% in 2020, the economy expanded well above trend growth over the last two years. The recovery was driven by substantial fiscal support and household consumption. Higher inflation and tighter financing conditions will slow economic growth this year. Even though fiscal policy remains expansionary, DBRS Morningstar expects Slovenia to gradually consolidate fiscal accounts and reduce the government debt-to-GDP ratio as external and domestic conditions improve. By 2025, the government targets a deficit of 2.2% of GDP and a debt ratio of 65.0%.

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 comparatively high stock of public sector debt in a context of unfavourable demographic trends and rising age-related costs. Furthermore, Slovenia’s small and open economy makes it vulnerable to external shocks.

RATING DRIVERS
The ratings could be upgraded if the public debt ratio materially declines, due to the government effectively implementing policy measures that strengthen medium-term growth prospects or that address rising age-related public spending.

The ratings could be downgraded if there is lasting reversal of debt dynamics, due to prolonged economic underperformance or material fiscal deterioration.

RATING RATIONALE
Slowdown in Economic Growth in 2023, Following A Strong Recovery in 2021 and 2022

The Slovenian economy grew by 8.2% in 2021 and by 5.4% in 2022. The domestic demand components that facilitated the strong rebound stemmed from public support measures, easing of high private sector savings, strong investment in machinery and equipment, and robust employment. The harmonised unemployment rate, having declined to 3.5% in April 2023 from 6.0% in January 2021, is at an all-time low due to strong domestic demand and labour shortages. The harmonized index of consumer prices (HICP) remains high at 8.1% in May 2023 compared to a year earlier. HICP net of energy and unprocessed food also remains elevated at 9.2% as of April 2023. High inflation started to dampen economic sentiment in the second half of 2022, and higher production costs and weaker consumer purchasing power look set to weigh on output growth this year. In its 2023 Stability Programme (SP), the government expects economic growth to slow to 1.8% in 2023 and projects steady growth around 2.5% per year through 2026.

EU funding mechanisms available to Slovenia this decade constitute upside risk to the growth outlook. The Recovery and Resilience Facility commits EUR 1.5 billion in grants. In addition, Slovenia will benefit from EUR 3.2 billion in EU cohesion funds for the period 2021-2027 on top of the remaining commitment from the 2014-2020 funding period. These funding plans include important reforms to pension, healthcare, and the long-term care systems. Successful execution and absorption of the windfalls could increase Slovenia’s economic productivity and strengthen its growth potential.

Following Years of Strong Surpluses, Slovenia’s Current Account Moderated Due To High Import Costs And Weak External Demand

Despite some recent deterioration in Slovenia’s current account, its external position should continue to benefit from an improvement in the net international investment position (IIP). From 2012 to 2019, Slovenia’s current account surplus averaged 4.5% of GDP, supported by the economy’s strong export performance. Higher import prices and weaker external demand shifted the current account to a deficit of 0.4% of GDP in 2022, from a 7.6% surplus in 2020. Slovenia’s direct trade links to Russia are limited, accounting for 2.2% of exports in 2021, yet it has relied on imports of energy and metals from Russia and Ukraine. The IMF expects Slovenia to record small current account surpluses over the forecast period due to the increases in import costs and lower foreign demand for Slovenian exports. From a stock perspective, years of strong external savings have led to an improvement in the country’s net international liability position from 44.0% of GDP in 2012 to -0.6% in 2022.

Fiscal Policy Remains Expansionary In 2023; Deficit Expected To Fall Below 3% By 2024

The economic contraction and the fiscal measures to counter the impact of the pandemic resulted in fiscal deficits of 7.7% of GDP in 2020 and 4.6% in 2021, from small surpluses recorded in 2018 and 2019. 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 strong economic recovery from the pandemic improved the deficit to 3.0% of GDP in 2022, despite higher spending linked to the energy crisis. Government measures to address rising prices will persist this year, and coupled with slower growth, will widen the deficit to 4.1% of GDP in 2023. The SP targets a deficit of 1.3% by 2026. Risks to the fiscal outlook over the long-term stem from Slovenia’s weak demographic outlook and increasing age-related costs. Planned pension and healthcare reforms will be important for the health of Slovenia’s structural 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 debt reduction prior to 2020 and effective debt management. From 2015 to 2019, the government debt ratio declined by seventeen percentage points of GDP. The debt ratio returned to its downward path in 2021 and reached 69.9% in 2022. Other key debt management metrics are also strong. Even with the rapid rise in interest rates, the financing cost of the state budget declined to 1.1% of GDP in 2022, from 3.2% in 2014. The average maturity of public debt increased to 10.2 years in 2022, from 5.7 years in 2013, and debt is at fixed rates and in euros. These factors reduce the sensitivity to rising interest costs. The SP projects public debt to fall below the pre-pandemic level by mid-decade.

Slovenia’s Banking System Has Weathered Recent Shocks

The Slovenian banking system’s strong financial metrics before the pandemic have helped it weather global economic and financial shocks. Banks have maintained sound capital levels and good liquidity positions. Non performing exposures (NPEs) in the non-financial corporations portfolio stood at 1.6% as of March 2023, although NPEs remain high in the accommodation and food services sectors, which were severely affected during the COVID-19 restrictions. High inflation and rising interest rates could lead to a deterioration in bank asset quality, although there is little evidence so far. Real estate prices grew by 11.3% in fourth quarter 2022 compared to a year earlier, amid the strong economic recovery and supply constraints. While the Bank of Slovenia identifies some overvaluation in the real estate market relative to price fundamentals, risks linked to high real estate price growth are mitigated by the moderate level of private sector indebtedness. The household debt-to-GDP ratio in particular is low, reaching 27% in the fourth quarter of 2022.

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. Golob’s GS party became the most popular party in Slovenia, garnering 34.5%, while outgoing PM Janez Jansa’s Slovenia Democratic Party (SDS) came in 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 passing pension and healthcare reforms. Slovenia has a stable political system and strong institutions. Membership of the EU and the euro area anchor macroeconomic policymaking, and 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
The Human Capital and Human Rights factor affects Slovenia’s ratings. Slovenia’s per capita GDP was relatively low at USD 29,505 in 2022 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 or 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 (May 17, 2022) 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 at: https://www.dbrsmorningstar.com/research/415633.

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 (August 29, 2022) https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments. 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 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The sources of information used for this rating include Ministry of Finance (Stability Programme 2023, Investor Presentation April 2023), Bank of Slovenia (Financial Stability Review October 2022, Review of Macroeconomic Developments March 2023, Monthly Report on Bank Performance March 2023), Institute of Macroeconomic Analysis and Development (Spring 2023 Forecast of Economic Trends, Slovenian Economic Mirror No. 2, 2023,) European Commission (European Economic Forecast Spring 2023, 2023 Country Report – Slovenia, Integrated National Energy and Climate Plan of the Republic of Slovenia), Statistical Office of the European Communities, Republic of Slovenia Statistical Office, OECD, IMF (Article IV January 2023), WEO, World Bank, IFS, Bank for International Settlements, European Central Bank, Social Progress Imperative, 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. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/415632.

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: Michael Heydt, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: November 17, 2017
Last Rating Date: December 9, 2022

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