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 CREDIT 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 and domestic shocks. The catastrophic floods in August 2023 added to existing economic challenges, principally higher inflation and tighter financing conditions. The European Commission (EC) forecasts real GDP growth to decelerate to 1.3% in 2023, after expanding by 2.5% last year. Flood-related rebuilding costs appear manageable for the fiscal accounts. The EC expects one-off reconstruction spending next year to equal half a percentage point of GDP, net of receipts from the EU Solidarity Fund. The government forecasts a fiscal deficit this year of 4.5% of GDP, although DBRS Morningstar expects public finances to gradually improve in the coming years as extraordinary spending winds down. The IMF forecasts the debt-to-GDP ratio to decline from the 2020 peak of 79.6% to 64.7% by 2025, roughly the same level of indebtedness registered in 2019.

Slovenia’s credit strengths stem from its wealthy and high value-added economy compared to other ‘A’ category peers in the region, its effective debt management and credible 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.

CREDIT RATING DRIVERS
The credit 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 credit ratings could be downgraded if there is a lasting deterioration in government debt dynamics, due to prolonged economic underperformance or weaker fiscal outcomes.

CREDIT RATING RATIONAL
GDP Revisions Show Slower Than Previously Expected Economic Growth Last Year

Real GDP growth in 2022, previously estimated at 5.4%, was revised down to 2.5% in August 2023 by the National Statistical Authority. According to the Institute of Macroeconomic Analysis and Development (IMAD), the revision was primarily due to changes in value aggregates for construction, manufacturing, and consumption. Consequently, the post-pandemic recovery began to slow earlier than previous estimates suggested because the drop in purchasing power turned households more cautious in their spending. The household savings rate is now higher than originally assumed and private consumption lower. Output growth has also slowed due to the weaker performance of key European trade partners, especially Germany, which has weighed on Slovenia’s export growth.

However, the economy is set to recover from the 1.3% growth expected this year. Public and private investment is expected to be strong, and lower inflation should support consumers’ purchasing power. Moreover, the labour market remains tight, with the unemployment rate at 4.0% in October 2023 and real wages growing at a modest pace. The harmonized index of consumer prices (HICP) fell to 4.5% in November 2023, a significant decline from the 7.1% rate in September 2023. While the August floods reduced tourist arrivals, IMAD expects the direct negative impact of the floods on manufacturing, transportation, and tourism to be temporary and to have no major near-term adverse effect on macroeconomic activity. Rather, the rebuilding of homes, businesses, and infrastructure will likely have a stimulative effect on construction over the months and years to come. Thus, IMAD forecasts real GDP to expand by 2.8% next year and 2.5% in 2025. The main upside risk stems from the EU funding mechanisms. The Recovery and Resilience Facility makes available EUR 2.7 billion (4.7% GDP) in grants and loans. Slovenia will also benefit from EUR 3.2 billion in EU cohesion funds for the period 2021-2027. 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.

Fiscal Policy Will Focus On The Reconstruction Of Flood-Affected Areas; Deficit Expected To Narrow In 2024

Slovenia’s fiscal performance deteriorated in recent years due to measures to counter the impact of the pandemic and of the energy crisis on businesses and households. This resulted in fiscal deficits of 7.6% of GDP in 2020 and 4.6% in 2021, from small surpluses recorded in 2018 and 2019. 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. The severe floods that hit Slovenia in Summer 2023 will delay the consolidation of the fiscal accounts. The government in the 2024 Budget expects the measures meant to alleviate the consequences of the floods to have a deficit-increasing impact of 0.6 percentage points of GDP in 2023 and 1.2pp in 2024. This is partially offset by support to Slovenia from the EU Solidarity Fund. The government’s spending plans target a deficit of 4.5% of GDP in 2023 and 3.8% in 2024. Risks to the fiscal outlook over the medium-term will depend on the scale of spending ultimately allocated for reconstruction. Likewise, planned reforms to the public sector wage system, and the pension and healthcare systems, will be important for the health of Slovenia’s fiscal accounts. Slovenia’s weak demographic outlook pressures underlying age-related costs.

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

Slovenia’s debt-to-GDP ratio increased by 14.2pp of GDP in 2020, from 65.4% in 2019, due to the pandemic shock. The rise in the debt ratio 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 17.2pp of GDP. The Ministry of Finance estimates that the general government debt will decline to 69.9% of GDP in 2023 from 72.3% in 2022. Other key debt management metrics are also strong. Even with the rapid rise in interest rates, the interest bill of the state budget declined to 1.1% of GDP in 2022, from 2.9% in 2014. The average maturity of public debt increased to 10 years in 2023, from 5.7 years in 2013, and debt is at fixed rates and in euros. These factors reduce the sensitivity to rising interest rates and currency fluctuations. The 2024 Budget forecasts public debt of 68.9% of GDP at the end of 2024.

Risks To Financial Stability Are Contained; Slovenia’s Banking System Has Weathered Recent Shocks

Slovenia’s banking system is in a good position to weather a weaker macroeconomic
environment. Slovenian banks remain liquid, profitable and well-capitalized, with the weighted average Common
Equity Tier 1 (CET1) capital ratio at 16.3% in June 2023. The impact on banks’ asset quality has been limited thus far. Non performing exposures (NPEs) in the non-financial corporations portfolio stood at 1.6% as of September 2023, while the NPE ratio in the household portfolio stood at 1.7%. High inflation and rising interest rates could lead to a deterioration in bank asset quality, although there is little evidence of this so far. After reaching a peak of 17% growth in March 2022 compared to a year earlier, the Slovenian real estate market is cooling down with annual price growth of 7.4% in June 2023. 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 26.3% June of 2023.

Slovenia’s Current Account Returned To Surplus

After ten years of surpluses, the current account balance shifted to a deficit of 1.0% of GDP in 2022. This was driven by strong domestic demand and deteriorated terms of trade. As energy and other commodity prices moderated and real imports decreased, the current account has reverted to surplus in 2023. The EC expects a 3.7% of GDP surplus this year and for surpluses to remain over the forecast period. From a stock perspective, years of strong external savings have led to an improvement in the country’s net international position from a net debtor of 44.0% of GDP in December 2012 to a net creditor of 0.6% in June 2023.

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, 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. 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

ESG Considerations had a significant effect on the credit analysis.

Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
The following Social factors had a significant effect on the credit analysis: The Human Capital and Human Rights factor affects Slovenia’s ratings. Slovenia’s per capita GDP was relatively low at USD 28,529 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.

Governance (G) Factors
There were no Governance factors that had a relevant or significant 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 (04 July 2023) https://www.dbrsmorningstar.com/research/416784/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/425058.

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 (06 October 2023) https://www.dbrsmorningstar.com/research/421590/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/416784/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 these credit ratings include Ministry of Finance (Draft Budgetary Plan 2024, Investor Presentation October 2023), Bank of Slovenia (Financial Stability Review October 2023, Review of Macroeconomic Developments October 2023, Monthly Report on Bank Performance October 2023), Institute of Macroeconomic Analysis and Development (Autumn 2023 Forecast of Economic Trends, Slovenian Economic Mirror No. 7 / Vol. XXIX / 2023) European Commission (European Economic Forecast Autumn 2023, Commission Opinion on the Draft Budgetary Plan of Slovenia (21.11.2023), 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, these are unsolicited credit ratings. These credit ratings were 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://registers.esma.europa.eu/cerep-publication. 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 credit rating assumptions can be found at https://www.dbrsmorningstar.com/research/425059.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jason Graffam, Vice President, Credit Ratings, Global Sovereign Ratings
Rating Committee Chair: Michael Heydt, Senior Vice President, Credit Ratings, Global Sovereign Ratings
Initial Rating Date: November 17, 2017
Last Rating Date: June 09, 2023

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