17 May 2013

Fitch downgrades Slovenia to 'BBB+'; outlook negative

The downgrade of Slovenia's sovereign ratings reflects the following key rating factors:

• The macro-economic and fiscal outlook has deteriorated significantly since Fitch's last rating review of the Slovenian sovereign in August 2012. The agency now forecasts a 2 per cent contraction in real GDP in 2013 and a decline of 0.3 per cent in 2014, when Slovenia is expected to be one of only two eurozone economies to contract. Fitch forecasts that the general government deficit (GGD, net of bank recapitalisation costs) will rise to 5 per cent of GDP in 2013 from 4 per cent in 2012, against a target set down in the end-2012 budget law of 2.8 per cent.
• Fitch now projects that a larger GGD than previously expected, a poor macro-economic outlook, and costs deriving from bank recapitalisation and the issuance of state guarantees for "bad bank" (BAMC) bonds will cause gross general government debt (GGGD) to rise to 72 per cent of GDP in 2013-14, up from 22 per cent in 2008. This compares with a forecast for 2014 of 63 per cent when Fitch last downgraded Slovenia to 'A-'/Negative in August 2012.
• There remains a significant divergence between official and Fitch estimates of bank recapitalisation costs. The agency's baseline estimate is that the Slovenian banking sector will necessitate a further capital injection €2.8 billion (8 per cnt of GDP). Of this, the state needs to inject €2 billion into the three largest (predominantly state-owned) banks. This is more than twice the latest official estimate. However, the latter makes somewhat different assumptions regarding non-performing loan (NPL) coverage; core capital adequacy ratios (CARs) to be targeted; and the deleveraging of banks' balance sheets deriving from asset transfers to the BAMC. Crucially, Fitch believes that NPLs have yet to peak, given the prolonged economic contraction.
• The coalition government in power since March 2013 is showing a renewed sense of urgency in addressing bank balance sheet clean-up and structural reforms. However, it is an interim administration comprised of disparate parties whose agendas sometimes conflict, and whose term may not extend beyond mid-2014. This could hamper its ability to respond to economic shocks.

The 'BBB+' rating reflects:

• Even factoring in the above adverse developments, Fitch expects the GGGD ratio to remain below the eurozone average for 2012 (93 per cent of GDP), albeit above the median for the 'BBB' range (36 per cent). Fitch projects the primary budget to be in balance by 2015, leading to stabilisation of the GGGD/GDP ratio.
• The current-account balance (CAB) was in surplus by over 2 per cent of GDP in 2012 and Fitch expects it to remain in surplus in 2013-14. The economy thus remains self-financing. The openness of the economy, with exports equivalent to 75 per cent of GDP, is supporting rebalancing
• The Slovenian sovereign retains access to international bond markets, as demonstrated by successful issuance of a total $5.75 billion in five- and 10-year bonds in October 2012 and May 2013. In conjunction with issuance of €1.1 billion in 18-month T-bills in April, this should fund budget and debt redemption needs to end-2014.
• EU and eurozone membership, a relatively high value-added and diversified economy, and high human development indicators continue to underpin Slovenia's investment-grade rating.

Full press release

© Fitch, Inc.