TEXT-Fitch affirms Slovakia ratings

(The following statement was released by the rating agency)

May 21 - Fitch Ratings has affirmed Slovakia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+'. The Outlook on both ratings is Stable. Fitch has simultaneously affirmed Slovakia's Short-term rating of 'F1' and Country Ceiling of 'AAA'. Slovakia's 'A+' IDR balances the economy's good growth profile, moderate public and external debt burdens, progress in fiscal consolidation and stable banking sector, against downside risks from an intensification of the eurozone crisis. Slovakia made strong progress in fiscal consolidation in 2011, cutting the headline budget deficit to 4.8% of GDP from 7.7%. For 2012, Slovakia has set an unambitious deficit target of 4.6% of GDP, although this is based on a conservative real GDP assumption of 1.1% growth relative to Fitch's higher forecast. Fitch expects the Slovak authorities to meet its EU excessive deficit target of 2.9% of GDP by 2013, but this will require them to decide and implement additional fiscal measures of 2.2% of GDP. Achieving the target therefore carries downside risks from both a weaker growth outlook and fiscal slippage from a new untested government. Real GDP growth is forecast by Fitch to fall to 2.1% in 2012 from 3.3% in 2011. This reflects both a slowdown in economic activity in Slovakia's key trading partners and weak private consumption growth at home. Risks to growth remain predominately on the downside. However, a robust auto manufacturing sector and growing export demand from emerging markets means Slovakia will likely remain one the strongest-growing EU countries in 2012. External finances continue to benefit from stable net FDI inflows and the resilient export sector. Slovakia's current account position has improved significantly since 2008 from a deficit 5.8% of GDP to a moderate surplus 0.1% of GDP in 2011. The stable banking sector continues to support Slovakia's rating. Slovak banks have operated a prudent business model that has shielded them from the problems facing their western European parents. A loan-to-deposit ratio of 85% highlights a strong ability to fund themselves domestically. In addition, Slovak banks pose little risk of contingent liabilities to the sovereign. The loans-to-GDP ratio was 51% as of end-2011. This compares with a eurozone average of 132%. An intensification of the eurozone crisis remains the predominant risk facing Slovakia. Eurozone recession and turbulence, or a significant increase in contingent liabilities could lead to a downgrade. Significant slippage from fiscal targets and failure to specify a credible consolidation path which would put public debt-to-GDP ratio on a clear downward trajectory, would also likely lead to negative rating pressure. In the medium term, sustained and balanced economic growth, a reduction in the public debt ratio and an easing in the eurozone crisis could lead to positive rating action. (Caryn Trokie, New York Ratings Unit)