RPT-Fitch: Slovenia political risk falls, bank challenges remain

Fri Mar 22, 2013 8:38am EDT

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March 22 (Reuters) - (The following statement was released by the rating agency) The formation of a new Slovenian government reduces short-term political uncertainty, Fitch Ratings says. But the new administration faces challenges in implementing plans to deal with the county's troubled banks, and in securing economic reform and growth. Our assumption remains that Slovenia will be able to avoid requesting international financial assistance. Maintaining investor confidence and therefore the ability to borrow in the market on reasonable terms will require the incoming government to finalise and implement legislation on a bad bank solution and state asset management company. Failure to tackle these issues in a timely manner would increase pressure on the 'A-' sovereign rating. Prime Minister Alenka Bratusek said on Wednesday that the new coalition government would continue the previous administration's EUR4bn bank recapitalisation and asset transfer scheme "with some changes". Furthermore, one of the parties in the coalition, the Civic List, has made its participation conditional on the adoption of bad bank and asset management company measures. But it remains unclear what shape these measures will finally take, while bank asset quality continues to deteriorate, banks' capital buffers are thinning and implementation risks remain. Banking sector reforms have been prone to setbacks in the past (our downgrade last August was partly prompted by a delay in implementing recapitalisation). Our assessment of Slovenia's sovereign rating will take into consideration the progress in implementing the relevant legislation, and other factors including fiscal and economic performance and market access. A combination of weak demand domestically and in Slovenia's main trading partners, contracting credit, and highly indebted corporates continues to weigh on the economy. We forecast a second consecutive year of economic contraction in Slovenia in 2013, with real GDP set to fall by 1.6% following a 2.3% fall last year. Rising NPLs and a weak economic outlook make bank recapitalisation all the more urgent. The new government has indicated that may balance existing austerity policies with some economic stimulus, although the margin for the latter will be constrained by Slovenia's requirement to exit the Excessive Deficit Procedure in 2013. Recent progress on labour market reform suggests a partial softening of the traditional social and political resistance to structural reform. Slovenia issued a USD2.25bn 10-year bond in October, demonstrating that it had access to funding in the international bond market. The country needs to demonstrate it can borrow in the bond market on reasonable terms and regularly to fund the public borrowing requirement and bank recapitalisation, and reduce refinancing risk. The risks to bank restructuring and recapitalisation, structural reform, economic growth, and market access, are reflected in the Negative Outlook on Slovenia's rating. Bratusek's four-party coalition formally took power on Thursday after a vote in the Slovenian parliament. The previous coalition government fell earlier this year after members withdrew following corruption allegations.