Fitch Affirms Slovenia at 'BBB+'; Outlook Negative

Fri Nov 8, 2013 11:38am EST

LONDON, November 08 (Fitch) Fitch Ratings has affirmed Slovenia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+'. The issue ratings on Slovenia's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB+'. The Outlooks on the Long-term IDRs are Negative. The Country Ceiling has been affirmed at 'AA+' and the Short-term foreign currency IDR at 'F2'. KEY RATING DRIVERS The Negative Outlook on Slovenia's foreign and local currency IDRs reflects the following factors: - Uncertain cost and timing of banking sector clean-up. The agency estimates the additional cost of recapitalisation will be EUR4.6bn. Fitch judges that unlike in Ireland (BBB+/Stable) or Spain (BBB/Stable), contingent liabilities to the Slovenian sovereign have yet to be adequately sized by the authorities, placing downward pressure on creditworthiness. The timetable for the recapitalisation and balance sheet clean-up of Slovenia's majority state-owned banks, which make up the bulk of the sector, has been set back repeatedly. Fitch expects the results of the banking sector asset quality review and stress test to be published in December. - Continuing recession. Fitch expects that following an estimated contraction of 2.4% in 2013, real GDP will shrink by a further 0.6% in 2014 before posting a relatively weak recovery. Foreign banks have withdrawn funds equivalent to 9% of GDP from the banking sector in 2012-13. Domestic demand is likely to remain weak in the short term. Corporate debt is among the highest in the eurozone at 140% of GDP. The risk remains that NPLs peak later and at a higher level than Fitch currently forecast, thus exacerbating the banking sector problems. - Risks to public finances. Fitch's baseline scenario is that the general government deficit (GGD), net of recapitalisation costs, will fall to 3.3% in 2015 from an estimated 4.3% in 2013, somewhat higher than the government's target of 2.5%. Slovenia faces an uphill struggle to achieve fiscal consolidation in the midst of a lingering recession, which Fitch expects to persist into 2014. Combined with continuing uncertainty regarding the banking sector, this has led the 10-year bond yield to rise just over 6% recently from 5% at the beginning of 2013. Slovenia needs to roll over public debt worth around EUR3bn (8% of GDP) over 2014, half of which falls due in April. The sovereign retains market access for the time being, but Fitch does not rule out an official financial assistance programme. The affirmation of Slovenia's 'BBB+' rating reflects the following key rating drivers: - Economic rebalancing and no large external imbalances. Due to a combination of deep domestic deleveraging and resilient exports, Slovenia is running a large current-account surplus that Fitch expects to continue over the forecast period. In turn, this is leading to a gradual reduction in net external debt, which at a peak of 42% of GDP in 2012 was already considerably lower than in similarly-rated eurozone peers, although it remains higher than the 'BBB' median of 4%. - Public debt should remain sustainable. Even taking into account the projected rise in public debt following the banking sector operations, Fitch expects gross general government debt (GGGD) to peak around 78% of GDP in 2016-17. This represents a marked rise from 22% in 2008 and is above the 'BBB' median of 40%. However, it is below the eurozone average of 91% in 2012, and well below the figure for some eurozone rating peers including Italy (BBB+/Negative) at 127%. - Greater momentum behind reform. International pressure on Slovenia to reform its banking and corporate sectors has increased. Parliament passed legislation in October to facilitate restructuring of the heavily indebted corporate sector, and the privatisation agenda appears to be accelerating. Nevertheless, there is considerable implementation risk in view of Slovenia's weak track record in this regard. - 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. RATING SENSITIVITIES The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: - A materially larger burden on public finances deriving from banking sector clean-up than Fitch currently assumes. - Significant further delay to the key processes of cleaning up banking and corporate balance sheets and reforming the economy, including the privatisation of key corporates. - GGGD peaking significantly above our current projections, for instance due to a deeper and longer recession than Fitch currently forecasts. - A political shock that led to worsened financing conditions or policy paralysis. The current Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include: - Significant progress in bank and corporate balance-sheet clean-up which engenders sustained economic recovery that in turn supports faster fiscal consolidation. -Lower risks around our medium-term public debt/GDP projections, for instance an improved economic outlook, strong progress in fiscal consolidation and privatisation. -Continued structural reforms that enhance Slovenia's competitiveness and growth potential and reduce its private and public debt burdens. KEY ASSUMPTIONS The ratings incorporate Fitch's assumption that the government will sustain medium-term fiscal commitments made under the EU's enhanced fiscal surveillance framework. Fitch assumes that Slovenia will only start recovering from mid-2014 from its deep recession as the large external and particularly domestic shocks causing the current recession to linger on into 1H14. Fitch assumes medium-term potential growth of 1.5%-2.0%, constrained by the aftermath of the burst corporate credit bubble and by weaker medium-term prospects for external demand. Fitch's GGGD projections incorporate partial (EUR2bn for the purposes of its debt dynamics calculations) use of state guarantees for Bank Asset Management Company (BAMC) bonds. Fitch has revised upward its estimate of the additional cost of recapitalisation to EUR4.6bn from EUR2.8bn, most of which will be borne by the state. However, Fitch also factors in the conversion of an estimated EUR1bn of deposits currently held at commercial banks into equity to fund their recapitalisation. This limits the rise in GGGD but raises net government debt relative to previous expectations. Given the considerable uncertainties involved, the agency does not assume a contribution from privatisation or realisation of returns on distressed assets held on BAMC's balance sheet for the purposes of its GGGD projections The rating reflects Fitch's judgement that Slovenia will retain market access and a sovereign liquidity crisis remains a tail risk. If Slovenia required an official financial assistance programme, Fitch would review the rating, taking into account the characteristics of the programme. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policy makers. It also assumes that the risk of fragmentation of the eurozone remains low. Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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