Fitch Affirms Slovakia at 'A+'; Outlook Stable

Fri Nov 15, 2013 11:55am EST

LONDON, November 15 (Fitch) Fitch Ratings has affirmed Slovakia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+'. The issue ratings on Slovakia's senior unsecured foreign and local currency bonds are also affirmed at 'A+'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following factors: -Membership of the eurozone continues to benefit Slovakia's economic development, by promoting a robust institutional framework, expanding its export sectors and improving prospects for inward investment. EMU membership also limits balance of payments and exchange rate risks. -Slovakia's real GDP growth remains one of the strongest in the eurozone and among Central and Eastern European peers. The impact from weaker eurozone growth in 1H13 has led Fitch to revise down its real GDP growth forecast for 2013 to 0.8% from 1.2% back in May 2013, but the agency expects growth to recover to 2.2% in 2014. -A solid banking sector remains a key strength of Slovakia's ratings. A strong domestic funding base has facilitated net lending by Slovak foreign subsidiaries to their West European parent banks. The average capital adequacy ratio is high at 16.9%, and the ratio of loan-to-deposits is conservative at 89%. Fitch does not view the Slovak banking sector as a material contingent liability for the sovereign. -Improved external finances also support Slovakia's ratings. Fitch expects the sovereign to maintain its current account surplus over the agency's forecast horizon. Slovakia's lower unit labour costs relative to its European peers will continue to support the external competitiveness of its service and industrial sectors. The current account will also benefit from the eurozone's more positive economic outlook over the medium term. Sustained current account surpluses would help to contain Slovakia's gross and net external debt ratios, which at 77% and 31% of GDP respectively are high relative to 'A' peers of 50% and -16% respectively. -Slovakia's year-to-date fiscal consolidation progress suggests the sovereign is on track to bring its headline budget deficit below 3% of GDP by end-2013. However, Fitch continues to highlight the sovereign's reliance so far on one-off revenue measures to reach fiscal targets, rather than on more sustainable consolidation of public expenses. While Slovakia's ratio of government expenditure to GDP of 38% (end-2012) is below the eurozone average of 50%, further evidence of credible expenditure measures would increase Fitch's confidence in the sovereign's ability to improve the medium-term sustainability of public finances. -The authorities remain vigilant on keeping the government debt-to-GDP ratio below the constitutional debt ceiling of 57%. Relative to the eurozone's average debt-to-GDP ratio of 91%, Slovakia's public debt ratio is significantly lower, although worse than 'A' and 'AA' rated medians with debt ratios of 38% and 27% respectively. Downside risks to public finances are probable if economic growth proves weaker-than-expected. Slovak parliamentary elections fall in 1H16, the same time the country will take up EU council presidency; discipline on public spending over 2015-2016 could prove challenging. RATING SENSITIVITIES The main factors that individually, or collectively, could trigger a negative rating action include: -Failure to implement credible fiscal consolidation that would stabilise and ultimately reduce the public debt-to-GDP ratio -A severe negative growth shock from the eurozone that damages economic and fiscal stability The main factors that individually, or collectively, could trigger a positive rating action include: -Meeting or exceeding fiscal targets in a sustainable manner, stabilising the government debt ratio and then placing it on a firm downward trajectory, in conjunction with higher trend growth KEY ASSUMPTIONS Fitch assumes the current ruling SMER government will tighten fiscal policy broadly consistent with its 2014 budget framework. Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments by euro area policymakers. It also assumes that the risk of fragmentation of the eurozone remains low. Fitch assumes that under severe financial stress, support for Slovak foreign subsidiary banks would be forthcoming from their parent banks. Contact: Primary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Matteo Napolitano Director +44 20 3530 1189 Committee Chairperson Richard Fox Senior Director +44 20 3530 1444 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. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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