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Fitch Affirms Slovakia at 'A+'; Outlook Stable
February 28, 2014 / 5:06 AM / 4 years ago

Fitch Affirms Slovakia at 'A+'; Outlook Stable

LONDON, February 28 (Fitch) Fitch Ratings has affirmed Slovakia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+' with Stable Outlooks. The issue ratings on Slovakia's senior unsecured foreign and local currency bonds have also been affirmed at 'A+'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS The affirmation and Stable Outlook reflect the following factors: Slovakia's economic growth is expected to continue outperforming the eurozone average. Against Fitch's latest projection for the eurozone to grow 0.9% in 2014, Slovakia's economy is estimated to grow 2.4%, also broadly in line with the CEE3 (Poland, Czech Republic and Hungary). However, despite a resilient growth profile, Slovakia suffers from structurally high unemployment. At 14%, the unemployment rate is significantly above the 'A' median of 6.4%. Fitch judges the macro-prudential framework to be sound. A solid banking sector and low level of private sector indebtedness remain key strengths for Slovakia's ratings. The banking sector has a high average capital adequacy ratio (17.2%) and a strong domestic funding base, which supports a manageable loan-to-deposit ratio of 82%. Slovakia's current account is projected by Fitch to remain in surplus in 2014-2015, largely helped by an improving trade surplus, which will continue to be supported by Slovakia's low unit labour costs relative to European peers and the more positive eurozone outlook. Sustained current account surpluses would help reduce Slovakia's net external debt, which is worse than the net external creditor positions of both the 'A' and 'AA' medians. Slovakia has undertaken significant fiscal consolidation since 2009. The headline fiscal deficit came in below the Maastricht threshold of 3% of GDP in 2013, while the structural deficit estimated by the European Commission contracted to 2.3% from 7.3% in 2010. Moderate fiscal easing, including potential slippages on the expenditure side has led Fitch to forecast a general government deficit of 2.8% of GDP in 2014, slightly up from an estimated 2.6% in 2013, but still in line with the 'A' median. Slovakia faces a challenging task to meet its medium-term fiscal target of 1.5% of GDP by 2016, while a tendency to rely on one-off rather than structural measures raises some questions about the durability of fiscal consolidation. Nonetheless, Fitch estimates general government debt will end up in 2013 at around 55% of GDP, broadly in line with the 'A' median and below Slovakia's self-imposed constitutional debt threshold of 57% of GDP. Membership of the eurozone continues to benefit Slovakia's economic development, by promoting a robust institutional framework, expanding its export sectors and supporting prospects for inward investment. EMU membership also limits balance of payments and exchange rate risks. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that individually or collectively could result in 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 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 gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. 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. Fitch does not anticipate Slovak banks will face significant capitalisation changes following results of the upcoming Asset Quality Review of the European Central Bank. 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 Paul Rawkins Senior Director +44 20 3530 1046 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@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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