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Fitch affirms Slovenia’s rating at BBB+, upgrades outlook to stable

Fitch affirms Slovenia’s rating at BBB+, upgrades outlook to stable

LJUBLJANA (Slovenia), May 2 (SeeNews) - Fitch Ratings said on Friday it affirmed Slovenia’s long-term issuer default ratings (IDRs) at 'BBB+' while upgrading the outlook to stable from negative.

Fitch has simultaneously affirmed the country ceiling at 'AA+' and the short-term foreign currency IDR at 'F2, the ratings agency said in a statement on its website.

Fitch's statement also said:

"The revision of the Outlook on Slovenia's IDRs to Stable reflects the following key rating drivers and their relative weights:

In Fitch's view, the government's policy actions in late 2013 and early 2014 have materially reduced risks surrounding the banking sector, and thus the sovereign balance sheet. As a result of an injection of EUR3.2bn from the state budget to date, the banking sector's Tier-1 capital adequacy ratio rose to 13.6% in January 2014 from 10.2% at end-2012.

The subsequent transfer of EUR3.3bn of impaired assets to a Bad Asset Management Company (BAMC) from the two largest banks brought about a reduction in bank loans overdue by more than 90 days to 13.2% of total sector loans from 17.3%. A further EUR1.5bn of non-performing loans is scheduled to be transferred from two smaller banks in the near future.

The sovereign's access to market funding has eased considerably. As of late April 2014 the spread versus 10-year German bunds had nearly halved from over 400 bps at the time of the previous sovereign review in November 2013. Slovenia has taken advantage of benign market conditions to fully finance its 2014 debt redemptions as well as some of its 2015 financing needs.

The economy is recovering faster than expected. Real GDP contracted by 1.1% in 2013, far less than Fitch had expected at the time of its last review. The agency has raised its forecast for 2014 GDP to (positive) 0.5% from a 0.6% contraction previously. Brighter eurozone prospects and a gradual improvement in domestic demand should support the Slovenian economy.

External imbalances are being reduced. The current account registered a surplus of 6.3% of GDP in 2013, and Fitch expects further, albeit smaller, surpluses in 2014-15. This is contributing to a reduction in net external debt, which at 36% of GDP in 2013 was higher than the 'BBB' median of 9%, but lower than eurozone peers such as Ireland or Spain.

Slovenia's 'BBB+' ratings reflect the following key rating drivers:

- Slovenia entered a phase of political uncertainty after the Prime Minister, Alenka Bratusek, lost a leadership contest in her party in late April, increasing the likelihood of an early parliamentary election. In Fitch's view political instability poses a risk to the structural reform agenda in 2014-15, including the privatisation of key state-owned enterprises. Nevertheless, Slovenia has passed in recent years a number of reforms, including in the pension system and labour market, as well as in corporate insolvency.

- Public debt has risen considerably in recent years, although it remains sustainable in Fitch's judgment. Banks' recapitalisation and impaired asset transfer drove a rise in gross general government debt (GGGD) to 71.7% of GDP in 2013 ('BBB' median: 40%) from 54.4% in 2012. Fitch forecasts that the general government deficit should narrow in 2014-15 and be broadly in line with the 'BBB' and 'A' medians, although implementation risks have increased. The agency's baseline scenario is that GGGD should peak in 2014 at 80% of GDP (below the 2013 eurozone average of 93%) and, in the absence of further large stock-flow adjustments, fall gradually thereafter.

- Despite the recent improvement in growth prospects, Slovenia falls short of the 'BBB' or 'A' medians on this metric. Fitch forecasts that GDP growth will rise only modestly in 2015, to 1.5%, reflecting the protracted nature of the adjustment in the banking and corporate sectors and in public finances.

- Overall bank asset quality remains poor. Impaired bank loans (on Fitch's preferred definition of asset quality), at 19.3% of the total in January 2014, remain high owing to a tightening of collateral valuation rules. The BAMC is just beginning to tackle the substantive task of managing distressed bank assets with a view to reducing high corporate indebtedness (net financial liabilities worth 120% of GDP in 3Q13 according to Bank of Slovenia data).

- Indicators of human development, governance and per-capita incomes exceed comfortably the median of the 'BBB' category. EU and eurozone membership and a fairly high value-added and diversified economy also underpin Slovenia's sovereign ratings.

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors individually, or collectively, could trigger a positive rating action:

- Increased confidence that bank and corporate balance-sheet clean-up and fiscal consolidation are progressing in a steadfast manner

- A stronger economic upturn, supported by structural reforms

- A significant reduction in public and external debt ratios

The following risk factors individually, or collectively, could trigger negative rating action:

- Weaker long-term growth prospects

- Significant fiscal slippage resulting either from widening budget deficits or the crystallisation on the sovereign balance sheet of unexpected liabilities related to banking or corporate sector clean-up

- A macro-financial or geopolitical shock that causes a deep recession or a significant worsening of financing conditions


Given the uncertainties involved, Fitch does not assume a contribution from the realisation of returns on distressed assets held on BAMC's balance sheet for the purposes of its GGGD projections. Fitch makes allowance for only a limited contribution to GGGD reduction from privatisation proceeds, given that the sale of significant assets in the telecoms, banking and transport sectors is still uncertain at this stage, particularly in light of ongoing political uncertainty.

We assume Slovenia and the eurozone as a whole will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. However, Slovenia's competitiveness adjustment within the currency union will continue to exert downward pressure on prices over the medium term. This will make the balance-sheet adjustment of the public and private sectors more challenging.

Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key economic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term."