LJUBLJANA (Slovenia), April 30 (SeeNews) – Moody's Investors Service said it affirmed the government of Slovenia's Baa1 long-term issuer and senior unsecured bond ratings and changed the outlook to positive from stable.
“The key driver for the change in the outlook to positive from stable is the ongoing institutional response to the underlying problems laid bare by the sovereign debt crisis at the start of the decade,” the rating agency said in a statement on last week.
The rating agency noted that the ongoing institutional response is evidenced by structural improvements in the Slovenian economy and hence in potential growth, supported by a rebound in investment and strong productivity growth, sustainable improvements in Slovenia's fiscal position, with debt-to-GDP on a continually declining trend and the near-completion of the post-crisis recovery of the banking system.
“The affirmation of Slovenia's Baa1 ratings reflects government debt levels that, although declining, remain more elevated than peers'; high wealth levels as well as the competitiveness and high degree of diversification of Slovenia's export-oriented economy; high levels of institutional strength although these are constrained by a sometimes slow government policy response; and moderate event risk driven by banking sector risks,” the statement added.
Slovenia's long-term foreign and local currency bond and deposit country ceilings remain unchanged at Aa1. Moreover, the short-term foreign currency bond and deposit ceilings remain unchanged at P-1.
Moody's also said:
RATINGS RATIONALE
RATIONALE FOR THE CHANGE IN THE OUTLOOK TO POSITIVE FROM STABLE
FIRST DRIVER: STRUCTURAL IMPROVEMENTS IN THE SLOVENIAN ECONOMY, SUPPORTED BY A REBOUND IN INVESTMENT AND STRONG PRODUCTIVITY GROWTH
The Slovenian economy has continued to strengthen in the wake of the country's double-dip recession and financial crisis, which culminated in a large scale government recapitalization of the banking system at the end of 2013. While the acceleration of growth to 4.9% in 2017 and 4.5% in 2018 bore a marked cyclical component, IMF and European Commission estimates of the country's potential growth rate have also increased from just below 2% in 2016 and 2017 respectively to around 3% of GDP in 2019. The improving growth outlook has been driven by strong labour input growth, supported by previous pension reform and positive net immigration, a rebound in investment growth as corporates and banks have gradually recovered following the clean-up of the financial system that began in 2013 as well as continued strong productivity growth. We expect GDP growth to slow from 2018 levels as the economic cycle turns, but remain robust and close to potential at 3.4 and 3.0% of GDP in 2019 and 2020 respectively.
While demographic headwinds will increasingly weigh on the Slovenian economy going forward, we expect the Slovenian government to move forward with labour market and pension reforms that will contribute towards alleviating ageing-related fiscal and labour market pressures. We expect the Slovenian economy's growth potential to be increasingly supported by a rebound in investment following a long period of post-crisis deleveraging, with gross investment as a share of GDP increasing from a low of 18.7% in 2016 to an expected 22.5% in 2019. Moreover, we expect total factor productivity, which has grown at a much more rapid rate than the European Union average since 2014, to continue to grow at a rapid clip, with productivity growth in recent years increasingly supported also by the non-tradables sector in addition to the earlier recovery of the tradables sector.
SECOND DRIVER: SUSTAINABLE IMPROVEMENTS IN SLOVENIA'S FISCAL POSITION WITH DEBT-TO-GDP ON A RAPIDLY DECLINING TREND
Slovenia's government debt-to-GDP ratio has continued to decline at a rapid pace in recent years. After peaking at 82.6% of GDP in 2015 gross government debt at the end of 2018 stood at just over 70% of GDP. The government's headline balance moved from a deficit of 1.9% of GDP in 2016 to balance in 2017 and a surplus of 0.7% of GDP in 2018. This has in part been supported by strong growth, but temporary fiscal consolidation measures such as a freeze in certain social benefits and falling interest payments have also contributed to an improving headline and structural fiscal position in recent years. The European Commission estimates a moderate structural deficit of 0.4-0.5% of potential GDP in 2017-2018, down from around 2% in 2014. Other measures including pension reform and VAT increases have previously helped reduce the structural deficit from around 4.5% of potential GDP in 2011.
Expenditure increases agreed by the new government that took office in September 2018 will contribute to a slight decline in the structural position to a deficit of 0.6% of potential GDP in 2019 as estimated by the European Commission. While the government has come in for criticism for its expansionary policy from the Eurogroup, we expect the Slovenian government to take measures that will lead the structural position to improve from 2020 on.
We expect that a combination of continued solid but gradually slowing growth and modest government fiscal surpluses will continue to bring the government's debt burden to 62.2% of GDP by end-2020. Debt reduction will also be supported by revenues from the privatization of banks Nova Ljubljanska Banka d.d. (NLB) and Abanka d.d. (both rated deposits: Baa2/P-2 positive outlook, BCA: ba1) which were both recapitalized by the government earlier in the decade, 90% of which are earmarked for reducing government debt. We estimate that this could reduce the government's debt load by an additional 2% of GDP in 2019-2020. The government's total cash buffers stood at over 14% of GDP at end-2018, and may be used to reduce gross debt over and above the receipts from the sale of NLB and Abanka.
THIRD DRIVER: THE NEAR-COMPLETION OF THE POST-CRISIS RECOVERY OF THE BANKING SYSTEM
The Slovenian financial system has continued its process of recovery from the country's banking crisis. Banks' capitalization levels have remained at strong levels since the government-led recapitalisation of the banking system in 2013. The most notable area of improvement in recent years has been to bank asset quality. Problem loan ratios were far above the EU average in the wake of the crisis and were concentrated in Slovenia's three largest banks NLB, Abanka and Nova Kreditna Banka Maribor d.d. (NKBM) (Baa3/P-3 positive, ba2) which combined accounted for around 45% of total banking system assets as of year-end 2018.
However, these banks have continued to see a marked reduction of their share of problem loans, reflecting a combination of loan sales, write-offs, loan work outs and a supportive macroeconomic environment. We expect a continued reduction of banks' troubled assets in 2019 and beyond, which could bring the NPL ratio of the three main banks below 5%. Improving asset quality and the overall improvement in banks' solvency were important factors influencing our decision to upgrade the deposit ratings of these three banks by two notches over the last year while maintaining positive outlooks.
We also view positively the privatisation of NLB and Abanka in 2018-2019, which follow the privatisation of NKBM in 2015. The part-privatisation of NLB in 2018 removed uncertainty related to a possible demand from the European Commission that the state aid provided in 2013 be repaid (as this was originally granted conditional on the privatisation of the bank by end-2017), a factor which directly contributed to our decision to upgrade NLB in 2018. The sale of an additional 10% of NLB in 2019, following the 65% stake sold in 2018, and 100% of Abanka will also substantially reduce the Slovenian government's direct exposure to any potential risks stemming from the banking system, and significantly reduce the book value of enterprises owned by the state. We see the latter as being credit positive in light of the long history of comparatively weak performance by state owned enterprises (SOEs) in Slovenia.
RATIONALE FOR THE AFFIRMATION OF THE RATING AT Baa1
Notwithstanding the positive trends identified above, we would want to see a further sustained track record of improvements before revising our assessment of Slovenia's overall credit profile. Although Slovenia's debt-to-GDP ratio is on a rapidly declining trend, it remains above the Baa1 rated median of 47%. We also take into account the comparatively high levels of debt of non-financial sector SOEs and the contingent liability risks these pose for the government. We assess Slovenia's susceptibility to event risk as being moderate, driven by the (diminishing) risks stemming from the banking sector. Slovenia's Baa1 rating is supported by the country's high economic strength and comparatively high income levels in purchasing power parity terms. This reflects a dynamic and export-oriented private sector that is unusually diversified for a country of its size. Slovenia's institutional strength remains high although institutional effectiveness is hampered by the authorities' often slow response to major policy challenges.
WHAT COULD CHANGE THE RATING UP/DOWN
A decision to upgrade Slovenia's government bond ratings would flow from further assurance that the policy response to the challenges made evident by the debt crisis will continue to be effective, most likely reflected in the expected pace of debt reduction being achieved, in continued improvements in the health of the financial system with the government completing the remaining bank privatisations, and in further progress on enacting planned labour market and ageing-related reforms.
Conversely, there could be downward pressure on the rating in the event of a substantial weakening of the macroeconomic environment or fiscal position. A relapse of problems in the banking sector would also be negative for Slovenia's credit profile, but the degree of recapitalization and restructuring that we have seen thus far implies that even an extreme event of this nature would not have the same negative impact that we observed during the most recent financial crisis.
GDP per capita (PPP basis, US$): 34,420 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2017 Actual) (also known as GDP Growth)
Inflation Rate (HCPI, % change Dec/Dec): 1.9% (2017 Actual)
Gen. Gov. Financial Balance/GDP: 0% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 7.2% (2017 Actual) (also known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
On 23 April 2019, a rating committee was called to discuss the rating of the Government of Slovenia. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially increased. The issuer's susceptibility to event risk has decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.