January 17 (SeeNews) - Standard&Poor's (S&P) Ratings Services said on Friday it has affirmed its A-/A-2 long- and short-term foreign and local currency sovereign credit ratings on Slovenia.
The outlook on the rating is stable, which balances the agency's expectation that the government will continue fiscal consolidation and banking system restructuring, against the risks associated with its higher borrowings and weak growth, S&P said in a statement on its website.
S&P also said in the statement:
"RATIONALE
The ratings on Slovenia reflect our view of its open and relatively wealthy economy, and its declining net external liability position. These strengths
are moderated, in our opinion, by its rising government debt burden, which is partly associated with government support for state-owned banks; its weak growth outlook, given fiscal consolidation, private-sector deleveraging, low investment levels, and weak labor and property markets; and policy implementation risks to resolving economic and fiscal pressures.
We estimate Slovenia's GDP per capita in 2013 at $22,800, and expect the economy to contract for a third year in 2014, reflecting weak domestic demand. We calculate that this will leave Slovenia's real GDP 6% lower over the period. The current account moved into surplus with the 2011-2013 downturn, after a decade of deficits, but we expect current account surpluses to be the norm over the next few years at 6.0%-6.5% of GDP, because of improved export performance.
Further privatizations would likely strengthen Slovenia's competitive position, raise foreign direct investment, and reduce Slovenia's reliance on
external savings to fund its growth. We anticipate narrow net external debt (the ratio of gross external debt less official reserves and financial sector external assets to current account receipts (CARs) will average 64% over 2013-2015.
We expect that the government, led by prime minister Alenka Bratusek, will make further progress in fiscal consolidation. We project the change in general government debt will be 7.2% of GDP in 2014, reflecting an operating fiscal deficit of 3.2% and up to €1.3 billion (4% of GDP) to fund bank restructuring costs. For 2013, we estimate a fiscal deficit of 4.3% of GDP and bank recapitalization costs of 11.4% of GDP. Following the December release of the bank stress test results, we estimate worst-case bank resolution costs during 2013-2014 at 15.4% of GDP, compared to our earlier projection of 17.1%.We expect fiscal deficits and the pace of debt accumulation to fall to 2.0% of GDP by 2016, reflecting fiscal consolidation and an end to the government supporting the banks.
We anticipate that Slovenia's net general government debt will stabilize at about 70% of GDP during 2014-2016, excluding the guarantees related to the European Financial Stability Facility.
We assess Slovenia's policy settings as having stabilized. We view the government's National Reform Programme 2013-2014 and Stability Programme 2013 as providing useful policy frameworks to guide progress in fiscal consolidation. Moreover, new limitations on referendum procedures appear likely to reduce uncertainty regarding decision-making and policy implementation. However, we believe that entrenched political patronage and weak institutional and corporate governance could hamper the pace and effectiveness of budgetary, health care, labor, and state administration reforms.
Although Slovenian private entities borrow at higher rates than comparable entities in northern eurozone states, we view Slovenian banks' access to the European Central Bank (ECB) as an important credit support. Although Slovenian banks' low rollover rate of external debt has seen net financial sector external debt to CARs fall to a forecast 8% in 2014, from 30% in 2009, we understand that Slovenian banks have ample unencumbered collateral (including recent government injections of recap bonds) to access ECB facilities if needed.
While the economy benefits from its openness, we view the sustainability of economic recovery in its main trading partners as a key risk to Slovenia's growth prospects. Recapitalization costs are broadly consistent with the estimates in our base-case scenario of the provisioning the banking system will need to maintain an adequate level of capital at the end of 2015. Any further asset quality deterioration in domestic, and particularly government-owned, banks increases the likelihood of further support from the Slovenian government, as well as contingent liabilities crystallizing on the sovereign balance sheet (see "Banking Industry Country Risk Assessment:Slovenia," published June 3, 2013).
Given our economic growth and fiscal projections, and our assumption that bank asset quality problems have been addressed, we expect the government to retain full market access without official support.
OUTLOOK
The stable outlook reflects our expectations that the government will progress its fiscal consolidation and banking system restructuring.
Our outlook also assumes that Slovenia's coalition government will remain in place until the 2015 election, and that its fiscal consolidation program will stabilize net general government debt at about 70% of GDP in the second half of the decade. We anticipate delays to structural reforms, but expect progress on growth-enhancing improvements over the medium term.
We may lower the ratings if Slovenia's banks weaken further, if policymaking becomes less predictable, or if government debt rises significantly, either because of fiscal loosening or additional support for Slovenian banks.
On the other hand, we may raise our ratings if the reform program of Slovenia's government results in substantially better growth and fiscal
outturns than we currently expect, such that net general government debt falls below 60% of GDP and net external debt continues to decline. We consider this scenario unlikely over the next three to five years, however."