For the detailed rating report, click here.

Rating action

Scope Ratings GmbH has today affirmed Slovenia’s A- sovereign rating. At the same time Scope has affirmed Slovenia’s A- long-term and senior unsecured local- and foreign-currency ratings, along with the short-term issuer rating of S-2 in both local and foreign currency. The Outlook for all ratings is Stable.

Rating rationale

The A- rating is underpinned by: i) Slovenia’s euro area membership, ii) further improvements in macroeconomic performance, iii) continued progress in fiscal consolidation, iv) a strengthening external balance position and v) a strengthening banking sector. The rating remains constrained however by: i) elevated debt levels, and ii) the need for comprehensive structural reforms, addressing the country’s growth potential and ageing-related impacts.

Slovenia has shown sound macroeconomic fundamentals, with 2017 real GDP growth at 5.0% raising cumulative real GDP growth from 2014 to 2017 by 13.4%, driven by strong domestic demand buoyed by the employment recovery. In fact, employment in May 2018 increased by 11.6% from January 2014 while unemployment, using the International Labour Organization definition, was 5.9% in Q1 2018 after peaking in 2013 at 10.1%. With employment increasing, and inflation at moderate levels below the European Central Bank’s target level of close to but below 2.0%, real wages should also increase, ensuring solid domestic demand going forward. Scope thus expects economic growth to continue, with real GDP growth in Q1 2018 increasing by 4.6% from Q1 2017, aided particularly by strong growth of gross fixed capital formation (9.1%), which Scope anticipates will continue to grow as EU structural and cohesion fund expenditures increase, reaching 20.1% of GDP in 2018 and 20.6% in 2019 after 19.3% in 2017. Similarly, construction increased for this period by 12.0% and manufacturing grew by 7.2%. Scope anticipates that GDP growth will slow to 4.0% in real terms in 2018 and to 3.2% in 2019, with growth constrained by a lack of skilled workers. This is evidenced, for instance, by the share of enterprises listing shortages of skilled labour as factors limiting increases in production reaching a new peak in July 2018 at 38%. For this reason, despite current solid fundamentals, Scope expects growth potential in Slovenia going forward to be constrained.

Scope notes that Slovenia’s A- rating is also supported by the successful government consolidation of its public finances over the past few years. The primary balance in 2017 was positive at 1.5%, a significant improvement from -11.5% in 2013. Scope anticipates further positive fiscal adjustments, with the primary balance expected to be in surplus at 1.9% in 2018 and 1.5% in 2019. In addition, Scope notes positively that while outstanding guarantees by the government of Slovenia continue to remain relatively high, they have steadily declined from 22.8% of GDP in 2013 to 14.5% in 2017.

The rating also benefits from strengthening external balances. The current account surplus in Slovenia reached 6.5% of GDP in 2017, up significantly from a current account deficit of 5.3% of GDP in 2008. Scope anticipates this falling to 5.7% in 2018 and to 5.2% in 2019, reflecting increased domestic demand and higher international energy prices. Net international investment in Slovenia was -32.0% of GDP in 2017. Given further strong current account surpluses going forward, Scope expects the net external position to be largely in balance by 2023. Scope notes positively that gross external debt fell from a recent high of 124.8% of GDP in 2014 to 96.5% in 2017, as did net external debt, from 42.6% in 2013 to 22.4% in 2017. However, despite this reduction, external debt remains high compared to peers such as Latvia (A-/Stable) and Lithuania (A-/Stable) and the country’s overall strong dependence on foreign trade leaves Slovenia vulnerable to short-term external shocks, as a sharp decline in export demand would disproportionately affect Slovenian growth.

Scope notes that the banking sector in Slovenia, after successfully recovering from the banking/sovereign crisis in 2012-2013, continues to improve. Bank profitability is up, with return on equity reaching 9.7% (8.0%) and return on assets increasing to 1.2% (1.0%) at the end of 2017 (2016). The capital adequacy ratio was 18.1% at the end of 2017, down from the all-time high of 19.1% in 2016. Resolution of non-performing loans held by the Bank Asset Management Company is ongoing and macro-prudential instruments have been put into place. Asset quality continues to improve significantly, with the non-performing loan ratio falling from a high of 15.2% in 2012 to 3.2% in 2017.

Despite the relative strengths of Slovenia, challenges remain. High levels of public debt, incurred during the banking/sovereign crisis, continue to constrain the rating for Slovenia, despite debt ratio reductions resulting from continued buy-backs and the reduction in the government’s cash position by EUR 800m in 2018 (EUR 300m pre-financing from 2017), or about 1.7% of GDP. As a result, despite the successes in consolidating its public finances, Slovenia’s gross government debt, measured as a percentage of GDP, remains elevated at 75.4% in 2017, despite falling from a peak of 83.1% in 2015. While Scope anticipates that this reduction will continue in 2018 (to 72.1%) and 2019 (to 69.8%), after several years of effective reforms, the government now faces limitations on additional expenditure cuts and revenue increases. Thus, Scope expects further consolidation to slow down somewhat, keeping Slovenia at a marked distance from the Maastricht criteria level of 60% and above the levels of peers such as Latvia and Lithuania. Conversely, containing the adverse effects of a high debt-to-GDP ratio, Scope notes positively the increase in debt maturity at the end of 2017 of 9.2 years, up from 5.7 years in 2013.

Slovenia also faces key structural challenges – improving international competitiveness, including an acceleration in the privatisation of the large state-owned enterprises, meeting policy goals under tight budget constraints, persistent skills mis-matches in the labour force and relatively low productivity, high healthcare costs and long-term care challenges from an ageing population – that will require comprehensive reforms and policy changes. While Slovenia has made some progress with the National Reform Programme for 2018, Scope expects that the implementation of these reforms and policy changes will be lengthy and politically difficult, especially with non-political actors such as public-sector unions. Scope highlights that demographic constraints are a significant fiscal challenge going forward.

Costs related to an ageing population (pensions, education, healthcare and long-term care) are expected to increase government expenditures to 28.8% of GDP by 2050, up from 21.9% in 2016, implying an increase of 6.9 percentage points of GDP. This is driven by a significant increase in the share of the elderly population (over 80 years) from 5.0% in 2016 to 11.4% in 2050. At the same time, the working age population is expected to decrease from 66.4% of the population in 2016 to 54.6% in 2050, with life expectancy at the age of 65 increasing from 20 years in 2016 to 23 years in 2050. Addressing implicit liabilities of the longer-term costs of government pensions and healthcare costs for an ageing society will present significant challenges to government expenditures in Slovenia in the years to come. Slower economic growth and, to a lesser degree, the risk of contingent liabilities crystallising through guarantees remain risks to Slovenian debt sustainability.

After the resignation of PM Cerar on 14 March 2018, elections were held on 3 June 2018, with coalition discussions agreeing on 10 August 2018 to a minority government led by Marjan Šarec (LMŠ) in a six-party centre-leftist government. Scope does not expect coalition discussions to result in any major policy changes.

Core Variable Scorecard and Qualitative Scorecard

Scope’s Core Variable Scorecard, which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative ‘A’ (‘a’) rating range for the Republic of Slovenia. This indicative rating range can be adjusted by the Qualitative Scorecard by up to three notches depending on the size of relative credit strengths or weaknesses versus peers based on qualitative analysis. For the Republic of Slovenia, relative credit weaknesses are: i) growth potential of the economy and ii) vulnerability to short-term shocks. The combined relative credit strengths and weaknesses generate no adjustment and indicate a sovereign rating of A- for the Republic of Slovenia. A rating committee has discussed and confirmed these results.

For further details, please see Appendix 1 of the rating report.

Factoring of Environment, Social and Governance (ESG)

Scope considers Environmental, Social and Governance sustainability issues during the rating process as reflected in its sovereign methodology. Governance-related factors are explicitly captured in Scope’s assessment of ‘Institutional and Political Risk’, in which Slovenia scores highly based on the World Bank’s Worldwide Governance Indicators, in line with most euro area sovereigns. Qualitative governance-related factors in the ‘recent events and policy decisions’ and ‘geo-political risk’ categories of Scope’s Qualitative Scorecard are assessed as ‘neutral’ compared with Slovenia’s sovereign peers. Socially-related factors are captured in Scope’s Core Variable Scorecard as Slovenia’s moderate GDP per capita (USD 23,654 in 2017), low level of unemployment but weak old-age dependency ratio. Qualitative evaluations of social factors are reflected in Scope’s ‘macro-economic stability and sustainability’ category, for which Scope assesses Slovenia at ‘neutral’. Slovenia performed well on social scoreboard indicators supporting the European Pillar of Social Rights, with low income inequality and a decrease in social exclusion. However, despite improvements in labour market outcomes, employment rates for older workers and low-skilled workers remain low and old-age poverty prevails. Slovenia is encouraging economic growth while ensuring the sustainability of natural resources. This is accounted for in the ‘growth potential of the economy’ and ‘macro-economic stability and sustainability’ assessments of the Qualitative Scorecard. Environmental factors are considered during the rating process but did not have an impact on this rating action. 

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s view that risks to the ratings are largely balanced over the next 12 to 18 months.

The rating could be upgraded if the sovereign were to: i) achieve a material reduction in public debt, ii) bring about structural improvements in potential growth, and/ or iii) implement successful pension and healthcare reforms. Conversely, the rating could be downgraded if: i) the economic outlook were to deteriorate, ii) fiscal consolidation were to reverse.

Methodology

The methodology used for this rating and rating outlook the Scope Sovereign Methodology May 2018, available on www.scoperatings.com.

Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. No cash flow analysis was performed. No stress testing was performed.

Solicitation, key sources and quality of information

The rating was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the rating process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: Banka Slovenije, Republic of Slovenia Statistical Office, BIS, IMF, OECD, ECB, European Commission, Eurostat, Haver Analytics.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures

This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst John F. Opie, Associate Director
Person responsible for approval of the rating: Giacomo Barisone, Managing Director Public Finance
The ratings/outlooks were first released by Scope on January 2003. The ratings/outlooks were last updated on 01.09.2017.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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