Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns, and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Scope completed the monitoring review for the Republic of Slovakia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A+/Negative; short-term local- and foreign-currency issuer ratings: S-1+/Negative) on 17 April 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

For the updated rating report accompanying this review, click here.

Key rating factors

The Republic of Slovakia’s long-term A+/Negative ratings are underpinned by the country’s institutional strengths, among which EU- and euro area memberships. Slovakia has a strong reserve currency, access to ECB asset purchases and refinancing operations, as well as a strong fiscal framework reinforced by the European fiscal rules. Furthermore, Slovakia’s ratings recognise access to substantive EU structural and recovery funds, moderate levels of public debt, and a competitive export-oriented industrial base, anchored by sustained foreign direct investment inflows.

However, Slovakia remains reliant on Russian energy supply, which still account for 43% of total energy imports as of October 2022. GDP growth rate is expected to decelerate at 1.4% in 2023 (1.7% in 2022) and inflation to average 10% in 2023 (12.1% in 2022), one of the highest in the euro area and Central and Eastern Europe. Measures introduced to mitigate the impact of the energy crisis for households and corporates explain the widening of the budget deficit at 5.5% of GDP in 2023 (-3.5% in 2022). Despite the strength of Slovakia’s fiscal framework and robust GDP growth rates, which drive the projected stabilisation of public debt around 60% of GDP, heightened political uncertainty is a risk on Slovakia’s medium-term fiscal trajectory because of potential adverse consequences on the reform agenda and the disbursement of European funds, among which the Recovery and Resilience Plan.

Challenges relate to Slovakia’s ratings include: i) over-reliance on Russia’s energy calling for a swift diversification of supply; ii) high exposure to external demand and global value chains, mostly through the automotive industry; and iii) debt trajectory exposed to adverse demographic trends.

The Negative Outlook represents Scope’s view that risks to the ratings are tilted to the downside over the next 12 to 18 months.

The ratings could be downgraded if, individually or collectively: i) GDP growth prospects decline materially due for example to a disorderly energy supply transition and/or a weakening of external demand; ii) the rise in public debt to GDP ratio is larger than anticipated due for example to sustained delay in fiscal consolidation; and iii) persistent political uncertainty and/or a shift in policy priorities weaken the reform agenda and relations with European institutions.

Conversely, the Outlook could be revised to Stable if, individually or collectively: i) GDP growth prospects are stronger than anticipated due for example to a swift diversification of the energy supply and/or a robust reform momentum demonstrating strong resilience to external shocks; and ii) the evolution of public debt to GDP ratio is more favorable than currently anticipated based on a sustained fiscal consolidation post elections.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 September 2022) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Thomas Gillet, Associate Director.

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