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Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Slovenia’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at A and affirmed the short-term issuer ratings at S-1 in local and foreign currency. All Outlooks are Stable.

Summary and Outlook

Slovenia’s A/Stable ratings are driven by the country’s i) wealthy and resilient economy; ii) strong market access and favourable debt profile; and iii) effective and prudent fiscal policy.

Rating challenges relate to i) the moderately high public debt; ii) a weak demographic outlook, with a rapidly ageing population pressuring long-term fiscal sustainability via rising pension and healthcare costs; iii) labour market rigidities that threaten to curb the country’s medium-term economic growth potential; and iv) pressure on external competitiveness relative to regional peers.

The Stable Outlooks reflect Scope’s opinion that risks to the credit ratings over the next 12 to 18 months are broadly balanced.

The ratings/Outlooks could be upgraded if, individually or collectively, Slovenia’s: i) fiscal outlook improved, with public debt on a firm downward trajectory over the medium- to long-term, supported, for example, by structural reforms addressing age-related pressures sustainably; and/or ii) sustained growth raises income due to, for example, structural reforms addressing labour market rigidities and/or pressure on external competitiveness.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively, Slovenia’s: i) medium-term growth prospects notably deteriorated due to, for example, a large economic shock, labour shortages, and/or a continued erosion of external competitiveness; ii) fiscal outlook weakened due to protracted fiscal deterioration; and/or iii) political fragmentation and policy uncertainty curtailed the implementation of reforms and/or resulted in lower EU transfers and/or foreign direct investment.

Rating rationale

The first driver underpinning the affirmation of Slovenia’s A/Stable ratings is its wealthy (2022 GDP per capita of EUR 27,975) and resilient economy, supported by the diversification of energy supply, countercyclical measures, and robust external performance.

Slovenia’s economy comfortably weathered the Covid-19 crisis. In 2021, GDP grew by 8.2% and output surpassed the pre-Covid level in Q3 of the same year. The economy also navigated the impact of rising energy prices triggered by the Russia-Ukraine war, with GDP growth of 5.4% in 2022. This was thanks to swift actions to diversify gas supply through other bilateral partners (Algeria, Croatia, and Hungary), even overcoming the lack of gas storage and heavy reliance on Russia, which before the crisis provided over 80% of the country’s gas imports. Slovenia’s diversified energy mix has been key to managing its downside risks on energy security, with natural gas accounting for just 12% of its total energy supply in 2021. Moreover, countercyclical measures against the Covid-19 and energy crises (respectively 11% of GDP over 2020-2023 and 3.8% in 2022-2023), as well as Slovenia’s euro area membership, shielded the economy against external headwinds.

Looking ahead, Scope expects GDP growth to moderate to 1.3% in 2023 (0.7% YoY in Q1) once the economic rebound following the Covid-19 crisis fades. Private consumption (50% of GDP) is being constrained by high inflation eroding real disposable incomes, though the effect is dampened by countercyclical measures as well as strong labour markets, with unemployment at close to historical lows. Tighter funding conditions and uncertainty triggered by the Russia-Ukraine war across Europe are discouraging investment (20% of GDP), while the economic slowdowns of European trading partners such as Germany, Italy and Austria are weighing on this year’s growth forecast. In 2024, however, GDP growth is projected to rise to 2.4%, supported by higher public investment and the EU Recovery and Resilience Plan. Downside risks relate to tightening monetary policy in response to the higher-for-longer inflation and to tensions on energy markets.

Slovenia’s robust external performance also supports economic resilience. Despite lower external demand due to the Covid-19 and Ukraine crises (three-quarters of its goods are exported within the EU), Slovenia’s current account deficit was modest at 0.4% of GDP in 2022. This year, the country is expected to run a current account surplus of about 2.0% of GDP thanks to the gradual normalisation of external trade conditions, including lower energy prices and robust exports (+21% YoY over January and May 2023 against 9% for imports). This should enable the net international investment position to strengthen further after a modest deficit of 1.2% of GDP in Q1 2023. A high share of foreign direct investment compared to portfolio investment, notably in the automotive industry (around 10% of GDP), also supports resilience against external shocks.

The second driver underpinning Slovenia’s A/Stable ratings relates to its strong market access, favourable debt profile, and sound debt management.

The spread of Slovenia’s 10-year benchmark government bond yield to the 10-year German Bund yield averaged around 100 basis points in H1 2023, despite its yield increasing to 3.3% over the period from 2.2% in 2022. This spread level is in line with historical levels and significantly better than those of non-euro area peers such as the Czech Republic, Poland, and Hungary, which reflects the benefit of the ECB’s monetary policy and financial sector oversight, including via the ECB’s asset purchase programmes and the (untested) Transmission Protection Instrument.

Furthermore, Slovenia’s sound debt management practices support debt affordability and mitigate liquidity risks stemming from higher interest rates and market volatility. The ample liquidity buffers (EUR 8.9bn at end-March 2023, or 13.7% of GDP)¹ constitute a core credit strength, with the treasury single account system² improving debt management flexibility. Liquidity buffers are larger than the principal to be repaid in 2024 and 2025 (EUR 4.6bn). Moreover, the interest burden is low, reflecting the solid investor base (non-residents hold around half of public debt), the lack of foreign-currency exposure, the fixed interest rates, and the long debt maturities. Net interest payments are foreseen to remain very low at 2.2% of revenues on average by 2028. Finally, the Bank of Slovenia holds more than one-third of total public debt, reducing interest rate sensitivity.

The third driver supporting Slovenia’s A/Stable ratings relates to its robust fiscal framework and prudent fiscal policy, driving the expectation of lower deficits and favourable debt dynamics into the medium term.

Slovenia has a long record of fiscal discipline, with budget surpluses and declining debt levels before the Covid-19 pandemic. The 2013 crisis took a toll on the sovereign balance sheet, but Slovenia subsequently strengthened its fiscal framework, for example, with the introduction in 2015 of the Fiscal Rule Act – requiring the gradual elimination of structural deficits – and the establishment in 2017 of an independent Fiscal Council.

Slovenia’s fiscal framework, featuring a constitutionally mandated balanced budget, is expected to be instrumental in keeping the fiscal deficit in line with the Maastricht threshold in the near- to medium-term. The general government deficit is projected to widen to 4.1% of GDP in 2023 from 3.0% in 2022 (against 4.5% according to the government³) due to a slowing economy and energy related measures (1.7% of GDP this year, against 2.2% in 2022). However, the gradual phase-out of fiscal measures amid the deactivation of the general escape clause – allowing for temporary derogation under exceptional circumstances – should enable the deficit to narrow to 2.6% of GDP in 2024 and around 1.8% of GDP on average by 2028. Moreover, disbursements from the Recovery and Resilience Plan – EUR 391m this year according to the Fiscal Council⁴ – are expected to peak in 2025, supporting investment and medium-term flexibility. In July 2023, the government proposed to the European Commission to amend the initial plan, with the final approval expected this autumn.

Finally, Slovenia's debt-to-GDP should decline to around 60% of GDP by 2028 from 70.2% in 2022, below the pre-Covid level of 65% and the euro-area average of 90%, thanks to low primary deficits, a modest interest burden and robust GDP growth rates. Contingent liabilities in the form of government guarantees are low at 8% of GDP, which authorities expect to drop to around 5% by end-2026.

Despite these strengths, Slovenia’s A/Stable ratings are challenged by several credit weaknesses.

First, Slovenia’s public debt is moderately higher than sovereign peers’ and exposed to the long-term implications of its weak demographic outlook.

The general government debt is foreseen to return to pre-Covid levels in 2025, but Slovenia underperforms peers that have lower debt-to-GDP ratios among euro-area countries, including Estonia, and Lithuania. Moreover, when taking a longer time horizon, the expected steady rise of age-related expenditures, to about 30% of GDP in 2060 from 21% in 2022, will challenge long-term sustainability if existing policies are not changed. In that case, simulations from Slovenia’s Fiscal Council show that public debt would steadily increase to above 150% of GDP by 2050⁵. The projected rise would result, among other factors, from pension spending increasing to 16% of GDP by 2060 from 10% currently, outpacing that of almost all European countries and the second highest of the 27 EU members⁶. Planned reforms of pension, healthcare, and long-term care systems⁷ as part of the Recovery and Resilience Plan will therefore be essential for the long-term debt trajectory. The absence of a parliamentary election until 2026 and of the presidential election until 2027 may provide some space to tackle these challenges. The parliament recently approved a 1% contribution levied on gross salaries and net pensions starting from 1 July 2025 to fund long-term care expenditures.

Second, supply-side constraints in the labour market may hinder Slovenia’s long-term GDP growth potential. Although the employment of foreign workers could ease near-term pressures, Slovenia has an unfavourable demographic outlook, with the old age dependency ratio set to increase to 59% in 2070 from 33% in 2019, according to the European Commission. The rapidly ageing population and shrinking domestic labour force could curb the country’s GDP growth potential, currently estimated at 2.5% by the European Commission and 3.0% by the government. Moreover, skills mismatches constitute another long-term challenge as the green and digital transitions may result in profound economic changes, though the government has started to tackle this challenge through reforms around working conditions and lifelong learning.

Finally, the shrinking domestic labour force may result in higher-for-longer inflation and unit labour costs, adversely impacting Slovenia’s external competitiveness, which is a key economic growth driver. The current account surplus is expected to average 0.5% of GDP by 2028 according to the IMF, which is significantly lower than the 2010-2019 average of 3.5% of GDP. The medium-term risk on the current account relates to a sustained deterioration of price competitiveness relative to regional peers. The OECD’s indicator of competitiveness based on relative unit labour costs remained flat since the Covid-19 pandemic and is set to drop by end-2024 from a regional peer average including Czech Republic, Poland, and Slovakia.

The deterioration in price competitiveness results from labour supply tensions that are weighing on domestic prices through higher minimum wage – the level of which already exceed those of OECD regional peers by sizable margins. A sustained deterioration in price competitiveness may further reduce Slovenia’s export market shares at global and EU levels, which simultaneously contracted in 2021 and 2022 for the first time over the past decade. In the long run, a durably weaker external performance could weigh on Slovenia’s small, open economy.

Core Variable Scorecard (CVS) and Qualitative Scorecard (QS)

Scope’s Core Variable Scorecard (CVS), which is based on the relative rankings of key sovereign credit fundamentals, provides an indicative rating of ‘a+’ after accounting for a one-notch positive adjustment for the euro’s reserve currency status. This indicative rating can be adjusted by the Qualitative Scorecard (QS) by up to three notches depending on the size of relative credit strengths or weaknesses versus the indicative sovereign peer group based on qualitative analysis.

For Slovenia, the QS signals relative credit weaknesses against indicative rating peers for the following qualitative analytical categories: i) macro-economic stability and sustainability; and ii) environmental factors. No credit strengths relative to peers were identified.

The QS generates a one-notch downside adjustment via the QS and signal an ‘A’ sovereign rating for Slovenia.

The results have been discussed and confirmed by a rating committee.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG sustainability issues during its ratings process via the sovereign methodology’s stand-alone ESG sovereign risk pillar, with a 25% weighting under the quantitative model (CVS).

For environmental factors, Slovenia’s score is close to the CVS average for carbon emission intensity against euro area peers but performs well for natural disaster vulnerability and the ecological footprint of its consumption relative to available biocapacity. However, the country’s transition towards a decarbonised energy mix is complicated by its high dependence on fossil fuels and persistent downside risks on energy supply, with less than half of demand met with domestic resources. This drives Scope’s ‘weak’ assessment.

For social risk factors captured under the CVS, Slovenia presents an elevated old-age dependency. Despite the weak demographic outlook, Slovenia has a productive and well-educated workforce, as well as one of the lowest income inequality levels in Europe in nominal terms. This drives Scope’s ‘neutral’ assessment.

Under governance-related factors captured in Scope’s CVS, Slovenia scores well on a composite index of six World Bank Worldwide Governance Indicators. Moreover, the stability afforded by the absence of any election until 2026 is balanced by the motion of no-confidence in March 2023, possible tensions within the centre-left coalition around the execution of reforms, and converging voting intentions between the Freedom Movement and the Slovenia Democratic Party. This drives Scope’s ‘neutral’ assessment.

Rating committee
The main points discussed by the rating committee were: i) domestic economic risk; ii) public finance risk; iii) external economic risk; iv) financial stability risk; v) ESG-related risk; and vi) rating peers.

Rating driver references
1. Ministry of Finance, Investor Presentation, June 2023
2. Ministry of Finance, Treasury Single Account System, July 2023
3. EU Commission, Stability Programme 2023, April 2023
4. Fiscal Council – Assessment of the Draft Revised Budget of the Republic of Slovenia for 2023, May 2023
5. Fiscal Council – Slovenia’s general government debt: characteristics, medium-term sustainability and long-term simulations, March 2021
6. EU Commission – The 2021 Ageing Report, May 2021
7. EU Commission, National Reform Programme 2023, April 2023

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 27 September 2022), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for this Credit Rating and Outlook is (Core Variable Scorecard version 2.1), available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party Participation     NO
With Access to Internal Documents                                  NO
With Access to Management                                            NO
The following material sources of information were used to prepare the credit rating: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 19 August 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
© 2023 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.