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, with Stable Outlooks. The short-term issuer ratings have been affirmed at S-1 in both local and foreign currency, with Stable Outlooks.

The affirmation of Slovenia’s long-term ratings reflects a wealthy and resilient economy that has weathered external shocks well thanks to economic diversification and countercyclical policies. This resilience is bolstered by robust foreign direct investment and strong external performance. The affirmation also reflects a credible policy framework anchored by national fiscal rules and euro area membership, supporting prudent fiscal policy, moderate financing needs, and a favourable debt profile. Slovenia’s main credit challenges relate to the economic and fiscal implications of an ageing population and a tight labour market.

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Key rating drivers

A wealthy and resilient economy driven by economic diversification and external demand. Slovenia has a 2023 GDP per capita of EUR 29,753 and its economy has weathered external shocks well, such as the Covid-19 pandemic, cost of living crisis, and August 2023 floods, thanks to economic diversification, with manufacturing and tertiary sectors representing around 20% and 58% of GDP in 2023, respectively. Government countercyclical measures, swift energy supply diversification from Russia, euro area membership, and robust external performance have shielded the economy from a prolonged slowdown. Real GDP grew by 2.5% in 2022 and 1.6% in 2023.

Slovenia is expected to maintain strong economic performance, with real GDP growth projected at 2.3% in 2024 and around 2.7% over 2025-2029, against an estimated growth potential of 2.5%. Domestic economic activity is expected to be driven by private consumption, supported by declining inflation (2.5% YoY in May 2024, below the EU average), a tight labour market, and dynamic wage growth. Public and private investment is expected to remain robust thanks to the reconstruction spending following 2023 floods, EU Recovery and Resilience Plan disbursements, and foreign direct investment, including in the automotive industry and electric vehicle value chains.

Slovenia’s economic resilience is further reinforced by strong external performance. Export sectors are expected to benefit from recovering external demand within the EU, which accounts for about three-quarters of goods exports. After a modest current account deficit of 1.0% of GDP in 2022, Slovenia recorded a surplus of 4.5% in 2023, thanks to the normalisation of external trade conditions, which strengthened the net international investment position to 3.7% of GDP. High levels of foreign direct investment, particularly in the manufacturing sector, provide additional protection against external shocks.

A credible policy framework and favourable debt profile support funding flexibility. Slovenia has a good record of budget discipline and surpluses, underpinned by a constitutionally mandated balanced budget. Upcoming alignment of national fiscal rules with the revised EU budgetary framework is expected to reduce Slovenia’s moderate budget deficit. One-off measures to mitigate the impact of floods (around 1.7% of GDP, after 0.9% of GDP in 2023¹) have been highlighted by the European Commission, excluding Slovenia from the Excessive Deficit Procedure². Flood recovery programmes are financed through the reallocations from the general budget reserve, the annual state budget, and the Fund for the Reconstruction of Slovenia until 2028³. The government also increased corporate income tax from 19% to 22% and introduced a 0.2% tax on bank assets over 2024-2028, expected to generate around EUR 0.5bn. Scope projects the general government deficit at 3.0% of GDP in 2024, from 2.5% in 2023, and 2.5% on average by 2029. The deficit reduction and resilient GDP growth are expected to lower general government debt from 69.2% of GDP in 2023 to 68.0% in 2024 and around 64.0% by 2029.

The moderation of fiscal deficit and public debt are expected to enhance funding flexibility. Gross financing needs of the central government are moderate, around EUR 4.7bn, with about half covered as of end-June 2024. Funding flexibility is supported by high tax to GDP ratio and ample liquidity (around 15% of GDP) relative to gross financing needs. Slovenia’s favourable debt profile includes a low interest burden, net interest payments below 3% of revenues, a solid investor base – with non-residents holding around half of public debt –, minimal foreign-currency exposure, fixed interest rates, and long average debt maturity (9 years). Funding flexibility is further reinforced by EU funds, with a payment request of EUR 280m in gross terms under the Recovery and Resilience Facility⁴ and of EUR 300m under the EU Solidarity Fund.

Rating challenges: weak demographics and labour shortages

Challenges include a weak demographic outlook, with age-related expenditures expected to rise from 22% of GDP in 2022 to about 28% of GDP by 2060, among the highest in the EU⁵. Pension spending is projected to increase from 10% to 14% of GDP by 2060. Without policy changes in pensions and healthcare, age related costs could challenge long-term debt sustainability, potentially increasing public debt at around 150% of GDP by 2050⁶. The government plans to reform the pension, healthcare, and long-term care systems⁷. A new compulsory health contribution was introduced in January 2024 to replace private insurance, and a long-term care contribution on gross salaries and net pensions from July 2025 is projected to raise social contributions by 0.4 percentage point of GDP.

Finally, Slovenia faces supply-side constraints in the labour market, with declining active population and a registered unemployment rate of 4.6% as of April 2024. Although the employment of foreign workers could ease near-term pressure, the rapidly ageing population and shrinking domestic labour force could weigh on the economic momentum. Labour market rigidities affect minimum wages, public salaries, and unit labour costs, reducing price competitiveness relative to regional peers. A sustained deterioration in price competitiveness could reduce export market shares globally and within the EU, posing a downside risk for Slovenia’s small, open economy. These challenges are compounded by high geopolitical risks.

Outlook and rating sensitivities

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

The upside scenarios for the rating and Outlooks are (individually or collectively):

1. An improvement in the fiscal outlook, 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;
    
2. Sustained GDP growth raises income due to, for example, structural reforms addressing labour market rigidities.

The downside scenarios for the rating and Outlooks are (individually or collectively):

1. Notable deterioration in medium-term growth prospects due to, for example, a large economic shock, labour shortages, and/or continued erosion of external competitiveness;
    
2. Weakened fiscal outlook due to protracted fiscal deterioration;
    
3. Political fragmentation and policy uncertainty curtailed the implementation of reforms and/or resulted in lower EU transfers and/or foreign direct investment.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘a’ for Slovenia, which was approved by the rating committee. Under Scope’s methodology, the indicative rating receives 1) a one-notch positive adjustment from the methodological reserve-currency adjustment; and 2) no negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘a+’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Slovenia’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified the following QS relative credit weaknesses for Slovenia: 1) macro-economic stability & sustainability; and 2) environmental factors. Conversely, Scope identified no QS relative credit strengths for Slovenia. On aggregate, the QS generates a negative one-notch adjustment for Slovenia, resulting in final A long-term ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

For environmental factors, Slovenia’s score is slightly below the SQM average for carbon emission intensity and the ecological footprint of its consumption relative to available biocapacity against euro area peers but performs slightly better for natural disaster vulnerability. Carbon emissions per capita are stagnating and the use of renewables still lags the regional peer average. This drives Scope’s ‘weak’ assessment.

For social factors captured under the SQM, 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 the SQM, Slovenia scores well on a composite index of five World Bank Worldwide Governance Indicators, reflecting strong democratic institutions. The stability afforded by the absence of any election until 2026 is balanced by possible tensions within the centre-left coalition, 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. Republic of Slovenia – Investor presentation, June 2024
2. European Commission – Excessive Deficit Procedure Communication, June 2024
3. Republic of Slovenia – Government adopts two flood recovery programmes by 2028, May 2024
4. Republic of Slovenia – Third request for payment under the Recovery and Resilience Facility, June 2024
5. European Commission – The 2024 Ageing Report, April 2024
6. Fiscal Council – Slovenia’s general government debt, March 2021
7. IMF, Article IV Consultation, May 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Sovereign Rating Methodology, 29 January 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks is (Sovereign Quantitative Model Version 3.0), 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    YES
With access to internal documents                                   NO
With access to management                                            YES
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity, 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 28 July 2023.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis 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.