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

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

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit rating’s performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Slovakia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A/Stable; short-term local- and foreign-currency issuer ratings: S-1/Stable) on 19 July 2024.

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 ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

The Republic of Slovakia’s long-term A/Stable credit ratings are underpinned by: i) EU and euro area memberships; ii) competitive export-oriented industry; and iii) moderate albeit rising public debt. At the same time, the long-term ratings are challenged by: i) an uncertain fiscal consolidation agenda amid a weakening fiscal position and steady rise of the debt-to-GDP ratio in a no policy change scenario; ii) high dependence on external demand and global value chains; iii) an incomplete transition from Russian energy exposing local businesses to potential disruptions; and iv) long-term fiscal and debt trajectories exposed to adverse demographic trends and age-related spending.

Slovakia benefits from a strong economic outlook, with real GDP growth projected at 2.6% in 2024, up from 1.6% in 2023, and 2.9% in 2025. The economy is driven by a robust manufacturing sector benefiting from sustained foreign direct investment, particularly in the automotive industry, amid the transition towards electric vehicles. The Slovak economy also benefits from a significant grants allocation under the EU Recovery and Resilience Plan (EUR 6.4bn). Despite rule-of-law disputes with European institutions, the European Commission endorsed in July a positive preliminary assessment for the fourth disbursement, as the Slovak parliament amended the revision of the Criminal Code to safeguard European funds.

Slovakia’s fiscal outlook is challenged by wide budget deficits projected to increase to 5.9% of GDP in 2024, after 4.9% in 2023. This is driven by higher public spending, including healthcare and social expenditure (e.g., relaxed conditions for early retirement, parental bonus). However, the government outlined a consolidation plan with the objective to cut the deficit by 1 percentage point of GDP per year from 2025 onwards, to reduce the deficit to 3.0% of GDP by 2027 from an expected 5.0% of GDP in 2025. The credibility of this trajectory is supported by a spending-based consolidation plan, including the freeze of public sector wage growth and the phasing out of energy subsides, as well as targeted tax increases.

Still, it would be credit negative if the government’s fiscal trajectory deviated significantly from its outlined consolidation plan and targets. In a no policy change scenario, Scope expects the still moderate general government debt ratio (56% of GDP in 2023) to increase by more than 10 percentage points over the next 5-years. The scope and timing of the budgetary plans to be agreed between the Slovak government and the European Commission under the Excessive Deficit Procedure will thus be key to inform the credit rating trajectory.

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

The long-term ratings/Outlooks could be upgraded if, individually or collectively: i) the fiscal outlook improves, for example, due to a sustained reduction of deficits; ii) the macro-economic outlook improves, for example, due to stronger external demand; and/or iii) governance improves, furthermore strengthening prospects for the continued timely disbursement and implementation of European funds.

Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) the fiscal outlook deteriorates, for example, due to deviations from the fiscal consolidation plan leading to steady rise in debt-to-GDP; ii) the economic outlook deteriorates, for example, due to an external shock; and/or iii) governance materially weakens, undermining prospects for the timely disbursement and implementation of European funds.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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, Director

© 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.