Paris, June 18, 2021 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Slovakia's foreign and domestic currency
senior unsecured and long-term issuer ratings at A2. The
outlook remains stable.
The key drivers behind the rating action are:
1) The Slovakian economy's relative resilience to the pandemic shock,
as well as its solid post-pandemic growth prospects;
2) A government debt burden that remains moderate despite the fiscal impact
of the pandemic shock, as well as very strong debt affordability
The stable outlook reflects Moody's expectation that the Slovakian
economy will return to robust rates of growth in 2021 and beyond,
and that the government fiscal metrics will remain broadly in line with
those of rating peers. It also reflects Moody's expectation
that risks from the banking sector will remain contained, and that
the government's reform efforts to tackle some of Slovakia's
key structural economic and institutional challenges will produce positive
Slovakia's local and foreign currency country ceilings remain unchanged
RATIONALE FOR THE AFFIRMATION OF THE A2 RATINGS
FIRST DRIVER: THE SLOVAKIAN ECONOMY'S RELATIVE RESILIENCE
TO THE PANDEMIC SHOCK, AS WELL AS ITS SOLID POST-PANDEMIC
Although the Slovakian economy's contraction of 4.8%
of GDP in 2020 was its sharpest annual decline since the global financial
crisis, the economic contraction was milder than the more than 6%
decline in GDP recorded for the European Union (Aaa stable) and euro area
in 2020. While the initial pandemic shock led to a sharp decline
in above all industrial production, Moody's sees Slovakia's
relatively high reliance on industry and manufacturing, and low
dependence on in-person services and tourism as underpinning the
economy's relative resilience. Industrial production at the
beginning of 2021 had returned to pre-pandemic levels, while
goods exports in the fourth quarter of 2020 recorded a year-on-year
increase. Growth of the country's automotive sector,
which accounts for around a third of exports, has notably also been
increasingly driven by the export of electric and hybrid vehicles.
In contrast to many European peers, private consumption also proved
remarkably resilient in Slovakia during the pandemic.
Although the economy contracted moderately in the first quarter of 2021
under the impact of the second wave of the pandemic, we expect Slovakia
to return to full year-growth of 4.1% of GDP in 2021
before accelerating further to growth of 5.2% in 2022.
While vaccination rates in Slovakia are currently somewhat below that
of the EU as a whole, we expect vaccinations to have progressed
to a point where pandemic restrictions can be eased on a more permanent
basis in the second half of 2021. Moody's expects that strong
external demand, a release of pent-up consumer demand and
savings as well as disbursements under the EU's Next Generation
EU pandemic-recovery fund will be key drivers of Slovkia's
Slovakia is set to receive around 8% of 2018 GDP in grants under
the EU recovery fund, materially boosting investment and growth
when disbursements are likely to peak in 2022-2024. Based
on the government's draft spending plans, the funds will be
devoted to such objectives as improving education and research,
the functioning of the health care system and tackling problems around
the rule of law and control of corruption.
While the spending plan and the associated reforms present a major opportunity
for the government to tackle some of Slovakia's key structural economic
and institutional challenges, ensuring the effective implementation
of the plans will test the government's institutional capacity.
Slovakia currently has among the lowest absorption rates of EU structural
and cohesion funds among the 27 member states, and its share of
payment irregularities for EU funds are significantly higher than that
of the other members of the bloc, according to the EU's anti-fraud
office. Internal divisions within Slovakia's four-party
governing coalition, which came to the fore with the resignation
of prime minister Igor Matovic earlier this year, could also hamper
SECOND DRIVER: A GOVERNMENT DEBT BURDEN THAT REMAINS MODERATE DESPITE
THE FISCAL IMPACT OF THE PANDEMIC SHOCK, AND VERY STRONG DEBT AFFORDABILITY
The economic contraction and the government measures to mitigate the pandemic
shock in 2020, drove an increase in the headline fiscal deficit
to 6.1% of GDP, up from 1.3% in 2019.
While a substantial increase in the deficit, it is one that is not
out of line with Slovakia's rating peers at the A2 level.
The deterioration of the public finances and the economic situation also
led to a sharp increase in the government debt burden to 60.3%
of GDP at the end of 2020, up from 48.2% at the end
of 2019. However, this is broadly in line with the median
increase in debt of A2 rated peers, and leaves Slovakia's
debt burden broadly in line with the median at this rating level in 2021.
Moody's expects the fiscal deficit to remain very substantial in
2021 at 7.8% of GDP, as the government has prolonged
and expanded many of the crisis measures introduced last year.
However, Moody's expectations for a return to robust growth
in 2021 and beyond as well as the fact that the government borrowed significantly
more than its funding needs in 2020 means that the debt burden will remain
essentially stable relative to GDP in 2021. Moody's expects
the debt-to-GDP ratio to increase moderately to 62%
in 2022 before broadly stabilizing above 61% in 2023-2025
as Moody's also expects headline deficits to remain substantial,
at an average level of 3.5% of GDP in these years.
Despite the significant increase in the government debt burden,
Moody's expects Slovakia's debt affordability metrics to remain
very strong. Moody's forecasts the ratio of government interest
payments to revenue to stand at 2.4% at the end of 2021
and remain broadly at this level also in subsequent years. This
compares favourably to the median of A2 rated peers of 3.1%
at the end of 2021. The government's borrowing costs have
remained very low throughout the pandemic, supported by such factors
as the renewed buying of euro area sovereign bonds by the European Central
Bank (ECB) under its Pandemic Emergency Purchase Programme (PEPP).
On 14 April 2021, Slovakia issued a 15-year syndicated bond
of €1.5 billion with a coupon of 0.375% and
a yield of 0.435%.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Slovakia's ESG Credit Impact Score is neutral-to-low
(CIS-2), reflecting low exposure to environmental risk and
moderately negative exposure to social risks, as well as a very
strong governance profile.
Slovakia's overall E issuer profile score is neutral to low (E-2),
reflecting low exposure to environmental risks across all categories.
Slovakia's S issuer profile score as moderately negative (S-3),
reflecting low exposure to social risks across most categories.
The primary exception is demographics, where population ageing continues
to pose risks to the country's long-term growth potential
and fiscal sustainability.
Slovakia receives a positive G issuer profile score of (G-1).
Although concerns remain about the control of corruption in Slovakia,
we generally view the country's institutional environment as being
strong, supported by its membership of the EU and euro area.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that Slovakia will
return to strong rates of growth in 2021 and 2022 and maintain robust
rates of economic growth over our forecast horizon until 2025.
It also reflects Moody's expectation that the government debt burden
will broadly stabilize at its current level, as fiscal deficits
are reduced and economic growth returns beyond the pandemic. Moreover,
the stable outlook reflects Moody's expectations that risks to the
sovereign's balance sheet from the banking sector will remain contained
and that the government's efforts to tackle some of Slovakia's
key institutional challenges in the field of the rule of law and control
of corruption will produce positive outcomes over the medium term.
GDP per capita (PPP basis, US$): 32,710 (2020
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -4.8% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2% (2020
Gen. Gov. Financial Balance/GDP: -6.1%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.4% (2020 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: a1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 15 June 2021, a rating committee was called to discuss the ratings
of Slovakia, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become less susceptible
to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
FACTORS THAT COULD LEAD TO AN UPGRADE
Upward pressure on the ratings could build if we see significant progress
on tackling structural economic and institutional weaknesses, for
example relating to the education system, control of corruption
and the rule of law, that currently constrain the economy's
longer-term productivity and growth potential. A significant
reduction in government debt that brings it more into line with that of
A1-rated peers would also support a potential upgrade.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Conversely, downward pressure could build on the ratings if we were
to see a continued and material increased in the government debt burden
beyond the pandemic. Evidence that the economy's structural challenges
are having a material negative impact on the country's growth potential,
or backsliding on recent efforts to improve the institutional environment
would also be credit negative, as would signs that risks to the
sovereign's balance sheet from the banking sector are materially
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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