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Rating Action:

Moody's changes outlook on Slovakia's sovereign rating to positive, affirms A2 rating

07 Apr 2017

London, 07 April 2017 -- Moody's Investors Service ("Moody's") has today changed the outlook on Slovakia's rating to positive from stable and affirmed the A2 issuer and senior unsecured ratings.

Moody's decision to change the outlook to positive in Slovakia's A2 rating reflects the following two drivers:

1) Slovakia's continued strong economic growth prospects in the coming years.

2) Anticipated pick-up in the pace of public sector debt reduction supported by robust growth and continued fiscal consolidation.

Slovakia's long-term local and foreign currency bond and bank deposits country ceilings remain unchanged at Aaa. Its short-term foreign currency bonds and bank deposits country ceilings also remain unchanged at Prime-1 (P-1).

RATINGS RATIONALE

RATIONALE FOR ASSIGNING A POSITIVE OUTLOOK

FIRST DRIVER - STRONG GROWTH PROSPECTS

Moody's expects Slovakia's positive growth momentum to continue in the coming years, and to remain broad based—driven by both domestic and external demand—further supporting its robustness. Real GDP growth is expected to accelerate from a projected 3.3% in 2017 to 3.8% in 2018 and 4% in 2019, exceeding both the average for EU countries and A-rated peers.

A new wave of investments in the automotive industry by Volkswagen (VW), Peugeot Citroen (PSA) and Jaguar Land Rover (JLR) from 2016-20 is boosting private investment and increasing Slovakia's export potential. At full capacity from 2018-20, this investment is expected to increase Slovakia's annual car production by up to 500,000 units, lifting the country's total annual production to a maximum of 1.5 million cars, on par with the Czech Republic which is the largest regional car producer. Cumulatively, the new automotive capacities are expected to contribute close to 2½ pp to real GDP growth from 2016-20.

In addition, private consumption will contribute positively to growth over the outlook horizon, supported by a tightening labor market and real wage growth. At the same time, the unemployment rate which declined to 9.7% in 2016, reaching the historical lows of 2008, will also fall further, to 7½% and 6½% in 2017 and 2018, respectively.

Moreover, Slovakia's strong growth potential will lift the country's income levels even closer to the Euro Area average, continuing the rapid convergence observed over the past decade. Slovakia's 2015 wealth levels as measured by per capita GDP on a purchasing power parity basis were 1.7x their level in 2005, a near doubling. At the same time, Slovakia's 2015 per capita GDP was around 76% of the Euro Area average, significantly up from 56% of the Euro Area average in 2005. Going forward, Slovakia's per capita GDP on a PPP basis is expected to exceed $40,000 by 2021 compared to the EA average of $49,000 according to IMF forecasts. The country's rising wealth levels will in turn further increase the government's revenue generating capacity as demonstrated in recent years—the government revenue to GDP ratio rose markedly to 42.9% of GDP in 2015, approaching the 2015 Euro Area average of 48.5% of GDP.

SECOND DRIVER - DECLINING PUBLIC SECTOR DEBT BURDEN ON THE BACK OF STRONG GROWTH AND FISCAL EFFORTS

The positive growth momentum is reflected in a rapidly narrowing fiscal deficit, with the authorities establishing a track record of fiscal consolidation in recent years. Since the sharp fiscal deterioration in 2009 when the fiscal deficit widened to -7.8% of GDP, the government has narrowed the fiscal deficit steadily to -2.7% of GDP in 2013 and an estimated -1.9% of GDP in 2016, the latter equivalent to budgeted forecasts.

Going forward, Moody's expects the fiscal deficit to narrow further, reaching the government's target of a balanced budget by 2020, in compliance with the Stability and Growth Pact requirements. Specifically, Moody's expects a government fiscal deficit of -1.4% of GDP for 2017; -0.9% of GDP in 2018; and -0.1% of GDP in 2019, underpinned by strong growth in annual tax collection owing to both robust economic growth and tax measures. Over the forecast horizon, Moody's expects Slovakia's revenue-to-GDP ratio to average 41% of GDP. At the same time, Moody's expects the pace of nominal expenditure growth to slow owing, in particular, to a deceleration in capital spending and rising expenditure efficiency, thereby decreasing the overall expenditure-to-GDP ratio from 42.2% of GDP in 2017 to 40.5% of GDP in 2019.

The projected fiscal consolidation, together with the strong economic growth performance, should support a faster reduction in the public sector debt to GDP ratio in the coming years. In particular, Moody's forecasts a further 5.5pp decline in the public sector debt to GDP ratio from 2016-2020—on top of the 3pp reduction in debt levels from 2013-2016, bringing the debt level to around 46% of GDP by 2020.

RATIONALE FOR AFFIRMING THE A2 RATING

The A2 rating is supported by wealth levels that continue to converge with the EU, high institutional strength, a healthy banking system, low political risks and improving public finance.

At the same time, despite Slovakia's strong growth momentum and the government's fiscal consolidation, public sector debt to GDP ratio remains above the median for A1-rated peers. As a small open economy, the country is also susceptible to external shocks and structural challenges, both of which continue to constraint Slovakia's rating. Additionally, the country's non-price competitiveness as measured by the World Economic Forum's Global Competitiveness Indicators, has lagged other regional A1-rated peers for example the Czech Republic, underscoring the need for Slovakia to revive its structural reform agenda.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading Slovakia's sovereign rating if the country succeeds in maintaining political support for continued fiscal consolidation and using revenue windfalls to restore fiscal buffers to levels closer to A1-rated peers. Further convergence to EU levels of economic development and a resumption of structural reforms would also be credit positive.

Conversely, downward pressure on the rating could develop if Slovakia's economic growth prospects were to deteriorate significantly, thereby complicating fiscal consolidation and leading to a significant deterioration in the government's balance sheet. Separately, a significant rise in the risk of euro area fragmentation, particularly prompted by events in core countries such as France (Aa2 stable) or Italy (Baa2 negative), which suggested a sharp rise in the risk of their exit from the euro area, would be negative for all euro area member countries and would exert pressure upon the rating of Slovakia.

GDP per capita (PPP basis, US$): 29,758 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.3% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.2% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -1.9% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.9% (2016 Actual) (also known as External Balance)

External debt/GDP: 53.3% (2015 Actual)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 05 April 2017, a rating committee was called to discuss the rating of the Slovakia, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased. Other views raised included: The issuer's institutional strength/ framework, have not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Rita Babihuga
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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