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Rating Action:

Moody's upgrades Slovenia's government bond ratings to Baa1, assigns stable outlook

08 Sep 2017

London, 08 September 2017 -- Moody's Investors Service, ("Moody's") has today upgraded Slovenia's long-term issuer and senior unsecured bond ratings to Baa1 from Baa3. The outlook on the ratings has been changed to stable from positive.

Moody's decision to upgrade Slovenia's government bond ratings to Baa1 reflects the following key drivers:

1. The government's favourable debt trend, driven by fiscal consolidation and robust economic growth, which Moody's expects to be sustained.

2. Progress with respect to some important structural reforms, namely with regard to the banking sector, judiciary, and the administrative apparatus of the state.

The stable outlook on the ratings reflects Slovenia's largely balanced risk profile at the Baa1 rating level. On the one hand, we expect that favourable growth dynamics over the coming years will allow the nominal fiscal balance to continue improving, with positive knock-on effects for the debt burden. On the other hand, we recognise that progress on some other areas of structural reform—namely, pension and healthcare reform—are likely to be halting and that the country's structural fiscal balance is expected to deteriorate in the coming years.

Concurrently, Slovenia's long-term foreign and local-currency bond and deposit ceilings have been raised to Aa1 from Aa3. The short-term foreign currency bond and deposit ceilings remain unchanged at P-1.

RATINGS RATIONALE

RATIONALE FOR RATING UPGRADE TO Baa1

FIRST DRIVER: FAVOURABLE GOVERNMENT DEBT TREND, DRIVEN BY FISCAL CONSOLIDATION AND ROBUST ECONOMIC GROWTH

The first driver for the upgrade is the continuing and material improvement in Slovenia's fiscal strength, as exemplified by the improvement in the nominal fiscal position. In 2016, the deficit reduction outperformed the country's Stability Programme target due to rapid revenue growth; the nominal fiscal deficit came in at 1.8% of GDP for the year. In 2017, we are forecasting a 1 percentage point decline in the nominal budget deficit to 0.8% of GDP.

Recent economic growth trends have also been extremely positive in Slovenia. We are currently expecting 3.6% growth in 2017, and risks to this forecast are tilted to the upside. Growth has been fairly broad-based in spite of the fact that EU-financed public investment has been slow to come on stream and absorption of EU structural funds has fallen short. Private consumption has recovered against the backdrop of improved labour market conditions and improved sentiment. Private investment in the export-oriented segments of the corporate sector has been weak in the past but has started to pick up momentum due to capacity constraints and strong profitability. After a long period of weakness, residential investment has also been picking up. Net exports are not likely to play the same positive role that they did a few years ago due to the increase in import spending, but Slovenia is still expected to maintain a very healthy current account surplus that exceeds 5% of GDP. The combination of deficit reduction and robust economic growth has naturally had a positive impact on debt trends. Slovenia's debt burden peaked at 82.6% of GDP in 2015 and our base case is that it will steadily decline in future years, going below 75% of GDP in 2018. Moreover, due to significant pre-financing of debt, the government has accumulated a substantial cash buffer equivalent to roughly 16% of GDP (as of 30 June 2017).

Up until now, improvements in the fiscal balance have been both nominal and structural. Structural measures have included wage restraint and a highly effective debt management programme. This has allowed the structural deficit to fall by a full percentage point between 2014 and 2016 (from 2.7% to 1.7% under the European Commission's calculations).

SECOND DRIVER: REFORM PROGRESS WITH REGARD TO BANKING SECTOR, JUDICIARY AND STATE ADMINISTRATION

The second driver for the upgrade is the progress that we have observed in some areas of structural reform, particularly with regard to the banking sector, the judiciary, and public administration. The improvements that have been a part of this effort have had a positive impact on the government's institutional strength and hence on its overall creditworthiness.

The efforts to strengthen the banking sector, which have been ongoing for a number of years, continue to bear fruit in terms of boosting the sector's ability to support economic activity. According to statistics from the Bank of Slovenia, system-wide NPLs (90+ days overdue) amounted to 5.1% of total loans as of end May 2017, down from 8% at the same period a year earlier. However, the system-wide non-performing exposures ratio, according to the European Banking Authority's broader definition (which also includes some restructured loans), was significantly higher. Non-financial corporations (NFCs) still account for the majority of the banks' claims more than 90 days in arrears, though NPLs have been declining significantly since Q3 2014 and hit levels recorded in 2010. SMEs -- which are responsible for the largest proportion of problem loans -- remain a concern with NPLs exceeding 15% at end 2016, compared with around 4% for large enterprises according to statistics from the central bank. The very large increase in the sector's capitalisation to over 20% (Tier-1 capital) reduces the contingent liability risks that the sector poses to the sovereign. The transfer of some bad assets into the Bank Asset Management Company (BAMC) has also had a positive impact on the sovereign's credit profile, as it has helped to reduce some of the interlinkages between the state and corporate sector that were an important accelerant during the financial crisis.

The reforms of the judiciary and public administration are also important and have made positive contributions to the country's competitiveness as well as its institutional strength. Slovenia has had a significant problem with backlogs of court cases, which is gradually being resolved. Insolvency procedures have been revamped, which has had a particularly positive impact on simpler cases, most of which are now resolved quite quickly. In 2015, the government embarked on a reform of public administration aimed at modernising the way in which government operates and increasing the efficiency of the state. While it was slow to get moving, in the last 18 months it has gained traction and become more dynamic. Not surprisingly, IT forms a backbone of this strategy. According to the EC, the creation of a state cloud has had a very significant impact on the quality and efficiency of government services and has started to generate budget savings. This also should increase economic competitiveness at the margin through the reduction of red tape.

RATIONALE FOR STABLE OUTLOOK

The stable outlook is driven by Slovenia's largely balanced risk profile at the Baa1 rating level. On the positive side, we see favourable growth dynamics over the few years that will support further improvements in the nominal fiscal balance. By the end of this decade, we expect that Slovenia will be running small nominal budget surpluses. By this point, the debt burden should be below 70% of GDP and could be even lower if cash reserves are used to accelerate reduction in the gross debt stock.

At the same time, in Moody's view the improvements in this fiscal balance is not structural in nature. According to the IMF, the authorities will need an additional structural adjustment equivalent to 1.8% of GDP in order to eliminate the structural deficit by 2020. The EC (which has a different methodology for calculating the structural balance) also sees the structural deficit increasing from 1.7% in 2016 to 1.8% in 2017 and 2.3% in 2018; this is significantly different from Slovenia's recommended 0.6% of GDP decline in the structural deficit in 2017. Reforms to age-related expenditures, namely pensions and health care, are important in achieving structural deficit reduction. However, in light of the upcoming 2018 parliamentary elections and the slow reaction function of the authorities, we expect that any change in these policy areas will be slow and halting.

SLOVENIA COMPARES FAVOURABLY TO RATING PEERS

The Baa rating category is highly diverse, but a wide-ranging peer analysis indicates that Slovenia is well-positioned at the top of this rating category. On a relative basis, its fiscal metrics—notably its debt load— are weaker than peers, but it compensates for this by having relatively stronger institutions. Moreover, Slovenia is a small economy, but it has diversification levels that are similar to much larger economies. It is also wealthier than many other Baa-rated countries. Both Slovenia's diversification and its wealth give the country additional shock-absorption capacity, the extent of which was revealed during the financial crisis.

WHAT COULD MOVE THE RATING UP/DOWN

We would consider upgrading Slovenia's government bond ratings following further progress on structural macroeconomic and/or institutional reforms. Signs that the country's structural fiscal vulnerabilities are being addressed would also put upward pressure on the rating, as it would signal greater certainty that the expected improvements in the government's debt metrics will be sustained.

Conversely, there could be downward pressure on the rating in the event of a substantial weakening of the macroeconomic environment or fiscal position. A relapse of problems in the banking sector would also be negative for Slovenia's credit profile, but the degree of recapitalisation and restructuring that we have seen thus far implies that even an extreme event of this nature would not have the same negative impact that we observed during the most recent financial crisis.

GDP per capita (PPP basis, US$): 31,710 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.1% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 0.5% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -1.8% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 5.2% (2016 Actual) (also known as External Balance)

External debt/GDP: [not available]

Level of economic development: High level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 05 September 2017, a rating committee was called to discuss the rating of the Slovenia, 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 institutional strength/framework, have materially increased. The issuer's fiscal or financial strength, including its debt profile, has materially increased. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

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.

Sarah Carlson
Senior Vice President
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

No Related Data.
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