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Rating Action:

Moody's upgrades Slovenia's ratings to A3, outlook stable

02 Oct 2020

Paris, October 02, 2020 -- Moody's Investors Service ("Moody's") has upgraded the Government of Slovenia's long-term issuer and senior unsecured bond ratings to A3 from Baa1. Concurrently, the outlook has been changed to stable from positive.

The upgrade of Slovenia's ratings reflects the following key drivers:

(1) The improvement of Slovenia's debt burden and debt affordability metrics relative to peers; and Moody's expectation that the debt reduction trend will resume next year as the economy recovers from the pandemic shock;

(2) The significant improvement of the health of the banking system, as well as the completion of the privatization of the country's largest banks, since Moody's previous upgrade of the sovereign rating;

The stable outlook reflects Moody's expectation that the current crisis will not leave a significant and lasting negative impact on Slovenia's economy and that the country's economic and fiscal strength will remain aligned with the A3 rating. It also reflects Moody's expectation that the banking system will remain broadly resilient to the pandemic shock, with the capacity to support the economic recovery next year. Conversely, the stable outlook captures the rating agency's assumption that progress on key structural reforms, above all to the pensions system, will not materialize before the end of the current government's mandate in 2022.

RATINGS RATIONALE

RATIONALE FOR THE UPGRADE TO A3

FIRST DRIVER: THE IMPROVEMENT OF SLOVENIA'S DEBT BURDEN AND DEBT AFFORDABILITY METRICS RELATIVE TO PEERS

The most significant improvement to Slovenia's fiscal metrics concerns the affordability of its debt burden, which has strengthened considerably relative to both rating peers and Moody's previous expectations since our most recent upgrade of Slovenia's sovereign rating in 2017. The government's interest payments to revenue ratio has decreased from 6.8% at the end of 2016 to 3.9% at the end of 2019, as Slovenia has benefitted from the low yield environment and the asset purchase programmes of the European Central Bank of these years to refinance relatively expensive maturing debt at much lower interest rates. Consequently, its interest payments to revenue ratio is now considerably stronger than the median of Baa1 rated peers and also stronger than the median of A3 rated sovereigns.

In the four years preceding the outbreak of the coronavirus, Slovenia recorded the fastest reduction of its government debt burden among any EU member state bar Ireland, with the debt-to-GDP ratio falling from a peak of 82.6% at the end of 2015 to 65.6% at the end of 2019. The economic impact of the outbreak of the pandemic will lead to a significant deterioration of Slovenia's government fiscal balance and debt-to-GDP ratio this year, which Moody's expects will reach -8.4% and 81.1% of GDP respectively. However, given the global nature of the impact of the coronavirus, most rating peers will see their fiscal metrics deteriorate by a similar magnitude. Hence, relative to peers, Moody's expects that the significant improvements observed for Slovenia's debt-to-GDP relative to Baa1 and A3 rated peers will remain broadly intact. Slovenia's debt-to-revenue ratio is also already considerably stronger than the median of Baa1 rated sovereigns while the gap to the median of A3 rated sovereigns has also narrowed since 2017. Moreover, the government's exposure to contingent liability risks from state-owned enterprises has also diminished over recent years as their debt levels relative to GDP have fallen and financial performance has considerably improved.

Moody's expects that these improvements will remain resilient to the continued economic and fiscal impact of the coronavirus. Although Moody's expects fiscal policy to remain accommodative in 2021, with the government recording a 4.4% of GDP deficit next year, the rating agency also expects the government debt ratio to resume its downward trend in 2021. Moreover, the significant improvements made to both the headline and structural fiscal balance as well as on debt reduction since the peak of Slovenia's financial crisis in 2013, leads Moody's to expect that the Slovenian government will be able to bring its public finances under control also following the coronavirus crisis. The government's borrowing costs are also likely to remain low for the foreseeable future given continued support from accommodative monetary policy in the euro area, leading us to expect that interest payments will remain broadly stable in nominal terms despite the significant increase in the debt burden this year.

Although Moody's expects the Slovenian economy to contract by 6.7% of GDP this year, the rating agency expects the economy's growth potential, which the European Commission estimated at around 3% of GDP prior to the pandemic, will remain broadly intact beyond the current crisis. Although Slovenia's tourism industry is somewhat larger than the EU average and will continue to suffer from weak external demand during the pandemic, the country retains a competitive and diversified goods export base in areas such as pharmaceuticals, automotive and electrical appliances which Moody's expects will not be structurally weakened by the current crisis. Moreover, funding from the European Union's Next Generation EU instrument will provide a boost to investment rates and growth potential over the medium term. Moody's expects that a resumption of trend growth rates above the EU average will support the process of fiscal consolidation and debt reduction beyond the current crisis.

SECOND DRIVER: THE SIGNIFICANT IMPROVEMENT OF THE HEALTH OF SLOVENIA'S BANKING SYSTEM, AS WELL AS THE COMPLETION OF THE PRIVATISATION OF THE COUNTRY'S LARGEST BANKS, SINCE MOODY'S PREVIOUS UPGRADE OF THE SOVEREIGN RATING

Since Moody's upgrade of the sovereign rating to Baa1 in September 2017, the rating agency has continued to see significant and lasting improvements to the health and functioning of Slovenia's banking system, which was the subject of a large-scale government recapitalization and nationalization programme as well as the transfer of non-performing assets to a bad bank at the end of 2013. At the time of Moody's most recent upgrade of the sovereign rating, the average weighted Baseline Credit Assessment of Slovenia's three main banks stood at "b1". This has since improved by three notches to a score of "ba1" following a series of upgrades to the ratings of Slovenia's main domestic banks.

These improvements above all reflect a significant reduction of non-performing loans (NPLs) in the Slovenian banking system, which were the key legacy of the country's financial crisis. According to data from the European Banking Authority, the system-wide NPL ratio has declined from 13.3% in June 2017 to 3.5% in March 2020, following a series of loan repayments, NPL sales and write offs. Meanwhile, the capitalization levels of the Slovenian banking system have remained above the EU average, although the excess capital in the country's largest banks has been reduced owing to recent acquisitions. The coronavirus crisis has also led to a deterioration of the banks' operating environment. As a result, the banking sector's profitability has declined owing to higher forward-looking loan loss provisions, while Moody's expect that asset quality deterioration will only materialise into 2021, once the economic and employment consequences of the pandemic will become visible and the statutory loan moratorium ends. Based on Moody's central scenario, the rated banks' overall credit profiles should be resilient against the background of a deteriorating operating environment.

The Slovenian government in 2018 and 2019 also completed the process of privatisating the banks that were nationalised during the 2013 rescue of the banking system. 65% of the country's largest bank Nova Ljubljanska Banka d.d. (NLB, long-term deposit rating: Baa2 stable, baseline credit assessment: ba1) was privatised in an IPO in November 2018, with an additional 10 percentage points being sold together with 100% of the country's third-largest bank Abanka d.d. in June 2019. The latter has been acquired and merged with Slovenia's second-largest bank Nova Kreditna Banka Maribor d.d. (NKBM, long-term deposit rating: Baa2 stable, baseline credit assessment: ba1) which was privatized already in 2015. Although the privatisation of NLB, which was required under EU state aid rules, was marred by delays, its successful completion is proof of the government's ability to follow through on its reform commitments as well as the post-financial crisis normalization of the country's banking system. It also significantly reduces the sovereign's direct exposure to contingent liability risks from the banking sector and supports the reduction of government debt, as 90% of the privatisation proceeds have been ear-marked for government debt reduction.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that although the outbreak of the coronavirus will have a significant negative impact on Slovenia's economic and fiscal metrics this year, the crisis will leave only limited lasting scars on the country's diversified and export-oriented economy. It also reflects Moody's expectation that the country's economic and fiscal strength will remain aligned with the A3 rating. Furthermore, the stable outlook reflects Moody's expectation that the banking system will remain broadly resilient to the pandemic shock and be able to support the recovery of the Slovenian economy next year. It also captures Moody's assumption that progress on key structural reforms, above all to the pensions system, will not materialize before the end of the current government's mandate in 2022.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental risks do not materially impact our view of Slovenia's credit profile.

Social risks inform our assessment of Slovenia's credit profile, primarily through risks associated with the country's ageing population. While Slovenia's demographic profile is not markedly worse than that of many of its Central and Eastern European peers, ageing-related fiscal risks are among the highest in the region as past and current governments have yet to produce politically viable reforms that fully tackle risks associated in particular with increasing pension expenditure. Moody's also regard the coronavirus outbreak as a social risk under our ESG framework, which will have a significant negative impact on Slovenia's growth and fiscal metrics.

Governance risks primarily relate to the occasionally slow response of the Slovenian government in meeting major policy challenges, as reflected in our assessment of the country's institutional strength.

GDP per capita (PPP basis, US$): 38,462 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.2% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2% (2019 Actual)

Gen. Gov. Financial Balance/GDP: 0.5% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 6.6% (2019 Actual) (also known as External Balance)

External debt/GDP: [not available]

Economic resiliency: a2

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

On 29 September 2020, 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 institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure could build on the rating if Moody's were to see a reduction in debt levels beyond current expectations. Further improvements to the health of the banking system, as evidenced by further upgrades of the ratings of the main domestic banks, would also place further upward pressure on the rating. Tangible progress on reforms, above all to the pension system, that would materially reduce ageing-related fiscal risks and demonstrate the ability of Slovenia's institutions to proactively tackle longer-term policy challenges would also be credit positive.

Negative pressure could build on the rating if the deterioration in key government fiscal metrics brought about by the coronavirus crisis would become more permanent, leading to a continued increase in the government debt burden. A resurgence of problems in the country's banking sector or evidence that the current crisis would leave significant and lasting scars to the economy's growth potential would similarly be credit negative.

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.

REGULATORY DISCLOSURES

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.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

Petter Bryman
Asst Vice President - Analyst
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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