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Fitch Downgrades Slovenia to 'BBB+'; Outlook Negative
Fri May 17, 2013 12:26pm EDT
LONDON, May 17 (Fitch) Fitch Ratings has downgraded Slovenia's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB+' from 'A-'. The Outlook on the Long-term IDRs remains Negative. Fitch has simultaneously affirmed the Short-term foreign currency IDR at 'F2' and the common eurozone Country Ceiling for Slovenia at 'AAA'.
KEY RATING DRIVERS
The downgrade of Slovenia's sovereign ratings reflects the following key rating factors: - The macroeconomic and fiscal outlook has deteriorated significantly since Fitch's last rating review of the Slovenian sovereign in August 2012.
The agency now forecasts a 2% contraction in real GDP in 2013 and a decline of 0.3% in 2014, when Slovenia is expected to be one of only two eurozone economies to contract. Fitch forecasts that the general government deficit (GGD, net of bank recapitalisation costs) will rise to 5% of GDP in 2013 from 4% in 2012, against a target set down in the end-2012 budget law of 2.8%.
- Fitch now projects that a larger GGD than previously expected, a poor macroeconomic outlook, and costs deriving from bank recapitalisation and the issuance of state guarantees for "bad bank" (BAMC) bonds will cause gross general government debt (GGGD) to rise to 72% of GDP in 2013-14, up from 22% in 2008.
This compares with a forecast for 2014 of 63% when Fitch last downgraded Slovenia to 'A-'/Negative in August 2012. - There remains a significant divergence between official and Fitch estimates of bank recapitalisation costs.
The agency's baseline estimate is that the Slovenian banking sector will necessitate a further capital injection EUR2.8bn (8% of GDP). Of this, the state needs to inject EUR2bn into the three largest (predominantly state-owned) banks. This is more than twice the latest official estimate.
However, the latter makes somewhat different assumptions regarding non-performing loan (NPL) coverage; core capital adequacy ratios (CARs) to be targeted; and the deleveraging of banks' balance sheets deriving from asset transfers to the BAMC.
Crucially, Fitch believes that NPLs have yet to peak, given the prolonged economic contraction. - The coalition government in power since March 2013 is showing a renewed sense of urgency in addressing bank balance sheet clean-up and structural reforms. However, it is an interim administration comprised of disparate parties whose agendas sometimes conflict, and whose term may not extend beyond mid-2014.
This could hamper its ability to respond to economic shocks. The 'BBB+' rating reflects: - Even factoring in the above adverse developments, Fitch expects the GGGD ratio to remain below the eurozone average for 2012 (93% of GDP), albeit above the median for the 'BBB' range (36%).
Fitch projects the primary budget to be in balance by 2015, leading to stabilisation of the GGGD/GDP ratio.
- The current-account balance (CAB) was in surplus by over 2% of GDP in 2012 and Fitch expects it to remain in surplus in 2013-14. The economy thus remains self-financing.
The openness of the economy, with exports equivalent to 75% of GDP, is supporting rebalancing - The Slovenian sovereign retains access to international bond markets, as demonstrated by successful issuance of a total USD5.75bn in five- and 10-year bonds in October 2012 and May 2013.
In conjunction with issuance of EUR1.1bn in 18-month T-bills in April, this should fund budget and debt redemption needs to end-2014. - EU and eurozone membership, a relatively high value-added and diversified economy, and high human development indicators continue to underpin Slovenia's investment-grade rating.
RATING SENSITIVITIES
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: - Deeper and longer recession than currently forecast by Fitch that undermines the fiscal consolidation effort and increases already high contingent risks from the financial sector.
- Failure of Slovenian policymakers to clean up the balance sheets of the banking and corporate sectors in a timely manner, for example as a result of political uncertainty.
- Economic and fiscal outturns that imply GGGD will peak significantly above current projections.
- Sustained deterioration in fiscal and bank funding conditions.
- Re-intensification of the eurozone crisis could further weaken the economy through a fall in external demand, weaker confidence and tighter credit conditions.
The current Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
-Effective bank and corporate balance-sheet clean-up that engenders sustained economic recovery that supports faster fiscal consolidation.
-Confidence that the public debt to GDP ratio has embarked on a downward path.
-Continued structural reforms that reduce the state's participation in the economy and enhance Slovenia's competitiveness and growth potential.
KEY ASSUMPTIONS
The rating incorporates Fitch's assumption that the government will sustain medium-term fiscal commitments made under the EU's enhanced fiscal surveillance framework.
Fitch assumes that Slovenia will only start recovering in H114 from its deep recession as the large external and particularly domestic shocks causing the current recession to linger on into early 2014.
Fitch assumes that medium-term potential growth of 1.5%, constrained by the aftermath of the burst corporate credit bubble and by weaker medium-term prospects for external demand.
Fitch's GGGD projections incorporate partial (EUR1.5bn for the purposes of its debt dynamics calculations) use of the EUR4bn limit on guarantees for BAMC bonds.
Nonetheless, if the recession is deeper and longer than currently anticipated, or the financial position of the corporate sector is worse, the risk of a larger impact on the sovereign balance sheet cannot be discounted.
Given the considerable uncertainties involved, the agency makes no assumption for the purposes of its GGGD projections regarding revenue from privatisation and the eventual realisation of distressed assets on the BAMC's balance sheet.
The current rating reflects Fitch's judgement that Slovenia will retain market access. Were Slovenia to require an official programme, Fitch would review the rating taking into account the modalities of the programme.
Furthermore, Fitch assumes that the risk of fragmentation of the eurozone remains low.
Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: [email protected].
Fri May 17, 2013 12:26pm EDT
LONDON, May 17 (Fitch) Fitch Ratings has downgraded Slovenia's Long-term foreign and local currency Issuer Default Ratings (IDR) to 'BBB+' from 'A-'. The Outlook on the Long-term IDRs remains Negative. Fitch has simultaneously affirmed the Short-term foreign currency IDR at 'F2' and the common eurozone Country Ceiling for Slovenia at 'AAA'.
KEY RATING DRIVERS
The downgrade of Slovenia's sovereign ratings reflects the following key rating factors: - The macroeconomic and fiscal outlook has deteriorated significantly since Fitch's last rating review of the Slovenian sovereign in August 2012.
The agency now forecasts a 2% contraction in real GDP in 2013 and a decline of 0.3% in 2014, when Slovenia is expected to be one of only two eurozone economies to contract. Fitch forecasts that the general government deficit (GGD, net of bank recapitalisation costs) will rise to 5% of GDP in 2013 from 4% in 2012, against a target set down in the end-2012 budget law of 2.8%.
- Fitch now projects that a larger GGD than previously expected, a poor macroeconomic outlook, and costs deriving from bank recapitalisation and the issuance of state guarantees for "bad bank" (BAMC) bonds will cause gross general government debt (GGGD) to rise to 72% of GDP in 2013-14, up from 22% in 2008.
This compares with a forecast for 2014 of 63% when Fitch last downgraded Slovenia to 'A-'/Negative in August 2012. - There remains a significant divergence between official and Fitch estimates of bank recapitalisation costs.
The agency's baseline estimate is that the Slovenian banking sector will necessitate a further capital injection EUR2.8bn (8% of GDP). Of this, the state needs to inject EUR2bn into the three largest (predominantly state-owned) banks. This is more than twice the latest official estimate.
However, the latter makes somewhat different assumptions regarding non-performing loan (NPL) coverage; core capital adequacy ratios (CARs) to be targeted; and the deleveraging of banks' balance sheets deriving from asset transfers to the BAMC.
Crucially, Fitch believes that NPLs have yet to peak, given the prolonged economic contraction. - The coalition government in power since March 2013 is showing a renewed sense of urgency in addressing bank balance sheet clean-up and structural reforms. However, it is an interim administration comprised of disparate parties whose agendas sometimes conflict, and whose term may not extend beyond mid-2014.
This could hamper its ability to respond to economic shocks. The 'BBB+' rating reflects: - Even factoring in the above adverse developments, Fitch expects the GGGD ratio to remain below the eurozone average for 2012 (93% of GDP), albeit above the median for the 'BBB' range (36%).
Fitch projects the primary budget to be in balance by 2015, leading to stabilisation of the GGGD/GDP ratio.
- The current-account balance (CAB) was in surplus by over 2% of GDP in 2012 and Fitch expects it to remain in surplus in 2013-14. The economy thus remains self-financing.
The openness of the economy, with exports equivalent to 75% of GDP, is supporting rebalancing - The Slovenian sovereign retains access to international bond markets, as demonstrated by successful issuance of a total USD5.75bn in five- and 10-year bonds in October 2012 and May 2013.
In conjunction with issuance of EUR1.1bn in 18-month T-bills in April, this should fund budget and debt redemption needs to end-2014. - EU and eurozone membership, a relatively high value-added and diversified economy, and high human development indicators continue to underpin Slovenia's investment-grade rating.
RATING SENSITIVITIES
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings: - Deeper and longer recession than currently forecast by Fitch that undermines the fiscal consolidation effort and increases already high contingent risks from the financial sector.
- Failure of Slovenian policymakers to clean up the balance sheets of the banking and corporate sectors in a timely manner, for example as a result of political uncertainty.
- Economic and fiscal outturns that imply GGGD will peak significantly above current projections.
- Sustained deterioration in fiscal and bank funding conditions.
- Re-intensification of the eurozone crisis could further weaken the economy through a fall in external demand, weaker confidence and tighter credit conditions.
The current Outlook is Negative. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
-Effective bank and corporate balance-sheet clean-up that engenders sustained economic recovery that supports faster fiscal consolidation.
-Confidence that the public debt to GDP ratio has embarked on a downward path.
-Continued structural reforms that reduce the state's participation in the economy and enhance Slovenia's competitiveness and growth potential.
KEY ASSUMPTIONS
The rating incorporates Fitch's assumption that the government will sustain medium-term fiscal commitments made under the EU's enhanced fiscal surveillance framework.
Fitch assumes that Slovenia will only start recovering in H114 from its deep recession as the large external and particularly domestic shocks causing the current recession to linger on into early 2014.
Fitch assumes that medium-term potential growth of 1.5%, constrained by the aftermath of the burst corporate credit bubble and by weaker medium-term prospects for external demand.
Fitch's GGGD projections incorporate partial (EUR1.5bn for the purposes of its debt dynamics calculations) use of the EUR4bn limit on guarantees for BAMC bonds.
Nonetheless, if the recession is deeper and longer than currently anticipated, or the financial position of the corporate sector is worse, the risk of a larger impact on the sovereign balance sheet cannot be discounted.
Given the considerable uncertainties involved, the agency makes no assumption for the purposes of its GGGD projections regarding revenue from privatisation and the eventual realisation of distressed assets on the BAMC's balance sheet.
The current rating reflects Fitch's judgement that Slovenia will retain market access. Were Slovenia to require an official programme, Fitch would review the rating taking into account the modalities of the programme.
Furthermore, Fitch assumes that the risk of fragmentation of the eurozone remains low.
Contact: Primary Analyst Matteo Napolitano Director +44 20 3530 1189 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Douglas Renwick Senior Director +44 20 3530 1045 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: [email protected]; Malgorzata Socharska, Warsaw, Tel: +48 22 338 62 81, Email: [email protected].
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