Slovakia’s sovereign ratings raised on eurozone hopes

Capital Intelligence, the international credit rating agency, raised Monday the Slovak Republic’s long-term foreign and local currency ratings to ‘A’ and its short-term ratings to A1, while the outlook remains ‘stable.’
The upgrade reflects Slovakia’s improving economic fundamentals and the country’s upcoming accession to the eurozone, which will help to insulate the economy against balance of payments shocks and diminish the risk of a currency crisis. The ratings are also supported by a track record of moderate fiscal deficits and a comfortable level of public debt.
The Slovak economy has grown by an average of 7% per annum over the past five years (2003-07), taking GDP per capita measured in purchasing power standards to 62% of the eurozone average (compared with 44% in 2000). Having reached 10.4% in 2007, the pace of real output growth is expected to slow to about 7.3% in 2008 and 5% in 2009 but should remain well above the eurozone average.
Growth in recent years has been balanced, driven by both domestic demand and exports, the latter reflecting the FDI-related expansion of the export base, the Capital Intelligence report said.
The public finances are in good shape. The budget over-performed in 2007, ending the year with a deficit of 2.2% of GDP compared to a targeted shortfall of 2.9%, and a deficit of similar magnitude is projected for 2008. The government’s convergence programme envisions a sustained reduction in the deficit-GDP ratio to 0.8% by 2010, to be achieved by shrinking the central government workforce (by 10% over the period) and broadening the corporate and excise tax bases. Convergence targets are likely to prove challenging and may well be missed; but Capital Intelligence expects the budget deficit to remain comfortably below 3% of GDP and easy to finance.
General government debt has fallen steadily from a peak of 50.4% of GDP in 2000 to 29.4% (85% of budget revenue) in 2007. Interest expense is manageable at 4% of budget revenue (1.4% of GDP).
Debt dynamics have been driven by autonomous factors, including robust GDP growth and exchange rate appreciation, as well as by the use of privatisation proceeds to retire debt. Provided the government keeps the budget deficit close to 2% of GDP and real output growth trends at around 5%-6%, the debt ratio is likely to remain below 30% over the medium term.
Capital Intelligence noted that Slovakia will be the poorest member of the eurozone and still has some way to go to catch up with its EU peers. The loss of monetary and exchange rate autonomy makes it even more imperative that further steps are taken to improve the business environment and the flexibility of labour and product markets, and also that sufficient fiscal room is retained to enable the budget to be used to counter downturns in the economic cycle without undermining the sustainability of the public finances.