Subdued economic growth prospects and large debt stocks continue to pose challenges for Slovenia (Baa3 stable) and Hungary (Ba1 stable), but the countries differ in their resilience to external shocks, Moody's Investors Service said in a new peer comparison report.
Structural factors limit both Slovenia's and Hungary's economic growth potential, the rating agency said, adding that Slovenia's growth is expected to remain weak as the corporate sector’s recovery will take several years, while Hungary’s challenges stem from rigidities in the labour market and the weaknesses in the business environment.
That said, growth in 2014 for both countries was stronger than anticipated, because of stronger public sector investment and improved absorption of EU funding, but this is unlikely to be repeated in the coming years, according to Moody's.
In addition, both countries' weak banking systems result in a limited ability to support credit growth for those companies that are able to borrow, Moody's said, although non-performing loans (NPLs) levels are unlikely to worsen in 2015. According to the rating agency, Hungary's NPLs — which stood at 21.3% of total loans at the end of Q1 2014 — could improve following recent policy actions announced pertaining to the banking sector, while Slovenia's NPLs — 15.7% as of Q3 2014 — will likely stabilise in 2015.
Whereas Slovenia's growth outlook is subdued, it is supported by the diversification of its exports, which includes a strong focus on high value-added niche products, while Hungary's flexible exchange rate supports its exporters' price competitiveness, and its central bank funding scheme has helped boost economic growth.
Both countries' debt burdens will likely continue to remain sizeable in 2015, said Moody's. It expects that Hungary's will slowly decline to 76%, while Slovenia's will trend upward to 83% until the end of this year before slowly reversing. Slovenia's debt burden has worsened following its efforts to stimulate the economy and recapitalise banks since 2009.
Despite the diverging debt trends, risks stemming from external shocks are higher for Hungary than for Slovenia, as the former is more exposed to potential shocks stemming from a shift in investor confidence due to the high level of foreign-currency-denominated debt (40% for Hungary vs. less than 20% of total government debt for Slovenia). Moreover, Hungary's refinancing needs in 2015 are greater than Slovenia's, at around 22% of GDP and 17% of GDP, respectively.
However, external vulnerabilities have decreased for both countries alongside an economic rebalancing. Current accounts in both countries have recorded sustained surpluses in recent years — a trend that will likely continue in 2015, respectively, said Moody's, reflecting strong exports and still subdued domestic demand.
Moreover, Hungary has large currency reserves — with a foreign-exchange buffer of EUR 35 bln, or 35% of GDP at the end of December 2014 — while Slovenia benefits from access to euro area backstop facilities like the European Stability Mechanism (ESM, Aa1 stable).
