Largely as expected S&P cut Slovenias LT FC rating by one notch to A- last night. I suppose the good news for the credit is that it could have been worse Moodys already rates Slovenia two notches lower at Baa2, having downgraded the rating already in August 2012. Similarly Fitch also downgraded Slovenia in August 2012 but only to A-, but a three notch downgrade in effect from the AA- rating in 2011. The question for investors is whether this is now a floor for the ratings. My fear is that given on-going and extended political uncertainty see below the pressure will remain for further rating downgrades, and Moodys Baa2 rating is probably closer to the mark of where Slovenia should be rated. That said, S&P moved the rating outlook from negative to stable, suggesting some short term stability in the rating, perhaps.
In announcing the rating move S&P underlined the expected further deterioration in public sector debt ratios as a result of the costs of the on-going banking crisis and the need for the state to recapitalise banks, plus also the economys weak outlook for growth. Herein, amongst the Emerging European economies, Slovenia suffered the steepest rate of real GDP decline in 2012, estimated by the EC recently at minus 2.3%, and the expectation is for a further decline of 1.3% YOY in 2013. S&P estimates the costs of bank recapitalisation at around EUR7bn or the equivalent of 20% of GDP. S&P suggest that this will take net general government debt to 59% of GDP by the end of 2013 and beyond 60% thereafter EC data puts the gross debt levels at comparable levels. On the plus side, S&P highlights on-going fiscal consolidation which should keep the budget deficit below 3% of GDP.
S&P also highlighted significant policy implementation risks, perhaps related to Slovenias somewhat strained domestic political environment. Further evidence herein came this week with the announcement by the Slovenian Peoples Party, the third party now, in effect, to leave the former-five party ruling coalition of Janez Jansa. It now seems difficult to see the two remaining parties in the ruling coalition managing to endure much longer in a minority capacity, and early elections would now appear the most likely outcome, possibly in May of June. One saving grace perhaps is that there seems to be a willingness across the party spectrum to keep the Jansa administration in office for at least a few weeks yet, to enable still the passage of some key reform legislation (labour market reform), and importantly for Croatia at least the ratification of its EU accession treaty. Nevertheless, continued flux on the domestic political scene is expected to put further downward pressure on the sovereign ratings and also Slovenian asset prices.
Source: bne