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Slovenia benefits from its integration into the eurozone's core supply chains in a number of key industries, such as automotive, pharmaceuticals and electrical equipment. Slovenia's bright economic outlook and labour market conditions support the recovery of its financial sector, as non-performing loans continue to decline and the appetite for lending in the economy returns. Despite the European Central Bank's expansionary monetary policy, credit growth remains timid in Slovenia.

Slovenia continued its strong growth in first-quarter of 2017, with GDP expanding by more than 5 percent in real terms year-on-year. Accordingly, S&P revised upward the growth projections for 2017 and 2018 to 3.7% and 3.4%, respectively. This is driven by rising private consumption due to sound employment growth and higher incomes. The agency also believes that the authorities will drive the general government deficit to below 1 percent of GDP in 2017.

The stable outlook on Slovenia balances the upside potential from the further reduction of debt and contingent liabilities against structural reform complacency, risk of fiscal slippage and re-emerging external imbalances. S&P could raise the ratings if structural reforms were implemented to support sustainable economic growth and fiscal improvement, resulting from a consistent reduction in government debt. Furthermore, if progress on privatisation were to reduce the government's role in the economy significantly, containing contingent liabilities and further contributing to public debt reduction, the agency could also raise the ratings.

 

Interview: Ludwig Heinz, Primary Credit Analyst, S&P Global Ratings

 

As the outlook reveals, "political disagreements could also interfere in planned privatisations in Slovenia as shown in recent discussions on the privatisation of the country's largest lender, NLB". How does S&P factor privatisation into its sovereign analysis?

In our sovereign rating analysis, privatisations can reduce the government's contingent liabilities and potentially improve its fiscal position. In some cases, privatisation can also improve economic efficiency and the conditions for private enterprises, and may improve a country's growth potential. In Slovenia's case, we have not factored in potential proceeds from the sale of the state's NLB stake in our fiscal forecast. More broadly, we think that further privatisation in Slovenia will be a politically contentious issue, not only ahead of next year's elections but also thereafter.

The agency also expects continued growth in investment to result in capacity expansion in Slovenia's export-oriented industry. Can you be more precise?

We anticipate continued demand from Slovenia's trading partners, particularly in the eurozone but also globally. With external demand set to remain strong, we think that Slovenia's export-oriented corporates will continue to invest. Furthermore, recent capacity expansions (for example at Revoz) and planned investments in the automotive sector, support our forecast of the continued strong export performance of the Slovenian economy.

How does the agency assess the investment environment in Slovenia, especially from a foreign investment perspective?

Overall, Slovenia's very strong integration into core European supply chains is a positive factor in our assessment and also speaks to an attractive environment for foreign investors. At the same time, the state maintains a large role in the economy and structural reforms in this regard could potentially even improve foreign investment prospects further.