The Slovenia Times

S&P Downgrades Slovenia's Rating to A-


S&P estimates that state aid to banks will amount to EUR 3-4bn, a figure which is in line with the government's estimates of how much the bad bank will cost.

It projects public debt to rise to 59% of GDP by the end of the year, above S&P's previous forecast of 53%, and exceed 60% of GDP thereafter, topping off at 65% by the middle of the decade.

On the other hand, the budget deficit will drop to around 3% of GDP as a result of reforms, having already dropped from 6.4% in 2011 to 4% last year.

The agency observes rising policy-implementation risks to resolving economic and fiscal pressures, which limits Slovenia's ability to implement measures designed to strengthen the banking system, public finances and economic growth.

"Further policy uncertainty and weak institutional and corporate governance will likely impede improvements to the flexibility and transparency of institutions."

It opines that "vested interests that benefit from long-entrenched entitlements or other forms of rent-seeking related to Slovenia's political cycles drag on the pace and effectiveness of structural reforms."

The economy will benefit from its openness, but the sustainability of economic recovery in key trading partners is "a key risk".

"Any further asset quality deterioration that constrains the banks' profitability and capitalization increases the likelihood of further support by Slovenia and contingent liabilities crystallizing on its sovereign balance sheet."

As for the outlook, S&P says the risks are balanced against the government's overall commitment to fiscal consolidation and the relatively strong external position and the financial system's access to European Central Bank funding.

As a result, it does not expect that Slovenia will have to resort to the European Stability Mechanism for its borrowing needs.

This is the first downgrade by S&P since August 2012 and comes after the agency put Slovenia on watch in November due to concerns about the government's ability to carry out structural reforms.

In August Slovenia was downgraded by all top three ratings firms (S&P, Moody's and Fitch), which was followed by corresponding downgrades of banks and companies in state ownership.


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