The Slovenia Times

Slovenia's policies have become more predictable



Before joining the world's largest credit-ratings agency, he was Investor Services Head of Coverage for CEE and Russia at J.P. Morgan in London. As he explains, all sovereigns in the CEE region are rated by S&P, "in June this year we revised to positive our outlook for Slovenia, affirming the 'A-/A-2' long- and short-term sovereign credit ratings, which reflects our opinion that the ongoing economic recovery will broaden further, benefitting fiscal outcomes."

1. When rating the CEE countries, which includes Slovenia, how much weight do you put on qualitative factors and which ones are the most important in your opinion?

Standard & Poor's sovereign rating methodology addresses factors that affect a government's willingness and ability to service its debt obligations on time and in full. The analysis focuses on the sovereign performance over past economic and political cycles as well as on factors that indicate greater or lesser economic flexibility in future economic cycles. Throughout the rating process, five key factors form the foundation for our analysis of that willingness and ability: overall institutional assessment, economic assessment, external assessment, fiscal assessment and monetary assessment. We put them into two categories, one describes the institutional and economic profile (includes the institutional and economic assessment) and the second, the flexibility and performance profile (includes the external, fiscal and monetary assessment). Each assessment is based on a series of quantitative factors and qualitative considerations. Which qualitative factors are used dependsmostly on which of the five factors we are analysing.

2. Slovenia is rated 'A-' and you have justchanged the outlook from stable to positive.On what basis did S&P make this assessment?

Indeed on 19 June 2015 we revised the outlook on Slovenia to positive. This revision reflects our opinion that the ongoing economic recovery will broaden further, benefitting fiscal outcomes. We believe that real GDP will likely rise on average by about 2.1 percent per year over 2015-2018, about 0.6 percentage points higher than projected at our last review in December 2014, with the composition of economic growth gradually shifting in favour of domestic demand. Longer term, we believe that the implementation of growth-enhancing structural reforms, including in the judicial and administrative areas, could further boost Slovenia's longer-term economic growth prospects. Although the economy benefits from its openness to international trade, significant administrative barriers still inhibit foreign direct investment. The positive outlook reflects a one-in-three probability of an upgrade over the next 24 months if the economic recovery broadens and, combined with structural reforms, results in improved fiscal and debt metrics.

3. It seems a popular approach these days is to increase debt, especially in the EU and the US. How would you explain servicing debt in Slovenia according to the size of our economy?

In general and to simplify: the stronger the economy, the greater its ability to service debt. Referring to the Slovenian case, we estimate the government's net debt position at 72 percent of GDP in 2015. Our estimates of gross and net general government debt include BAMC-related obligations issued to purchase loans and other distressed assets from Slovenian banks at a discount to market. We do not yet incorporate the proceeds from the ongoing privatisation process but believe that, if these were applied toward government debt reduction, net general government indebtedness relative to GDP would decline at a faster pace than we currently anticipate.

4. During the last few years, Slovenia has been focused on a big privatisation debate. What are the components S&P uses for the assessment of mergers and acquisitions?

In respect to privatisation we do not have a specific approach to CEE or Slovenia in particular, but a generic approach. Overall, we could consider privatisation proceeds as a potentially credit positive factor for the overall risk assessment yet subject to what these proceeds are used for. If a government decides to use funds from privatisation to deleverage i.e.: decrease debt levels, then this could have apositive impact.

5. Does privatisation have an impact on S&P's rating assessment of individual companies?

It depends on a few factors - mostly whether we actually rate the company subject to the process and if so: who the buyer is, the post-acquisition strategy, the funding of the deal and other business considerations. Without knowing details, I am not able to advise whether the privatisation of a particular company will have arating impact - it will depend on a detailed analysis that our analytical team would conduct as part of the assessment, only then could we share ourview - i.e.: whether this has a positive, neutral or negative impact for the rating.

6. Companies from this region are more and more actively competing for financing from international players. How do you decide which companies you will rate?

We operate in a free market environment and apply the issuer-pay model. This means that it is the issuer's decision as to whether he needs an S&P rating based on the value proposition we present. We engage in a dialogue with the issuer, understand their needs, present our methodology, expert analytical experience, industry know-how and value proposition, underlining our best in class recognition with global investors. Following such an approach, the issuer takes the decision on getting rated.

7. Do you offer any fundamentally weighted indices, for example indices which focus on the company's wealth creation? If not, would you consider offering this?

An interesting question and the answer falls outside the core S&P Ratings business. Within the McGraw Hill Financial family we deliver indices through our S&P Dow Jones Indices entity. S&P Dow Jones Indices is a leading publisher of a wide variety of indices, many of which are used as benchmarks throughout the global marketplace. On the spot I do not recall an index that would focus on company's wealth creation, but would need to better understand what you expect such an index to present. Through our independently calculated solutions, we create custom indices to meet specific investment criteria and hence could consider such an index, firstly however byneeding to identify thedemand and value of such an index.

8. During the recent financial crisis, S&P underestimated the risk of some complex financial products. Which new models or changes have been introduced since then in order to improve, or even avoid, such a situation in the future?

We have taken to heart the lessons learned from the financial crisis and since 2008, spent over USD 400m on improving overall integrity, independence and performance of our ratings. We made significant changes within the management, brought in new leaders, many of them from the banking world with strong compliance and risk management experience. The CEO of S&P, NeerajSahai, is a former Citi veteran, CEO of McGraw Hill Financial, Doug Peterson is also former Citi, I am an ex-banker and many of our leaders are former bankers with a strong leadership, compliance and risk culture. We significantly enhanced and re-created our global risk management program and strengthened our approach to managing risk and compliance. We created an independent group that objectively validates our models and analytical approach and altered the way we rate many of the structured products. Finally, the ratings industry is now far more regulatedwith ESMA as the European regulator.


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