OREANDA-NEWS. August 17, 2015. Fitch Ratings has affirmed Slovakia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+' with Stable Outlook. The issue ratings on Slovakia's senior unsecured foreign- and local-currency bonds are also affirmed at 'A+'. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign-currency IDR at 'F1'.

KEY RATING DRIVERS
Slovakia's 'A+' ratings balance robust institutions, including the country's membership of the eurozone, which have helped attract foreign investment, against fairly high GDP volatility that reflects sector and market concentration. Public finances have deteriorated since the 2009 financial crisis but Fitch expects debt to stabilise in 2015 before slowly declining thereafter. Net external debt (35% of GDP in 2014) is high but expected current account surpluses should help reduce it.

Fitch expects real GDP growth to reach 3.2% in 2015 and 3.3% by 2017, from 2.4% in 2014, supported by growing domestic demand. Declining unemployment (12.4% in 1Q15, down from 14.1% in 1Q14) will support household consumption. Investment will benefit from favourable financing conditions. The contribution of net trade, negative in 2014, will gradually increase in line with stronger Europe activity (85% of exports, eurozone 50%, Germany 20%).

Fitch expects the deficit of the general government will remain broadly flat, at 2.5% of GDP by 2017, compared with 2.9% in 2014. While tax revenue will benefit from an improvement in economic conditions and firmer compliance, the general elections to be held in March 2016 limit the scope for structural fiscal adjustments. After a steep increase in government debt over 2009-2013, political parties broadly agree on the need to tighten public finance and Fitch does not expect a change in the fiscal stance following the elections.

Fitch expects government debt will peak in 2015 at 54.1% of GDP, up from 53.6% in 2014 (and 29% in 2008) and gradually decline thereafter, in line with a shrinking deficit and growing nominal GDP. Contingent liabilities as a share of GDP are among the lowest in the European Union (5.3% in 2013, based on Eurostat data) and the banking sector is foreign-owned, which limits potential negative spill-over from banks to public finances.

The share of non-residents' holdings of central government debt has risen markedly, to 63% of total in 2014 from 23% in 2010. While this supports fiscal financing flexibility, including lower interest rates and longer debt maturities, it also increases the exposure of government finances to global financial volatility.

Slovakia has been running a current account surplus since 2012 due to improvements in the trade and services balance, reflecting primarily the expansion of its automotive industry (25% of exports) and slower domestic demand after the financial crisis. The current account surplus was 0.1% of GDP in 2014 and is expected to widen to 0.8% by 2017, supported by stronger external demand, low oil prices and fiscal tightening. Although declining, net external debt will remain high relative to peers over the medium term.

World Bank governance indicators on rule of law and control of corruption are weaker than the median for 'A' rated peers'.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are evenly balanced. Nonetheless, the following risk factors could individually or collectively trigger negative rating action:

-A severe economic downturn, for example, affecting the automotive industry that damages fiscal, financial or economic stability

-Failure to stabilise and, ultimately, reduce the public debt/GDP ratio.

The main factors that could trigger positive rating action are as follows:

-A significantly lower public debt/GDP ratio supported by a tighter fiscal stance and stronger GDP trend growth.

KEY ASSUMPTIONS

In the event of a Greek exit from the eurozone, Fitch assumes this would be unlikely to trigger a systemic crisis like that seen in 2012, or another country's rapid exit. However, it would increase financial market volatility and dent economic confidence.

Fitch assumes that under severe financial stress, support for foreign-owned Slovakian banks would be forthcoming from their parent banks.