OREANDA-NEWS. March 28, 2016. Fitch Ratings has affirmed Slovenia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB+' with a Positive Outlook. The issue ratings on Slovenia's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB+'. The Country Ceiling has been affirmed at 'AA+' and the Short-term foreign currency IDR at 'F2'.

KEY RATING DRIVERS
Slovenia's 'BBB+' rating is supported by its relatively high value-added economy, which underpins a high level of income per capita, and membership of the European Union (EU) and eurozone. The rating is constrained by high government debt and a fragile banking sector. The Positive Outlook reflects Fitch's forecast that fiscal tightening will allow government debt to decline aided by an improved macro performance. Fitch also expects the continuing strong current account surpluses will support a decline in net external debt. Following government intervention, banks' capacity to resist shocks has much improved.

Slovenia's 'BBB+' IDRs also reflect the following key rating drivers:

Fitch estimates that the deficit of the general government was 2.9% of GDP in 2015 from 4.9% in 2014. The tightening primarily reflected the absence of charges related to bank support (which cost 1.6% of GDP in 2014). Fitch expects the deficit will reduce to 2.5% in 2016 and 2.2% in 2017, primarily as a result of stronger economic conditions that will support revenues. Based on the latest budget, Fitch does not include significant discretionary measures in its forecasts. The April EU stability programme could include new discretionary measures.

Fitch estimates the general government debt reached 82.7% of GDP in 2015, from 80.8% in 2014 and 38.2% in 2010. Part of the increase in 2015 reflected the building up of buffers given the exceptionally favourable financing conditions and the relative high level of debt maturities coming up in 2016. Fitch expects debt will decline to 80.1% of GDP in 2016 and 72.9% by 2022 assuming some fiscal tightening, real GDP growth above 2% and a gradual recovery in inflation. The use of privatisation proceeds could accelerate debt reduction.

The current account surplus reached 7.3% of GDP in 2015 from 7.0% in 2014 and Fitch expects it will remain above 5% of GDP by 2017. The strong performance reflects improved trade and services surpluses, the fall in oil prices and continuing corporate debt deleveraging. Current account surpluses are supporting a decline in net external debt, at an estimated 31% of GDP in 2015 from 46% in 2012.

Fitch expects bank credit to the private sector will stabilise in 2016 and start growing from 2017, after contracting by 6% in 2015. Non-performing loans (over 90 days in arrears) were down 9.9% at end-2015 from 11.9% end-2014 and a peak at 18.1% in November 2013. Banks' external debt has partly been replaced by local deposits, which cover two-thirds of assets. Overall banks were profitable in 2015.

Real GDP grew 2.9% in 2015 from 3.0% in 2014. The recovery since 2014 has been supported by external demand and a pickup in consumption in a context of declining unemployment (the rate was down 8.9% in January 2016 from 9.2% a year ago) and low inflation (-0.9%y/y in February). Public investment benefited from high disbursements of funds from the EU, which will slow down in 2016 and 2017. Fitch expects growth will be 1.9% in 2016 and remain slightly above 2% in the medium term.

RATING SENSITIVITIES
The main factors that could lead to positive rating action are:
-Fiscal policy settings consistent with government debt on a downward path.
-Further strengthening in the banking sector.
-Continued current account surplus consistent with declining external indebtedness.
-Sustained economic recovery supported by structural reforms.

The rating Outlook is Positive. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood of leading to a downgrade. However, the following factors could lead to negative rating action:
-Failure to reduce government debt to GDP.
- Weak economic growth performance or persistent deflation.

KEY ASSUMPTIONS
Fitch's forecast does not currently incorporate a contribution from the realisation of returns on distressed assets held on the bad bank's balance sheet for its government debt projections. Likewise, Fitch does not take into account potential debt reduction from privatisation proceeds.

Fitch expects the global economy to perform broadly in line with assumptions set in its Global Economic Outlook (March 2016), in particular eurozone GDP growth, Slovenia's main trade partner, to reach 1.7% by 2017, up from 1.5% in 2015.