OREANDA-NEWS. The formation of a new government in Slovakia is unlikely to lead to major changes in economic and fiscal policy, Fitch Ratings says. Given the potential instability of the heterogeneous four-party coalition, major economic reform is unlikely.

The coalition government was sworn in last week after the centre-left Smer party lost its parliamentary majority in elections on 5 March. Smer's Robert Fico will remain prime minister, leading a coalition that includes the conservative Slovak National Party, the centre-right, ethnic Hungarian Most-Hid, and the centrist, pro-business Siet'. Coalition parties are backed by 81 out of 150 MPs.

There is broad agreement on the need to continue reducing government debt, and the Fiscal Responsibility Act enjoys widespread political support. Peter Kazimir will remain as finance minister.

The priorities agreed by the coalition parties for 2016-2020 suggest that the current budget will be amended and there will be some relaxation in the fiscal policy stance relative to the previous government's three-year fiscal strategy. The government's common platform includes cutting corporate tax, higher welfare spending and balancing the budget by 2020 (versus 2018 in the previous strategy). But we already anticipated a slight deceleration in fiscal consolidation following March's election, reflecting Smer's manifesto commitment to a third social package, worth EUR1bn (1.2% of GDP) over several years.

We still expect the government deficit to fall gradually over the course of the new parliament, although at a slightly slower rate than previously, to 2.2% of GDP in 2016 and 2.1% in 2017, from 2.7% in 2015. This is consistent with stabilization in the debt-to-GDP ratio at 54% by 2017 and some decline thereafter.

Economic growth will be the main driver of deficit reduction through increased government revenues. Fiscal improvement will therefore be mostly cyclical rather than structural. Real GDP growth accelerated to 3.6% in 2015 from 2.5% in 2014, largely driven by high public investment as Slovakia drew down EU funds. We forecast GDP will grow 3.2% in 2016 and 3% in 2017. The improved labour market will support consumption (unemployment fell to 11.0% in Q415 from 13.2% in 2014). Private investment, including a EUR1.5bn investment by Jaguar Land Rover, will also increase growth potential.

As with deficit reduction, there is broad political agreement on the need to promote investment. But the coalition contains diverse interests - for example, it includes parties with nationalist leanings alongside Most-Hid, which is supported by Slovakia's Hungarian minority. We think this makes major economic structural reforms less likely during the current parliament, as the risk of political instability (and possibly early elections) could limit the scope for major policy steps in contentious areas. These include tackling regional economic disparities and high structural unemployment, which are weaknesses in Slovakia's sovereign credit profile.

We affirmed Slovakia's 'A+'/Stable sovereign rating on 12 February.