Fitch Affirms Slovakia at 'A+'; Outlook Stable

Fitch Ratings-London-02 February 2018: Fitch Ratings has affirmed Slovakia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A+' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Slovakia's ratings reflect its sound macro-economic performance, supported by sustained foreign capital inflows and European Union (EU) and eurozone membership. The rating is constrained by high net external debt, forecast at 28.1% of GDP versus the peer 'A' median of 9.6% of GDP in 2018. Rapidly rising household indebtedness, currently around 40% of GDP having more than doubled in the last decade, could also increase vulnerabilities to shocks if left unchecked.

Fitch forecasts growth of 3.6% in 2018 and 3.9% in 2019. This is up from 3.3% in 2017, and above the long-term potential growth estimated by authorities at 3%. Slovakia's five-year growth has performed favourably averaging 3.4%, versus the peer 'A 'median of 3.1%. Strong domestic demand, favourable underlying labour market trends (the unemployment rate fell to 7.5% in November from 9.0% in the same period a year ago) and high private and public sector investment will underpin the growth outlook. Fitch expects public sector investment to increase in line with EU funds disbursements as absorption increases.

Strong underlying macroeconomic conditions will lead to rising inflationary pressures. The agency expects inflation to rise to 1.8% in 2018 and 2.0% by 2019, from a relatively subdued 1.3% in 2017 and after three years of successive price falls. Risks to inflation will remain to the upside, with the key ECB policy rate not expected to rise till 2019, after tapering of the asset purchase programme in 2018.

Slovakia now has the highest retail credit-to-GDP ratio in central and eastern European (CEE) region, and credit is continuing to rise faster than nominal GDP growth. The authorities have put in place macro-prudential measures to tame credit growth with only a limited impact so far. Tightening in credit conditions is largely dependent on the ECB's policy stance. The housing market showed some signs of stabilisation in 2017 with slower credit growth and a moderating increase in house prices in the second half of the year. Authorities have indicated further macro prudential measures may be implemented at the national level if needed.
Fitch expects the fiscal deficit to decline to 1% of GDP in 2018 and 0.7% of GDP in 2019 from 1.3% of GDP in 2017, primarily thanks to strong GDP growth boosting revenues. Fitch's forecasts are more conservative than the government's projections, reflecting lower growth forecasts as well as risks of increased spending, including further social packages.

Fitch forecasts general government debt to continue falling, from 51% of GDP in 2017 to 49.6% in 2018 and 48.6% in 2019 due to continued moderate and declining fiscal deficits as well as strong nominal GDP growth. As such, government debt will continue to converge toward the peer 'A' median of 46.3% of GDP in 2019. Potential changes in the constitutional Fiscal Responsibility Act, which defines debt "brakes", remain under consideration. However, Fitch does not expect any amendment to lead to a marked change in fiscal policy given that the Act has proved a strong fiscal anchor in the past.