S&P expects the Slovenian economy to contract by close to 8% this year, as a result of the pandemic, followed by a 5% growth in 2021.
S&P Global Ratings has affirmed its ‘AA-/A-1+’ long- and short-term foreign and local currency sovereign credit ratings on Slovenia, with a stable outlook.
The stable outlook reflects the S&P’s expectations that the Covid-19 crisis will have a contained negative impact on Slovenia’s economy and public finances in the next two to three years, against a backdrop of strong existing fiscal and external buffers.
Downside scenario
S&P could lower the ratings if the fallout from the pandemic had a deeper and more protracted impact on public finances, with debt remaining on an upward trend, or if the damage to the economy was more severe and longer-lasting than they currently expect.
Upside scenario
S&P could raise the ratings on Slovenia if, following the temporary shock, the country’s economy was to return to its previous strong trajectory, boosting its GDP per capita without creating imbalances.
The growth outlook for the Slovenian, European, and global economies has deteriorated in 2020, mainly due to the COVID-19 pandemic and measures to contain its spread. S&P thinks that the past decade of private sector deleveraging and a decline of government debt to GDP since 2015 give Slovenia substantial buffers to weather the temporary shock without a lasting adverse impact on its credit metrics. At the same time, Slovenia’s economic expansion in recent years has been coupled with high current account surpluses, which helped reduce net external debt to 2.5% of GDP in 2019 from over 40% in 2012. Economic growth has been balanced, without emergence of macroeconomic imbalances. Taken together, these factors underpin S&P’s view that Slovenia entered into the recession from a much improved starting point compared with previous crises. They also think that the Slovenian government’s policy response, along with sizable ECB monetary support, will help preserve Slovenia’s productive capacity ahead of the recovery, which they project to take off toward the end of 2020.
S&P’s ratings on Slovenia continue to reflect the country’s high GDP per capita and its euro zone membership, which affords its small open economy the benefits of the ECB’s monetary policy. The current account is set to remain in surplus, while they project government debt will return to its downward path following the surge in 2020 as consolidation ensues from 2021. They also factor into their ratings Slovenia’s broadly stable and effective institutional framework.
Slovenia’s economy will contract sharply by almost 8% in 2020 as measures to contain the spread of COVID-19 have significantly deteriorated the global, European, and Slovenian growth outlook. The general government deficit will widen to nearly 8% of GDP in 2020, pushing net debt to almost 60% of GDP.
As a small, open economy, Slovenia is highly exposed to the economic developments of its key trading partners, particularly core eurozone economies such as Germany. Slovenia is tightly integrated into core European supply chains, notably German manufacturing. While Slovenia’s export-orientation has supported strong growth in recent years, it means that the supply chain disruption owing to the pandemic will strongly affect the country. However, in the medium- to long-run, with its strong export-oriented manufacturing sector, Slovenia could be well positioned if the pandemic were to trigger increased nearshoring and simplification of manufacturing supply chains. This remains uncertain at this stage though, and risks to global trade outweigh potential opportunities.
