Following Moody’s who cut the country’s credit grade to junk last month, Fitch cut Slovenia’s sovereign-credit rating citing a worsening economic outlook and a widening budget deficit as the nation battles to rescue its banking industry and avoid a bailout.
Since last rating review in August 2012, Fitch noted that the macroeconomic fundamentals has significantly deteriorated and is now projecting a GDP contraction in 2013 and 2014:
“The macroeconomic and fiscal outlook has deteriorated significantly since Fitch’s last rating review of the Slovenian sovereign in August 2012. The agency now forecasts a 2% contraction in real GDP in 2013 and a decline of 0.3% in 2014, when Slovenia is expected to be one of only two eurozone economies to contract.”
As a consequence, the general government deficit net of bank recapitalisation costs will rise to 5% in 2013 and 4% in 2014:
“Fitch forecasts that the general government deficit (GGD, net of bank recapitalisation costs) will rise to 5% of GDP in 2013 from 4% in 2012, against a target set down in the end-2012 budget law of 2.8%.”
Moreover, struggling with its second recession since 2009, Slovenian officials are working to fix their ailing banking industry with a €900 million capital boost and the creation of a so-called bad bank to cleanse lenders’ balance sheets (non-performing loans for the two largest banks exceeded 20% of total loans in 2012) and aid economic recovery. Nevertheless, this amount is far from Fitch estimates which reaches €2.8 billion (8% of GDP):
“There remains a significant divergence between official and Fitch estimates of bank recapitalisation costs. The agency’s baseline estimate is that the Slovenian banking sector will necessitate a further capital injection EUR2.8bn (8% of GDP).”
Therefore, it could lead to a total deficit of 13% in 2013 and will increase sharply the gross general government debt:
“Fitch now projects that a larger general government deficit than previously expected, a poor macroeconomic outlook and costs deriving from bank recapitalization and the issuance of state guarantees for ‘bad bank’ bonds will cause gross general government debt to rise to 72 percent of GDP in 2013-14”… “This compares with a forecast for 2014 of 63 percent when Fitch last downgraded Slovenia to A-in August 2012.”
The Slovenian government will face some issues in the short term as the European Commission will assess an economic-overhaul plan from the Adriatic nation this month. Government is also preparing to issue bond by June 6 to meet its financial obligations. Finally, Officials should sell state-company stakes at the beginning of September to raise cash.