Issuer: The Slovak Republic
FC (Foreign Currency Long-Term Senior Debts): A+ (Stable)
LC (Local Currency Long-Term Senior Debts): A+ (Stable)

JCR has affirmed the A+ ratings on the foreign currency long-term senior debts and the local currency long-term senior debts of the Slovak Republic. The outlook of ratings is stable.
The ratings are primarily supported by the significant reduction of the country's external financial risks following its euro adoption and the improved productivity rendered by its expanding production capacity resulting from investments on the back of massive inflows of foreign direct investment (FDI) and EU subsidies.
On the other hand, the ratings are constrained mainly by the country's high structural unemployment amid a sharp rise in the unemployment rate and by the large fiscal deficit expected to continue in the coming years on increased spending as stimulus measures and reduced tax revenues caused by the economic slump.
The outlook of the ratings is stable. JCR considers that the country's large fiscal deficit and increased public debt will continue in 2010. However, the government is highly likely to implement fiscal consolidation measures in accordance with the EU's Stability and Growth Pact once the economy is brought back on a recovery track. Slovakia has adequate fiscal capacity to absorb large deficits for several more years, as its general government debt stood relatively lower among the EU members at 27.7% of GDP as of the end of 2008.

1. Economic recovery will be moderate
Slovakia's economic growth rates averaged 7.4% during 2004-2008, driven primarily by an expansion of domestic demand led by consumer spending and capital investments induced by accelerated inflows of FDI Productivity has constantly improved due mainly to the expansion of the production capacity bolstered by investments on massive inflows of FDI and EU subsidies. Per capita GDP in PPP terms increased from 50 % of the EU-27's average in 2000 to around 72% in 2008, the gap narrowing considerably.
The Slovak economy deteriorated significantly in the first half of 2009 on a sharp fall in exports of cars and electric appliances amid the economic downturn in its major trading partners in the EU, which normally account for more than 80% of the total exports. However, there have been signs of recovery lately. The industrial production has been improving since the second half of 2009. The economy grew 1.6% and 2.2% quarter-on-quarter in the second and third quarter of 2009 thanks to the recovery of the external demands.
On the other hand, the economic downturn pushed up the unemployment rate to 12.4% (Eurostat) in October 2009. The country still has a large structural unemployment, whose ratio to total unemployment is one of the highest among the EU members. The consumer price inflation (Eurostat) stayed low thanks to the decline in food and oil prices and eased supply-demand gap, remaining broadly on a par with the EU-27's average since the euro adoption in January 2009.
JCR projects that Slovak economy will contract by around 5% in 2009. The growth rates of GDP in 2010, 2011 are expected to be between 1% and 3% considering the recovery of its major trading partners to be modest and also the high level of unemployment will become a shackle of the rebound in its domestic demand.
The current account deficit widened to 6.5% of GDP in 2008 from 5.3% a year before. The deficit narrowed to 2.7% of GDP in the January-September period of 2009 from 6.4% in the same period of 2008. The current account deficit for the whole year of 2009 is expected to improve thanks to the reduction of trade and income balance deficits.
The country's financial system showed relatively strong resilience amid the economic downturn. The capital adequacy ratio in the banking sector remained at relatively sound levels, standing above 12% at the end of June 2009. Nonperforming loans are on the increase but still stay at manageable levels.

2. Low government debt provides enough room to absorb large fiscal deficit
The general government deficit slightly increased to 2.3% of GDP in 2008 from 1.9% in 2007. The fiscal deficit is estimated to widen around 6% of GDP in 2009 due to a major fall in tax revenues and the implementation of a fiscal stimulus package totaling 1% of GDP in 2009-2010, which includes car scrapping incentive scheme, increase in tax credit for low income earners, employment subsidies and encouraging R&D spending. A large fiscal deficit may also continue in 2010 due to reduced tax revenues and increased expenditures on countercyclical measures.
The general government debt shrank to 27.7% of GDP in 2008 from 49.0% in 2001 thanks to progress in fiscal reforms. The public debt/GDP ratio is projected to rise to exceed 40% in the coming years due primarily to deterioration of the fiscal balance. However, the ratio is still lower among the EU economies.
In December 2009, the European Commission urged the country to slash its fiscal deficit to less than 3% of GDP by 2013. JCR expects that the government will carry out fiscal consolidation measures in accordance with the EU's Stability and Growth Pact once the economy is brought back on a recovery track. The personal income tax rate in Slovakia is one of the lowest among the EU countries. Its rise may be inevitable in the medium term, albeit challenging. With the general election slated for the middle of this year, JCR will closely watch whether the current government and a new government can maintain disciplined economic and fiscal policies.