Slovakia Dodges Second Downgrade Amid Deficit Reduction Plan

(Bloomberg) -- Slovakia escaped a second downgrade in fourth months as S&P Global Ratings maintained its credit score after Prime Minister Robert Fico’s government pledged to reduce the fiscal shortfall.

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While Fitch Ratings lowered the European Union nation by one notch in December due to a deterioration in public finances, S&P opted to keep its A+ grade with a stable outlook on Friday. Finance Minister Ladislav Kamenicky warned earlier this month that another downgrade was possible and said that investors were expecting such a move.

Slovakia’s government faces the imminent challenges of reining in high fiscal deficits and resolving contentious issues with the European Union’s executive arm to facilitate disbursements of the bloc’s funds, according to S&P.

“In our base case, we expect that the government will address both issues to avoid any repercussions for investor sentiment and government funding conditions,” the ratings company said in a statement.

The country’s fiscal performance worsened in 2023, with the public finance deficit widening to 4.9% of economic output, from 1.7% a year earlier. Despite the bigger gap, the broader measure of state finances was still better than the initially projected 6.5% shortfall.

Read more: Slovakia Ventures Beyond Euro Bonds for First Time in Decade

Fico’s administration envisages a fiscal gap at 6% of gross domestic product this year, but it plans to adopt further saving measures totaling 2.6% of GDP by 2027. This would amount to €3.9 billion ($4.2 billion) and help bring the gap down to 3%.

The government has yet to outline details of the plan as only partial steps have been announced so far, such as higher taxes on tobacco and sugary drinks.

Last year’s consolidation package focused mainly on banks, with the state imposing a 30% windfall levy on their profits. Fico’s cabinet is seeking to deliver on a key election promise to boost social spending, financed partly by raising taxes on higher earners and large companies.

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