Standard & Poor's sees Slovakia's sovereign credit rating as appropriate with no strong momentum for an upgrade, but planned euro adoption in 2009 might mean it could be raised if fiscal policy is tightened.
The agency rates Slovakia's long-term sovereign debt 'A' with stable outlook, one notch above neighbouring Czech Republic and Poland and two notches above Hungary. It last raised the country's grade in December 2005.
"Slovakia is well placed in this rating category. At the moment it is a stable story, there is no strong momentum where we would say this is pushing the rating up," S&P's sovereign analyst Kai Stukenbrock told Reuters in an interview on Tuesday.
"There are also limited downside risks currently. There is no development that would be concerning us in a sense we would say this will lead to a downgrade," he said. S&P's rating for Slovakia is on a par with Fitch Ratings, but one notch below Moody's, which raised the country's government bond grade to A1, from A2 in October last year.
Stukenbrock said Slovakia's relatively low per capita income compared with other A-rated countries was the main constraining factor for the rating. Slovakia also remains well on the way to meet the euro entry criteria, and adopt the common currency in 2009 as planned, which could provide an upward pressure on the rating, he said.
"Currently our expectation is that Slovakia has a good perspective of joining the euro, at least from the technical point of fulfilling the criteria," Stukenbrock said.
"There is still the second challenge as it is also the political decision ... but our baseline scenario is that Slovakia will make it into the euro by 2009," he said. Keeping inflation down is Slovakia's main challenge on the euro road. Inflation fell to a record low of 1.5 percent in May, and the annual average is seen at around that level next spring, below the threshold Slovakia forecast to be around 2.7 percent.
Stukenbrock said tighter fiscal policy after the eurozone entry was a key condition for potential rating upgrade, adding the agency's assessment of fiscal stance will be even more strict after Slovakia adopts the single currency. "The eurozone accession could be a fresh impetus for the rating, but only based on assumption the government takes a tighter stance on public finances, reducing structural deficits," he said.
"Otherwise, the benefits from the eurozone accession will not be benefits on the rating at least," he said. The finance ministry plans to cut the fiscal deficit to 2.94 percent of GDP this year, and reduce it to 2.34 percent in 2008 to keep the gap under 3 percent of GDP to qualify for the euro.
Stukenbrock saw the Slovak fiscal policy "quite well anchored" until the eurozone entry, adding there was a possibility the government might increase social spending after the euro membership is secured. Leftist Prime Minister Robert Fico won a June 2006 election with pledges of more social spending and shielding the poor against rising energy bills.
Stukenbrock also said Slovakia's robust economic growth, at 9.0 percent in the first quarter one of the highest in the EU, could support the rating in the future if sustained.