International rating agency Fitch Ratings has upgraded the Slovak Republic’s long-term foreign currency rating to ‚BBB‘ from ‚BBB-‚ on Monday. The long-term local currency rating was also upgraded to ‚A-‚ from ‚BBB+‘, while the short-term rating was affirmed at ‚F3‘. The outlook on the long-term ratings is stable.

The agency noted that 2002 was a critical year for Slovakia’s creditworthiness. A number of crisis warning indicators were flashing red. Financing depended uncomfortably on the privatization of gas monopoly SPP, which raised 11.5% of GDP. And there was a small risk of a severe political shock in the shape of an adverse election result postponing EU accession. The risk of that downside scenario was removed by the election of a pro-reform government in September and the Irish Nice Treaty referendum result. These events have cleared the path to EU and NATO membership in 2004, and triggered Fitch to upgrade Slovakia’s long-term foreign currency rating to ‚BBB-‚ on 1 November 2002 and retain a positive outlook.

Fitch said the Monday’s rating upgrade reflects a further improvement in Slovakia’s public and external debt ratios and the new government’s ambitious program of fiscal retrenchment and structural reforms, which have been given credibility by the early implementation of tax rises, benefit cuts and regulated price increases. A slim parliamentary majority, coalition rivalries, limited administrative capacity, high unemployment and the risk of a social backlash make this an ambitious agenda. Nevertheless, Fitch expects substantial progress, albeit with some slippage.

Fitch said Slovakia is a small, open and relatively inflexible economy, so that external shocks and changes in domestic demand feed through rapidly into external imbalances. It estimates the current account deficit was over 8% of GDP in 2002 – the fifth highest of any rated sovereign. Nonetheless, Fitch expects it to narrow to 6.7% of GDP this year as austerity measures slow import growth and new capacity at Volkswagen boosts exports. Concerns about the deficit are also tempered by Slovakia’s high investment rates, FDI finance, plentiful foreign exchange reserves and low net external debt.

The agency said Slovakia’s rating strengths include a GDP per capita well above the ‚BBB‘ median and good growth prospects driven by high investment rates and structural reforms. A further upgrade would depend primarily on the government’s success in reducing the fiscal deficit. It also needs to implement public service, labor market and other structural reforms. In addition, the authorities will need to manage macroeconomic policy so as to reduce the current account deficit, while maintaining growth and control of inflation.