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Moody’s Cuts Slovak Credit Rating on Fiscal, Political Risks

European Union and Slovakia flags outside the National Council of the Slovak Republic parliament building in Bratislava, Slovakia, on Monday, Sept. 5, 2022. Slovakia's second-quarter gross domestic product expanded 1.8% year-on-year, according to final data from the Statistical Office in Bratislava. (Michaela Nagyidaiova/Bloomberg)

(Bloomberg) -- Slovakia’s sovereign credit score was cut one notch by Moody’s Ratings, which cited concerns over political tensions and worsening state debt among reasons for the downgrade. 

The move brought the east European country’s long-term debt rating to A3, with a stable outlook, on par with fellow euro-area members Slovenia, Croatia and Portugal. Fitch Ratings downgraded Slovakia’s by one notch a year ago and last week affirmed it at A-.

Institutional environment in the European Union nation has been deteriorating over the past decade and the government’s changes to the judiciary and the media will weaken the checks and balances further, according to Moody’s.

“Increased political fragmentation challenges policymaking,” the ratings company said late Friday. “In particular, on the fiscal front, despite the government’s commitment to reduce the deficit in adherence with EU rules, we expect the general government’s debt burden to rise further over the next few years to levels above those of similarly-rated sovereigns.”

Slovakia’s public finances worsened following the coronavirus pandemic and political turmoil that led to early elections last year had delayed budget consolidation.

The current government pushed through a package of measures aimed at reducing fiscal deficit to 4.7% of economic output in 2025, from nearly 6% this year. The planned increases in existing taxes and introduction of new levies are expected to slow economic growth and accelerate inflation, while the country’s debt is projected to rise above 60% of gross domestic product by 2027.

Prime Minister Robert Fico’s administration has also faced public protests and criticism from the EU over steps potentially threatening to weaken rule of law. The policy changes included abolition of the special office for investigating high-level corruption, reduced penalties for economic crimes and bringing public media under political control.

The government in Bratislava said that while Moody’s review reflected its efforts to improve public finances, it was surprised that the credit downgrade was primarily based on “political assessment” of state institutions rather than fiscal data.

“The Finance Ministry considers several judgment opinions of the agency as incorrect, wrongly interpreted and one-sided,” it said in a statement.  

(Updates with additional Moody’s comments starting in the third paragraph, government’s response in eighth.)

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