Slovakia Downgraded at Fitch After Budget Deficit Swells

Slovakia Downgraded at Fitch After Budget Deficit Swells

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(Bloomberg) — Slovakia’s sovereign credit score was cut one notch by Fitch Ratings, which cited concerns that the new government of Prime Minister Robert Fico will struggle to rein in a widening budget deficit after a series of costly spending promises. 

The rating company lowered its assessment for the euro-area member state to A-, with a stable outlook, according to a statement on Friday. The move puts Slovakia on par with Poland and Chile.

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“The downgrade reflects a deterioration in public finances and an unclear consolidation path,” Fitch said. “Medium-term fiscal consolidation will require difficult policy trade-offs, given higher medium-term expenditure rigidities and a weakened structural position.”

The eastern European Union state of 5.4 million expects to post the widest deficit in the 27-member bloc this year, at 6.5% of economic output, according to estimates of the finance ministry in the capital Bratislava. Fico’s six-week old government plans to curb the shortfall by as much as 0.5 percentage point next year. It also seeks to deliver on pre-election promises to increase welfare spending.

Read more: Slovakia Hits Banks With 30% Windfall Tax to Shore Up Budget

Slovakia’s deficit has swelled this year mainly due to state energy subsidies after the war in neighboring Ukraine pushed up prices of electricity and natural gas across the continent. The country, which still largely depends on energy imports from Russia, will need to secure as much as €10 billion ($10.7 billion) from financial markets next year.

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Since winning a September election, Fico has announced a package of measures to boost budget income, including a 30% windfall tax on bank profits. He plans to hand out a special end-year payment to pensioners and introduce a program to help households cope with higher mortgage rates

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The country’s independent fiscal watchdog warned that the planned pace of deficit cuts is insufficient to reverse growth in debt, which is currently at 58% of gross domestic product.

Apart from fiscal concerns, a planned fast-track overhaul of the judiciary has triggered worries Slovakia may end up in the same camp as neighboring Hungary, where concerns over democratic backsliding led the EU to suspend fund payments. 

Read more: EU May Have New Rule-of-Law Pariah as Slovakia Scraps Office

—With assistance from Zoe Schneeweiss, James Regan and Krystof Chamonikolas.

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