Morningstar DBRS Confirms Republic of Slovenia at A (high), Positive Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the Republic of Slovenia's (Slovenia) Long-Term Foreign and Local Currency - Issuer Ratings at A (high). The trend on all Long-Term ratings remains Positive. At the same time, Morningstar DBRS confirmed Slovenia's Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (middle). The trend on all Short-Term ratings remains Stable.

KEY CREDIT RATING CONSIDERATIONS

The Positive trend reflects Morningstar DBRS' view that a successful adoption of structural reforms addressing age-related fiscal pressures would likely strengthen Slovenia's medium- to-longer-term fiscal sustainability. A proposed pension reform has recently garnered broad political support and could be adopted into law later this year. Slovenia's fiscal deficit is set to remain moderate at about 2% of GDP over the next years although spending pressures are rising in particular from the expansion of defence capacities. The potential headwinds for the Slovenian economy from more restrictive trade policies appear to be limited, with economic growth projected to remain sound at over 2% per year over the medium-term. Contained fiscal deficits supported by prudent fiscal policies amid sound economic growth could keep Slovenia's public debt-to-GDP ratio on a downward trajectory over the medium-term.

Slovenia's credit profile is underpinned by its solid and stable institutional framework, anchored by its membership of the EU and Euro area. Slovenia's prudent fiscal policies and effective debt management support the ratings. Nevertheless, Slovenia's debt burden is set to remain overall moderately high above 60% of GDP over the medium-term. The credit ratings are constrained by Slovenia's small and open economy being generally susceptible to external shocks, although it demonstrated economic resilience in recent years and expanded capacities in high value-added sectors. Slovenia's external position is set to remain sound with structural external payments surpluses and a net international asset position.

CREDIT RATING DRIVERS

The credit ratings could be upgraded if the public debt-to-GDP ratio remains on a downward path, supported by the implementation of policy measures that strengthen economic growth prospects and address medium- to-longer-term age-related fiscal pressures. The trends on the Long-Term credit ratings could be returned to Stable if structural reforms, for example the pension reform, are materially diluted.

The credit ratings could be downgraded if there is a lasting deterioration in government debt dynamics, because of prolonged weaker economic growth and higher fiscal deficits than currently anticipated.

CREDIT RATING RATIONALE

Sound Economic Growth Prospects and Prudent Fiscal Policies Contain the Public Deficit, Debt Burden on Downward Path

Morningstar DBRS takes the view that the size of Slovenia's fiscal deficit is likely to remain contained over the medium-term. Public sector revenues are supported by a very strong labour market, increased social security contributions and temporary higher taxes for corporations and banks (about 0.5% of GDP in additional revenue per year until 2028). Still, structural spending pressures are set to increase over the next few years. Slovenia's utilization of exemptions for higher defence spending under EU fiscal rules will lead to somewhat higher deficits compared to current government projections. Slovenia announced in May 2025 to gradually increase defence spending to 3% of GDP per year until 2030, up from an estimated 2% of GDP in 2025. Spending on public sector wages increased significantly after a reform of the public sector wage system at the beginning of 2025. Expenditure growth for pensions and other social benefits are also set to remain high, at least until potential reform benefits could materialize over the medium-term. However, high investment needs for public infrastructure (5.5% of GDP on average over 2025-28) will be supported by inflows of EU subsidies over the next few years. The IMF projects Slovenia's fiscal deficit at 2.5% of GDP this year (after 0.9% in 2024) and to slightly narrow to 2.2% of GDP by 2028.

Morningstar DBRS views positively recent advancements in addressing the country's medium- to-longer-term age-related fiscal pressures. The introduction of long-term care contributions in the second half of 2025 could increase revenues by about 1% of GDP per year over the medium-term. A major health care reform was passed in early 2025 that aims to improve spending efficiency and service quality. While broad political support on a major pension reform was reached in May, legislative adoption is still pending. The proposed pension reform would gradually increase the retirement age, incentivise employment for older workers and contain the future growth of average pension payments by shifting indexation to a larger extent to national consumer prices instead of wages. If adopted into law later this year, the growth of annual public pension expenditure could be contained to about 0.5-2 percentage points of GDP over the medium- to long-term¿which is around 1.5 percentage points of GDP lower compared to projections under current legislation. The reform could also balance other additional structural fiscal pressures over the medium to long-term, in particular from higher defence spending.

While remaining at overall moderately high levels, Slovenia's public debt burden is likely to continue trending downward over the medium-term. Sound economic growth prospects and moderate increases in public sector debt interest costs are set to outweigh the negative effects of additional new borrowings on public debt dynamics. The IMF projects Slovenia's gross general government debt to gradually decrease to 64% of GDP in 2029 from currently 68% in 2025. Public sector debt interest costs are projected to rise slowly to 1.3% of GDP in 2027. Morningstar DBRS takes the view that Slovenia could receive a small amount of subsidised loans for additional defence investments under the EU's SAFE EUR 150 billion financing envelope, limiting financing costs for higher defence spending to some degree. Nearly all public sector debts are denominated in domestic currency EUR and are at fixed rate, mitigating currency and interest rate risks. The downward path in the public gross debt ratio along with an effective debt management and elevated cash reserves--at about 13% of GDP in 2024--lend support to a positive qualitative adjustment in the "Debt and Liquidity" building block assessment.

Sound Economic Growth Driven by Strong Domestic Consumption; U.S. Tariffs Add to Weak External Environment

While Slovenia's economic momentum slowed in early 2025, real GDP contracted by 0.8% year-over-year in Q1, its medium-term economic outlook remains sound with firm domestic demand expected to withstand the stronger external headwinds. U.S. tariffs on EU exports will likely dent Slovenia's exports at least over the next year. While Slovenia is less reliant on auto exports compared to many peers in Central and Eastern Europe (CEE), it has a higher share of pharmaceutical exports. According to central bank (BS) estimates, exports to the U.S. account for around 7% of Slovenia's total exports, through direct and indirect trade flows via larger EU countries. The anticipated tariff-induced lower trade volumes are adding to the already weak external environment. The Slovenian economy has faced subdued demand from key EU-trading partners, particularly Germany, for some years now. Higher trade policy uncertainty also holds back more pronounced business investments. Nevertheless, domestic private consumption is set to grow firmly over the next years as household incomes continue benefiting from elevated real wage growth amid a tight labour market and contained inflation. Inflows of EU-financed investment subsidies -- grants and loans of around 7% of GDP remaining available to spend -- will likely support public sector investments over the next few years. The IMF projects Slovenia's real GDP growth at 1.8% in 2025, before accelerating to about 2.4% annually on average over the forecast horizon.

Nevertheless, the Slovenian economy faces some structural challenges to continued high growth. These include a constrained supply of labour and global competitiveness pressures. Higher energy costs after the cut-off from Russian supply and strong wage increases amid a tight labour market have outweighed productivity gains in recent years. The country's labour market remains tight with the unemployment rate close to historical lows and amounting to 3.5% at the end of 2024, ILO definition, amid reported labour shortages. Employment growth in recent years was mainly driven by the increasing share of foreign workers. Slovenia is seeking to facilitate more labour immigration with recent reforms and bilateral agreements with Asian countries. Still, Slovenia's ageing workforce will likely increasingly weigh on economic growth potential. While Slovenia has comparatively sound economic income-levels compared to peers in Central and Eastern Europe, its small and open economy is very susceptible to changes in the international trade environment. Like its peers, Slovenia's industry sector is facing higher direct competition from non-EU countries and technological transitions. Nevertheless, Slovenia could benefit from other major international policy shifts. Slovenia hosts a small sector of defence SMEs -- currently accounting for only a limited 1% of total value-added -- which could over the medium-term benefit from the large European defence-driven fiscal stimulus in conjunction with the shift to EU-domestic procurement of military equipment.

Surpluses in International Payments and Stronger External Balance Sheets Mitigate External Vulnerabilities

Morningstar DBRS expects that Slovenia's external position will remain strong over the medium term. The IMF projects a current account surplus of around 3% of GDP on average over 2025-2030. Slovenia's structurally large service export surplus, of 5.4% of GDP in 2024, outweighs smaller outflows from the foreign profit income generated on the inward FDI stock in Slovenia and remittances sent home by foreign workers. Goods trade balances remain weaker than in the last decade, reflecting subdued demand from European trading partners in recent years but also higher consumption-driven import needs. The Slovenian economy's external debt is contained, and is net of external assets limited to the Government sector. Financial and other private sector corporations underwent significant external deleveraging after the Slovenian banking crisis in the last decade. In recent years, Slovenia's external balance sheet turned to a net asset position -- with the net IIP standing at +8% of GDP at YE2024 improving from around -40% of GDP a decade ago.

Inflation Contained but Upside Risks from Tight Labor Market Persist; Financial Stability Risks Limited

Inflation in Slovenia remains contained, sticking close to the ECB's policy target rate of 2% in early 2025, in line with the Euro area aggregate. The IMF projects inflation at 2.6% at year-end in 2025 and to gradually converge to 2.1% by 2028. The expected uptick in inflation later this year is resulting from the phase-out of temporary energy price-containing measures and continued high services price pressures resulting from strong wage growth. Morningstar DBRS takes the view that more restrictive U.S. trade policies could lead in the short term to additional downward pressure on inflation, given the additional supply from excess export capacity in Asia and lower global energy prices. Medium-term upside risks to inflation persist domestically from high services wage growth and externally from the increase in debt-financed defence spending across Europe.

Slovenia's banking system remains resilient amid higher uncertainty in the external environment. The banking sector's capitalisation level is adequate and has further strengthened amid high profitability in recent years. Asset quality has remained relatively stable with non-performing loans (NPLs) standing at 1.6% of total loans as of February 2025. While Banka Slovenije identifies some overvaluation in the real estate market relative to price fundamentals, risks linked to high real estate price growth are mitigated by the moderate level of private sector indebtedness. Private sector debt amounted to around 57% of GDP in 2024, significantly lower than the euro area aggregate estimated at 125% of GDP.

Solid Institutional Framework Anchored by Deep EU integration; Recent Reform Progress Enabled by Stable Political Conditions

Despite occasional frictions among government coalition partners, policymaking in Slovenia has been generally effective in recent years. The current government coalition led by the Freedom Movement (GS) party has made significant advancements in passing structural reforms. Major initiatives like the recent health care and pension reforms require the support of social partners including trade unions and employer associations, which can lead to prolonged implementation processes. Disparities among coalition partners are unlikely to destabilise the government until the next scheduled parliamentary elections in April 2026. Notably, Slovenia is currently without voting power in the ECB's monetary policy decision-making body (the governing council) due to a delay in the process of appointing a new governor of the national central bank (BS). This is resulting from domestic political frictions between the government coalition and the Slovenian president. Nevertheless, Slovenia is maintaining good relations with EU institutions.

Slovenia's membership of the EU anchors its good institutional quality which is reflected in the country`s generally sound and stable rankings in World Bank's Worldwide Governance Indicators. The country's trade openness is facilitated by the EU's single market, freedom of movement and common trade policies with the rest of the world. Morningstar DBRS takes the view that Slovenia's external security risks in Eastern Europe stemming from the Russia/Ukraine war are very contained. Slovenia is member of NATO and subject to the common defence agreements within the EU.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors

The following Social factor had a significant effect on the credit analysis: Human Capital and Human Rights. Slovenia's GDP per capita is relatively low compared to its EU peers, estimated at around USD 35,300 in 2025. This factor has taken it into account within the Economic Structure and Performance Building Block.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments at https://dbrs.morningstar.com/research/454694

EURO AREA RISK CATEGORY: LOW

Notes:
All figures are in Euros (EUR) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings https://dbrs.morningstar.com/research/454196 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Banka Slovenije (BS): Review of Macroeconomic Developments (April 2025), Financial Stability Review (October 2024); Ministry of Finance of the Republic of Slovenia: Annual Progress Reports (April 2025), Draft Budgetary Plan 2025, Medium-Term Fiscal-Structural Plan 2025-2028, Medium-Term Debt Management Strategy (2023-25); Institute of Macroeconomic Analysis and Development of the Republic of Slovenia (IMAD): Forecast of Economic Trends (Spring 2025), Slovenian Economic Mirror (2/2025); Fiscal Council of the Republic of Slovenia; Statistical Office of the Republic of Slovenia (SURS); International Monetary Fund (IMF): Staff Report for the Art. IV Consultation (2024), World Economic Outlook (April 2025); World Bank (WB); European Commission: Economic Forecast (Autumn 2024), Eurostat; European Central Bank (ECB); Bank for International Settlements (BIS); AlTi Global Social Progress Index; Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/454693.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Marius Schulte, Assistant Vice President - Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director - Global Sovereign Ratings
Initial Rating Date: 17 November 2017
Last Rating Date: 06 December 2024

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