The international rating agency Moody's Investors Service has changed the outlook to positive from stable on the Slovak government's A1 foreign and local currency bond ratings in view of the strengthening economic fundamentals of the country. Simultaneously, Moody's has upgraded Slovakia's foreign currency debt and deposit ceilings to Aaa. This action puts the country's foreign currency ceilings on a par with those of the Eurozone, reflecting the EU Economic and Financial Affairs Council's recent decision that Slovakia will become the 16th member of the European Monetary Union (EMU) in January 2009.
"Moody's expects the upcoming adoption of the euro to be a net positive for Slovakia," said Moody's Vice President Dietmar Hornung. "EMU accession will help to shield Slovakia from potential external financial shocks by eliminating the risk of a balance of payments crisis, which is an important consideration for a small open economy," he said.
Mr. Hornung said that the positive outlook on the government's own ratings takes into account the structural economic improvements that have followed from free-market reforms and sound macroeconomic policies, in particular, robust economic growth and favorable public debt dynamics.
"Low wages, high educational attainment and close proximity to core Europe make the country attractive to foreign direct investors," explained Mr. Hornung. "As a consequence, Slovakia is not yet experiencing the competitiveness issues that other central and eastern European countries are facing, although rapid incomes growth and the sizeable appreciation of the currency prior to setting the euro conversion rate mean that the cost advantages are likely to dissipate."
After taking office in 2006, the current government prioritized fast-track EMU accession and succeeded in fulfilling the Maastricht criteria, although inflation was kept down mainly with help from a very strong exchange rate. When assessing Slovakia's creditworthiness going forward, Moody's will have to monitor closely the extent to which the EU/EMU anchor will remain effective in preventing considerable fiscal slippage or substantial structural reform roll-backs. In addition, maintaining adequate control over inflation will represent a test for policymakers, now that the currency's conversion rate against the euro has been set.