"Today's decision by the European Commission to recommend Slovakia for full membership of Economic and Monetary Union makes it highly likely that Slovakia will adopt the euro in January 2009," says David Heslam, Director in Fitch's sovereign team. "Fitch would therefore expect to upgrade Slovakia's Long-term foreign currency IDRs following a positive vote by the European Finance Ministers in July 2008."
Slovakia meets all of the identifiable Maastricht criteria. Government debt is less than half of the 60% Maastricht limit and the general government deficit (ESA95 methodology, including all pension reform costs) stood comfortably below the 3% criterion at 2.2% of GDP in 2007, the reference year for euro adoption in 2009. Slovakia's Maastricht-relevant inflation rate stood at 2.2% in March 2008, below the reference rate of 3.2%. Long-term interest rates have complied with Maastricht requirements for some time and the SKK has remained within its formal trading bands against the euro since entry into the exchange rate mechanism (ERMII) in November 2005.
The EC assessment, its recommendation today to remove Slovakia from the Excess Deficit Procedure, and the EC Spring economic forecasts indicate that it expects Slovakia to continue to meet the Maastricht criteria over the next two years, adding weight to arguments supporting the sustainability of Slovakia's compliance with Maastricht tests. However, the European Central Bank has expressed concerns over the future sustainability of Slovakia's inflation convergence in the absence of a strengthening currency and noted that the country's planned fiscal path lacks ambition in reducing the government deficit. While Fitch recognises these concerns, its understanding is that the EC's recommendation that Slovakia be allowed to adopt the euro from January 2009 will carry when the final decision is made, probably in July 2008. The final euro conversion rate for the SKK is also expected to take place in July.
"In addition to contributing to an improvement in Slovakia's external creditworthiness, the Commission's positive assessment of Slovakia's euro adoption ambitions sends a positive signal that the door is open to other new EU member states, should they meet the Maastricht criteria," says Mr. Heslam. Currently, Fitch expects a number of years to pass before the euro zone includes further members from central and eastern Europe, with inflation as the main barrier for the Baltic countries and sustainable public finances more of an issue in the larger central European countries.
