Economic studies
Slovakia

Slovakia

Population 5.4 million
GDP per capita 15979 US$
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Country risk assessment
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Synthesis

major macro economic indicators

  2014 2015  2016 (e) 2017 (f)
GDP growth (%) 2.6 3.8 3.3 3.0
Inflation (yearly average) (%) -0.1 -0.3 -0.4 1.0
Budget balance (% GDP) -2.7 -2.7 -2.2 -1.7
Current account balance (% GDP) 0.1 -1.3 -1.0 -1.3
Public debt (% GDP) 53.6 52.5 53.0 53.0

 

(f) Forecast

STRENGTHS

  • Euro zone membership
  • Production platform for the European automotive and electronics industry
  • Satisfactory public and external accounts
  • Robust financial system dominated by foreign groups

WEAKNESSES

  • Small economy dependent on European investments and markets
  • Heavy concentration of exports on certain sectors: automobiles and consumer electronics
  • Dependent on Russia for its energy (gas, oil, uranium)
  • Regional development inequalities / the east lagging behind (infrastructure and training)
  • Insufficient research and development
  • Lack of skilled workforce and high long-term unemployment

RISK ASSESSMENT

Strong growth based on internal demand

Growth is expected to remain strong in 2017. The main driver will continue to be sustained household consumption. Households are expected to benefit from continuing job growth and falling unemployment. Pay levels will be driven by the growing shortage of skilled labour in the automotive and IT sectors in the east and centre of the country. The higher participation rates for women, the long-term unemployed and migrants do not compensate for this shortage. Accordingly, manufacturers are seeking to attract available labour from the east of the country, but with little success because of low mobility. Inflation will make a limited re-appearance, especially as government-controlled prices for gas and electricity will drop further. After stagnating in 2016, investment is expected to pick up. Private investment will continue to be driven by FDIs in automotive and energy, specifically by the construction of a Jaguar Land Rover plant in the west of the country and the extension of the PSA and VW plants. House building will retain its dynamism. After falling sharply because of the gap between two European financing programmes, public investment is expected to recover, with, in particular, the Bratislava Ring Road and the modernisation of road and railway infrastructures. Although exports, specifically those relating to automotive, and tourism, will retain their dynamism, trade will make only a very weak contribution to growth. The reason for this lies in the very high import content of FDIs. It will take until 2018 for their contribution to increase, once production capacity has improved.

 

Satisfactory public and external accounts, but significant debt levels

The public deficit is expected to continue falling steadily and will remain moderate. The effort will be modest and will mainly depend on increasing revenues. First and foremost, these will benefit from growth. Revenues are also expected to benefit from the introduction of a 7% tax on dividends and a levy of 8% on non-life insurance premiums, an increase in excise duties on tobacco and the doubling of the specific extra tax on large companies in the energy and telecommunications sectors. The special 0.2% tax on the banks will be maintained against all expectations. Finally, the ceiling for the calculation of social security contributions is likely to be removed. Against this, tax on profits will be cut from 22% to 21%. As for spending, this is expected to rise more slowly, despite the recovery in public investment and a further significant increase in teachers' salaries. In this context, the burden of public debt will remain considerable but below the target threshold under the Stability and Growth Pact (60% of GDP). This notwithstanding, in accordance with the debt-brake included in the constitution, the fact that it is above 52% imposes constraints on spending. The debt is denominated in euros and so is not vulnerable to exchange rate risk. The health of the banking sector, which is dominated by Austrian and Italian groups, whose resources consist of local deposits, helps to keep borrowing costs down.

The current account balance is likely to continue to run a small deficit. Despite the increase in imports resulting from buoyant domestic demand, dynamic sales of cars and car parts, electronic, IT and electrical equipment, as well as household appliances, strong tourism and road transport activity, will maintain the surplus on trade in goods and services. Only half of the amount in interest and dividend repatriation resulting from the strong presence of foreign investors, particularly in automotive industry, is likely to be offset by remittances from Slovakian émigrés. The level of external debt is high. At the end of June 2016, it accounted for 87% of GDP, of which half was held by the State and the Central Bank, 20% by non-financial companies and 15% both by banks and in connection with FDIs.

 

A multi-party coalition government against a divided opposition

Robert Fico has led the government since 2012. However, after the March 2016 elections, he and his centre-left party, the SMER-SD (European Socialist Party Member) lost their absolute majority in Parliament and had to form an alliance with the (conservative) National Party and the (centre-right) Most (Bridge) Party. However, the policy of the centre-left, namely slow fiscal consolidation based on higher taxes on higher incomes and the regulated sectors, has been maintained. While the popular support enjoyed by the SMER has fallen (28% of votes cast in 2016 compared with 44% in 2012), the other parties (seven parties sitting in parliament as well as the SMER) do not seem able to provide an alternative, at lease in the short term. The uncertainty arises from the consequences of a potential resignation of the prime minister. Corruption (e.g. in the award of public contracts) and the wide inequalities between the regions are the country's major challenges, as they are among the most marked in the Euro zone. However, overall, the business climate remains satisfactory. 

 

Last update : January 2017

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