2013-02-24 15:04:57 - New Country Reports market report from Business Monitor International: "Slovakia Business Forecast Report Q2 2013"

Core Views

Prime Minister Robert Fico will continue to benefit from his party's outright majority in parliament, which has eased policy formation and implementation. While this is positive for political stability in the short term, it does not provide much space for consensus politics, with Fico's tax and welfare reforms likely to cause some concern among investors.

Economic growth is set to moderate in 2013 as production in the key automobile sector stabilises and external demand remains weak. Headline growth disguises the downside risks associated with an overdependence on exports and a narrow industrial base.

Domestic demand growth will remain negligible in the short term as new austerity measures come into force and unemployment remains stubbornly high.

Major Forecast Changes

We have raised our estimate

for the full-year current account surplus in 2012 to 1% of GDP (from a previous 0.7%), as exports continued to outperform in the second half of the year.


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The government is front-loading borrowing to take advantage of favourable market conditions where possible. As a result, we have revised our forecast for public debt up to 50.8% of GDP in 2012 and 55% in 2013.

Risks To Outlook

The risks to our growth forecasts lie mainly to the downside due to lingering headwinds in the regional economy, with developments in Germany and the Czech Republic particularly important for the export-driven expansion.

The emphasis on revenue-boosting measures to achieve significant fiscal consolidation leaves the deficit reduction programme vulnerable to weaker-than-expected growth while also threatening investment inflows.

Partial Table of Contents:

Executive Summary
Core Views
Major Forecast Changes
Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Fico's Reforms Pose Moderate Threat To Investment
- The Smer-SD administration has enacted several significant reforms in its first year since returning to power and forming the first oneparty government in modern Slovakia, demonstrating an improvement in policy formation and implementation. However, Prime Minister Robert Fico faces important challenges in 2013 as he attempts to enact significant fiscal consolidation while increasing state control over welfare programmes and maintaining a favourable business environment. New tax hikes and changes to the labour code will threaten investment flows, while also undermining efforts to tackle unemployment.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Convergence With West Remains Core View
- We expect Slovakia to continue to converge with Western European policies and standards of living over the next ten years as the small economy has benefitted greatly from inclusion in the bloc. However, we stress that the country will face a number of challenges to political stability including corruption, relations with the eurozone, ethnic tensions and population decline.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Growth Outlook Hinges On Exports
- GDP growth slowed to 2.1% in Q312 as signs of a gradual slowdown in economic activity became more evident. While the headline figure is relatively positive amid a regional recession, it hides a heavy dependence on exports from a few key industrial sectors.
TABLE: ECONOMIC ACTIVITY
Balance Of Payments
Current Account Surplus To Shrink In 2013
- We expect Slovakia's current account to have posted a strong surplus equal to 1.0% of GDP in 2012 (up from our previous estimate of 0.7%), as industrial exports continued to soar in Q312. However, we maintain our view that the export expansion, which is heavily reliant on the automotive sector, will moderate as industrial production growth slows, and target a current account surplus of 0.1%. The dominance of the auto industry will leave Slovakia's balance of payments vulnerable to sectoral shocks, while higher taxes will weigh on the foreign direct investment inflows that will support future export growth.
TABLE: CURRENT ACCOUNT
Fiscal Policy
Tax Gamble A Risk For 2013 Budget Target
- Parliament approved in December a budget targeting a shortfall of 2.9% of GDP in 2013, bringing it back into line with eurozone limits. While we believe this is broadly attainable (we forecast a 3.0% of GDP deficit), the focus on revenue-boosting measures via tax reform leaves fiscal consolidation vulnerable to a growth slowdown, while also risking important investment inflows. 17
TABLE: FISCAL POLICY
Monetary Policy
Short-Term Price Pressure To Ease
- We have revised our estimate for average inflation in 2012 to 3.6%, from 3.5% previously, as harmonised inflation remained relatively sticky in the second half of the year. However, we retain our view of moderating price pressures in the short term, forecasting inflation of 2.7% in 2013 and 2.4% in 2014, with imported, commodity-linked inflation the key driver. We expect inflation to remain above the eurozone average over the medium term, gradually eroding competitiveness.
TABLE: MONETARY POLICY
Exchange Rate Policy
Euro Downtrend: Temporary Disconnect
- Having rallied into the third quarter following the European Central Bank's pledge to purchase encumbered eurozone sovereign debt (conditional on the target member state first agreeing to a structural macroeconomic adjustment programme), the euro is now hovering around US$1.3000/EUR. This would ordinarily suggest potential for a more pronounced rally towards US$1.4000-1.4500/EUR. However, we believe that, while momentum could carry the euro towards US$1.3500/EUR, this would eventually give way to a fresh round of depreciation.
Regional Banking Sector
Eurozone: Financial Union Remains Elusive
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