Slovakia: Risk Assessment

Country Rating¹

Rating: A3

Business Climate Rating¹

Rating: A2

Risk Assessment²

Growth led by foreign direct investment (FDI) and infrastructure projects
Slovakia's relatively small and very open economy made a significant rebound in 2010, driven by stock replenishment and exports, mainly of electrical equipment and vehicles. This recovery was, however, limited by rising unemployment (up from 9% to 14%), credit terms still restrictive, and production overcapacity. In 2011, new greenfield investments and continuing infrastructure projects (8% of GDP) are expected to buoy up economic activity. Nevertheless, on-going budget consolidation is expected to penalise both public sector and household consumption, already affected by growing unemployment. In this perspective, dependent as it is on the vitality of foreign demand for durables (automotives and electronic goods), growth is unlikely to return to pre-crisis levels in the short term.

Fragile public finances
Slovakia was able to enter the Eurozone in 2009 thanks to its relatively robust external position, controlled public finances, and limited inflation. After deteriorating sharply due to contra cyclical policies implemented since 2009, the fiscal deficit is likely to contract significantly in 2011, thanks to the end of anti-crisis measures and an expected tax hike. However, it will still exceed EU-prescribed limits. In this context, public debt has risen significantly, although it will stabilise at a sustainable level in 2011 (44% of GDP).
The current account deficit contracted sharply during the crisis, and is expected to remain at around 3% of GDP. In 2011, the trade balance surplus and remittances will be unable to offset the services and revenues balance deficit. Half of the country's financing needs will be met by direct foreign investments, which will pick up after falling off during the recession.
In 2011, the financial situation for banks is expected to remain favourable in terms of liquidity, solvency and profitability, even though the latter has fallen well below pre-crisis levels.

A weak centre right coalition in power
The left-wing coalition led by the Smer-SD party lost the legislative elections in June 2010. An alliance between four centre right parties has made it possible to form a new government under the leadership of Iveta Radicova. The new team is likely to accord greater importance to budget consolidation, given the tension surrounding public finances within the EU. The stability of the government is not, however, guaranteed, due to the absence of a clearly identified coalition leader and lack of credibility in the fight against corruption. This may hinder the implementation of crucial policy measures, in particular improvements in the education system and pension reform.

Strengths

• EU membership has fast-tracked reform implementation
• Euro zone membership sheltering the country from exchange rate risk
• Foreign investments and modernization of the productive apparatus
• Limited public sector debt
• Attractive business environment

Weaknesses

• Economy dependent on foreign demand: exports of goods and services represent 99.5% of GDP
• Extent of short-term external debt
• High unemployment
• Competitiveness to protect
• Current government's weak commitment to reform