Slovakia: Risk Assessment
Country Risk Rating
|A3||Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.|
Business Climate Rating
|A2||The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.|
Continuing upturn underpinned by domestic demand
GDP growth is expected to rise slightly in 2016. Activity will continue to be driven by sustained household consumption. Although consumers are going to face higher inflation as a result of vigorous domestic demand and oil and gas prices which will no longer be a deflationary factor, they should benefit from the cut in VAT (from 20% to 10%), the increase in subsidies, higher wages and the reduction in the unemployment rate. Public investment is nevertheless expected to contract in 2016, as it will no longer be supported by EU funding within the finance program covering the period from 2007 to 2013, whilst private investment should be stimulated by foreign investors, in particular with the arrival of the car manufacturer Jaguar Land Rover in Slovakia. Industry is expected to remain the main driving force within the economy, in particular the car industry. The level of activity in this sector will, however, be constrained by its dependence on activity in the European economy, as Slovakia is a component in the German logistics chain. The Volkswagen scandal, revolving around the falsification of anti-pollution test results, could temporarily hit exports, given that the Slovakian subsidiary of the car manufacturer, located in Bratislava, is a major contributor to the country’s exports.
Balanced external accounts and satisfactory budget situation
The equilibrium in the current account is expected to be maintained in 2016, sustained by the slow upturn in Europe and by moderately priced oil and gas imports. Thanks to vehicles and automotive components, electronics and machinery, tourism and transport, the trade balances in goods and services should remain in surplus even if internal demand pushes imports up.
Foreign investments, specifically in the automotive sector, are expected to continue to guarantee the stability of the balance of payments.
The small deficit in the public accounts will continue into 2016, even though an increase in spending is planned. Three “social packages” were announced, including cutting the VAT on food products by half, raising the minimum wage, specific aid for the regions with the highest unemployment rates and an increase in social transfer to households, which added to tax relief for R&D spending are part of a program of pro-cyclical budgetary measures with a total cost of 1 billion dollars (1.3% of GDP). The additional spending should be offset by higher revenues from the slight upturn in growth and by improved effectiveness of tax collection. In this context, the ratio of the public debt is expected to hold steady and remain below the target threshold of the Stability and Growth Pact (60% of GDP). As a member of the Eurozone, most of the debt is denominated in the local currency, and is therefore not vulnerable to exchange rate risks. The stability of the banking sector and the beginning of ECB operations to buy up sovereign bonds in 2015 is expected to help keep down the cost of borrowing.
Solid government and measures of budget support
The government led by Mr. Robert Fico has been in power since the victory of the SMER-SD party (European Socialist Party member) in the early parliamentary elections held in March 2012. The party has a comfortable majority (83 seats out of 150 in the National Council), allowing it to govern without having to form a coalition and proceed with the consolidation of the budget. However, in the run-up to the parliamentary elections in March 2016, the improvement in tax revenues thanks to the economic upturn and the satisfactory outcome of the measures against tax evasion means that the government would have the capacity to implement the “social package”.
Externally, tensions with Hungary deteriorate from time to time, linked with history as well as the existence of a significant Hungarian minority in Slovakia. Slovakia will take on the alternating Presidency of the EU Council in the second half of 2016, as part of a troika with the Netherlands and Malta. This first Slovakian Presidency will start few months after the parliamentary elections.
Corruption and inequalities between regions are major challenges for Slovakia as they are among the most marked in the Eurozone. Finally, its performances in terms of governance remain satisfactory and the country’s ranking is set to improve in 2016 according to the World Bank indicators, most notably for payment of taxes and starting a business.