Slovakia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Eurozone membership
- Production platform for European automotive and electronics industry
- Satisfactory public and external accounts
- Robust financial system dominated by foreign groups
- Small economy dependent on European investment and markets
- Strong sectoral concentration of exports: automotives and consumer electronics
- Dependent on Russia for 70% of its energy (gas, oil, uranium)
- Regional development inequalities/the east lagging behind (infrastructure and training)
- Insufficient research and development
- Shortage of skilled labour and high long-term unemployment
Lively Growth Based on Internal Demand
In 2018, growth will receive a boost from investment (private and public) although household consumption is still the main growth contributor. Households are expected to benefit further from jobs growth and lower unemployment, which will drive up wages. The latter will also be driven up by the growing shortage of skilled labor in the automotive and IT sectors in the west and center of the country as well as increase to the minimum wage (up from EUR 435 to EUR 480). Moreover, low levels of household debt (70% of disposable income), together with low interest rates will help sustain the residential property sector. Nonetheless, the rise in disposable income will be slowed by higher inflation fuelled by higher food and energy prices. Public investment will be boosted by greater use of European funds, insofar as the country has used only 5.3% of the EUR 15 billion available under the 2014-2020 programme. The construction sector will benefit broadly from the increase in infrastructure projects, as well as good performance by the residential property market. Moreover, private investment will continue to be driven by FDI's in automotive and energy sectors, with the construction of a Jaguar Land Rover plant in the west of the country and the extension of PSA, Kia and VW plants. Exports will be buoyed by strong demand from the main trading partners and by the country’s growing integration in the European value chain. Accordingly, trade’s contribution to growth will remain positive and will increase as production capacity rises.
Satisfactory Public and External Accounts
The public deficit, already modest, is expected to continue on a slow downward path. The effort will be modest and will chiefly rely on higher tax receipts. In the first instance, these will benefit from growth and should also benefit from the fight against tax evasion with the introduction of a tax on company delocalization, as well as on Slovaks domiciled abroad. Against this, personal income tax and corporation tax deductions (particularly for R&D spending) will be increased. Moreover, spending is expected to rise modestly despite the recovery in public investment and another significant increase in civil service wages. In this context, the public debt burden will remain significant, but below the target threshold set by the Growth and Stability Pact (60% of GDP). The debt is denominated in euro and so is not vulnerable to exchange rate risk. The strength of the banking sector, dominated by Austrian and Italian groups, and whose resources comprise local deposits, helps keep borrowing costs low.
The current account balance is expected to continue to show a slight surplus. Despite the substantial increase in imports resulting from lively internal demand, the trade balance will remain in surplus thanks to momentum in sales of vehicles and automotive parts, electronics, IT and electrical equipment and in road transport. Nevertheless, poor diversification of export products and destinations will expose the trade balance to the reversal in the automotive sector and Eurozone demand (60% of exports). Interest and dividend repatriation, a consequence of the strong presence of foreign investors, especially in the automotive sector, is likely to be only partially offset by remittances from Slovak emigrants. The external debt is high, representing 90% of GDP in 2017 with a third owed by the state and another third associated with FDI's. These investments, long-term by nature, limit the risk of massive capital flight.
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, electronics, 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.
An Eclectic Coalition Government Faced by a Divided Opposition
Robert Fico has led the government since 2012. However, after the March 2016 elections, he and his center-left party, 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 center-right Most (Bridge) Party. This coalition has a narrow majority (79 seats out of 150). Moreover, during the summer of 2017, the National Party threatened to leave the government, prompting a renegotiation of the coalition pact. This new agreement, which remains secret, could slow the government’s center-left policy, especially the slow fiscal consolidation based on higher taxes on high incomes and the regulated sectors. In addition, the many differences (welcome afforded to refugees, on Europe, etc.) threaten the coalition’s stability and will force the SMER to find a compromise. Nevertheless, even if the popular support enjoyed by the SMER has fallen (25% of the votes cast in 2017 compared with 44% in 2012), the other parties (seven parties in parliament in addition to the SMER) do not seem to be in a position to offer an alternative, at least in the short term. Corruption and the wide inequalities between regions are major challenges, as they are among the most marked in the Eurozone. However, the business climate remains satisfactory.