Country Risk Rating

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average. - Source: Coface

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.

Strengths

  • Eurozone membership
  • Production platform for the European automotive and electronics industries
  • Satisfactory public and external accounts (in normal times)
  • Robust financial system dominated by foreign groups

Weaknesses

  • Small and open economy dependent on European investment and markets
  • Strong sectoral concentration of exports: automotive and consumer electronics
  • Regional development inequalities; the east is lagging behind (infrastructure and training)
  • Insufficient research and development; exports relying on assembly activities (low value-added)
  • Shortage of skilled labour and high long-term unemployment

Current Trends

Recovery after a strong contraction

In 2021, the Slovak economy is expected to recover with a solid GDP growth rate. However, it will not fully compensate the effects of the sizeable economic deterioration caused by the COVID-19 pandemic. Lockdown measures took a toll on domestic demand, which will remain subdued in 2021. This applies mostly to companies’ fixed asset investments, as the rebound from uncertainty and low capacity utilization will not be immediate, and will be recorded in the second half of the year. Another component of domestic demand, i.e. household consumption, is expected to recover faster, especially thanks to government support measures that will limit the deterioration on the labor market. Indeed, the unemployment rate increased to 7% in October 2020 compared to 5.7% a year before. There are still strong regional differences between the East and the West of Slovakia: the latter (including the capital city of Bratislava) enjoys a strong concentration of foreign and domestic companies that curbs unemployment. Nevertheless, the expiry of the protective measures implemented on the labor market (such as the short-time work scheme) is likely to keep unemployment at higher levels than before the pandemic, while wage growth is likely to be weaker.

Manufacturing experienced a sizeable contraction during the pandemic, but it has started to recover relatively fast. This applies particularly to automotive, which is a crucial sector of Slovak economy, with plants of Volkswagen Bratislava, PSA Peugeot Citroen, Kia Motors and Jaguar Land Rover. All of these closed for some time during the pandemic. Although Slovakia’s competitiveness supports the recovery of the sector, global automotive demand remains sluggish.

 

Widened public account deficits set to narrow

The government deficit is expected to shrink in 2021 after widening significantly because of the government measures implemented in 2020. Its reduction will be supported by an increase in the tobacco excise duty and increased revenues from higher consumer spending. Nevertheless, if the pandemic extends further into 2021, the government is likely to maintain support measures that would affect the country’s budgetary situation. The government announced that it intends to dedicate proceeds from the Next Generation EU recovery fund (8.5% of GDP) to fiscal reforms, the green economy, the labor market and social sustainability, education, science, research and innovation, health, public institutions and regulations, as well as digitalization.

The current account deficit deepened last year due to a slump in exports during the peak of the pandemic. Imports dropped as well, but to a lesser extent than exports. Slovakia remains strongly dependent on external markets, with exports of goods and services reaching 92.4% of its GDP in 2019. Moreover, companies in various sectors are included in global supply chains and therefore indirectly subject to global demand. The revival of global trade in 2021, as well as better perspectives for Slovakia’s key trading partners and the automotive sector, will contribute to improvements in the current account balance, which, however, will remain in negative territory because of recovering imports.

 

Changes in the political scene

Anti-corruption campaigner Zuzana Caputova was sworn in as Slovakia's first female president in 2019. She promised to fight impunity and champion justice. This particularly attracted people’s attention after a journalist's murder in 2018. Indeed, the killing of Jan Kuciak - who investigated high-level graft cases - and his fiancée at their home sparked mass street protests. The latest parliamentary election took place in February 2020, only a few days before the first coronavirus case was diagnosed in Slovakia. The anti-corruption party, Ordinary People and Independent Personalities (OL’aNO), won the election. Taking over from the previous government led by Peter Pellegrini, a center-right four-party coalition government led by Igor Matovic was sworn into office at the end of March 2020. In the course of 2020, there were series of arrests (including former top police officials) linked to Kuciak’s killing.

 

Source:

Coface (02/2020)
Slovakia