Country Report Slovakia

Outlook for 2008-09

• The Economist Intelligence Unit's central forecast is that the government will survive throughout 2008-09. However, tensions between ruling parties pose a risk that the coalition will break up in the forecast period.
• If the government were to break up, an early election would be the most likely outcome. This could allow Direction-Social Democracy (Smer-SD), the party of the prime minister, Robert Fico, to strengthen its position further.
• Slovakia will adopt the euro in 2009. The government will henceforth focus on preserving Slovakia's external competitiveness within the euro area, which will include measures to restrain inflationary pressures.
• We expect the current administration, or any that is centred on Smer-SD, to reverse some of the previous government's free-market reforms. However, the overall extent of the changes should be limited.
• Real GDP growth will slow in 2008-09 from a record-high 10.4% in 2007, as domestic demand moderates and net foreign trade posts smaller positive contributions than in 2007.
• Additional export capacity will improve the trade balance in 2008-09, and a further reduction in the current-account deficit as a share of GDP will reflect this.

Monthly review

• Midway through its four-year term, the ruling coalition, led by Smer-SD, looks broadly stable and capable of overcoming disagreements.
• Opposition parties have had trouble reconciling their diverging positions. The two Christian democratic parties struck a co-operation deal in May that excluded the Hungarian Coalition Party (SMK).
• In early May the European Commission gave Slovakia approval to adopt the euro from January 2009.
• On May 29th the National Bank of Slovakia (NBS, the central bank) revalued the central parity of the koruna within the EU's exchange-rate mechanism (ERM2), to Sk30.126:€1, the upper bound of the previously allowed range.
• According to the Statistical Office of the Slovak Republic (SUSR), real GDP growth slowed to 8.7% year on year in the first quarter of 2008—which is still the fastest growth in the EU.
• Inflation measured according EU-harmonised methodology (HICP) edged up to 3.7% year on year in April from 3.6% in March, reaching its highest rate since December 2006.