Country Report Slovakia July 2008

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

• In June Mr Fico conducted a series of control visits at individual cabinet ministries to mark the midway point of the electoral term. He reviewed the work of most ministers as positive.
• In June the finance minister, Jan Pociatek, was accused of leaking sensitive information to a local financial group ahead of the revaluation of the koruna in May, but he retained his post despite calls for his resignation.
• Mr Fico announced a modest package of social measures for 2008-09. The state budget seems to be able to finance them, but it is unclear how further pressure on social spending can be reconciled with fiscal consolidation goals.
• Real GDP growth fell to 8.7% year on year in the first quarter of 2008, from an exceptionally high 14.3% in the previous quarter. Domestic demand, and private consumption in particular, provided the main boost to growth.
• Consumer price inflation, calculated according to the EU-harmonised methodology (HICP), picked up to a 20-month high of 4% year on year in May, from 3.7% in April.

Source: Country Report