Country Report Slovakia November 2009

Outlook for 2010-11

• The Economist Intelligence Unit's central forecast is that the government will survive until the next scheduled election, in mid-2010. However, occasional tension between the ruling parties carries the risk of a coalition break-up.
• Given the persistently large lead in opinion polls of Direction-Social Democracy (Smer-SD), we expect it to head the next government. However, Smer-SD would have to form another coalition government.
• In the short term the government is likely to continue to focus on alleviating the social impact of the economic slowdown.
• Most of the previous government's free-market reforms should remain in place. However, lingering economic weakness and a drop in popularity could yet increase the government's incentives to reverse these reforms.
• GDP is estimated to contract by 4.5% in 2009 as higher unemployment and tighter lending conditions curb domestic demand and as recession in Slovakia's main export markets reduces exports.
• Modest growth in economic output should return in 2010-11, although we expect the medium-term outlook for exports to remain relatively subdued.
• We estimate the current-account deficit to narrow as a share of GDP in 2009 as the income and current transfers balances improve.
• We expect the current-account deficit to widen slightly in 2010-11 as domestic demand picks up and the profitability of foreign-owned companies recovers.

Monthly review

• Smer-SD is experiencing a decrease in voter support for the first time since coming to power in mid-2006. This appears to be linked to the effects of the global economic downturn, and recent alleged scandals in government.
• With the parliamentary election only months away, the centre-right opposition still seems unwilling, or unable, to form an alliance that would present any threat to Smer-SD.
• At the beginning of October the government approved the budget parameters for 2010. The budget projects a deficit of €3.8bn (US$5.4bn), equivalent to 5.5% of GDP, down from an estimated 6.3% of GDP in 2009.
• Some assumptions in the budget look optimistic, such as the projection that municipalities will in 2010 run a balanced budget on aggregate.
• Industrial and construction sector activity improved noticeably in August, although the outlook for household consumption remains negative. Headline inflation fell to a new record low in September.

Source: Country Report