Country Report Slovakia October 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 continuing high levels of popularity 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 impact of the economic slowdown.
• Most of the previous government's free-market reforms should remain in place. However, a sharper economic slowdown and a drop in popularity could yet increase the government's incentives to reverse these reforms.
• GDP growth is estimated to contract by 5.5% in 2009 as higher unemployment and tighter lending conditions reduce 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 that the current-account deficit will narrow as a share of GDP in 2009 as the income and current transfers balances improve.
• We expect the current-account deficit to widen modestly in 2010 as domestic demand picks up, and to narrow slightly in 2011 as exports rise.

Monthly review

• Despite some speculation that it would leave the ruling coalition in the wake of an alleged scandal at the Ministry of Environment, the Slovak National Party (SNS), led by Jan Slota, has chosen to remain in government.
• Relations between Slovakia and Hungary deteriorated further after the Slovak government barred the Hungarian president from entering the country.
• The Ministry of Finance now does not expect the consolidated budget deficit to contract to within 3% of GDP until 2012. The European Commission expressed disappointment at the perceived slow pace of consolidation.
• The government remains unwilling to cut spending, faced with dwindling revenue. In January-August the state budget deficit widened to ???1.21bn (US$1.65bn), exceeding the planned deficit for the full year by about 20%.
• Real GDP contracted by 5.3% in unadjusted terms in the second quarter of 2009 as business investment in particular fell sharply.

This report covers the following industry codes:
SIC Code: 70
NAICS Code: 72