Slovakia Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	54
ISBN Number	1745-0705
Product Code	BMI01535

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Summary

Slowing But Staying Robust

Despite a forecast slowdown owing to a weakening external environment, Slovakia remains one of our favourite economies in the Central Europe region. Entry into the euro in 2009 underlines the country's positive reform efforts in recent years, which we expect to continue paying dividends over the long term. Indeed, external debt is forecast to remain sustainable, the current account deficit is set to decline further and foreign investment levels should remain robust through the medium term. All this should keep economic growth above 5.0% until 2010.

Our core view is that government policy is unlikely to change after Slovakia receives formal approval to join the eurozone, expected by June. While the loss of the euro entry criteria (Maastricht requirements) as a fiscal policy anchor is a concern, there is little to indicate that major domestic political dynamics will shift alongside the eurozone timeline. Indeed, the SMER-led coalition government is unlikely to lose its firm grip on national policy direction, with the latest opinion polls in March continuing to point to left-wing SMER dominating the opposition.

We are holding to our forecast for real GDP to increase by 7.0% in 2008, followed by steady declines through to 2012, with average annual real GDP growth forecast to be .9% over those years. We believe that weakness in the external sector (on the back of slowing eurozone growth to a forecast 1.6% in 2008) will begin to impact the Slovak economy within the first quarter of 2008, both in the form of a slowdown in exports as well as foreign capital inflows owing to a concomitant rise in investor risk aversion.

Slovakia has been one of the most aggressive reformers in the emerging Europe region over the past 10 years and this has paid significant dividends for the country's business environment. Corruption has been lowered substantially, property rights are protected by a well-developed judiciary and the government has adopted arguably the most attractive foreign investment policy in central Europe, resulting in billions of dollars in net foreign direct investment (FDI) inflows. Underlining these developments has been membership to the EU, providing access to a huge consumer and investor market, low wage costs and very limited security risks. Going forward, we are concerned that the change in government in 2006 is likely to slow the momentum of reform, while real wage convergence with the EU's developed states will undermine the country's comparative advantage in low labour costs. That said, there are reasons to be optimistic too. Entry into the eurozone, expected in 2009, will help to facilitate trade flows, while major infrastructure development initiatives should bolster productivity further over the long term.

Content

Executive Summary
- Slowing But Staying Robust
Chapter 1: Political Outlook
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Politics
- Underlying Policies To Remain Unchanged Post Euro adoption
- With the government's long held policy priority of achieving euro-adoption looking likely to come to fruition
- within the short term, we examine the key implications of what the loss of the eurozone policy anchor will mean
- for Slovakia.
Chapter 2: Economic outlook
- SWOT analysis
- BMI Economic Risk Ratings
- Economic activity
- Growth To Slow To 7.0% in 2008
- Slovakia's surprise fourth quarter real GDP growth figure of 14.3% y-o-y is a positive sign of the economy's
- resilience amid a slowdown in the external sector.
- Balance of Payments
- Current account Dynamics Set To improve Further
- We have revised up our long-term current account deficit forecasts for Slovakia, in line with a higher than
- expected 2007 deficit of 5.3% of GDP.
- Exchange Rate Policy
- koruna To Skk31.50/EUR
- We hold to our views that Slovakia will be given formal approval to join the eurozone in May and that the
- euro-conversion target rate will be set at the high end of the ERM-2 trading band
- External Debt
- Gross External Debt levels Set To Rise
- Slovak gross external debt is set to rise as a percentage of GDP over the long term, from 58.9% at end-2007 to
- 69.1% by end-2012.
- Fiscal Policy
- A Strong But Not Stellar 2008 Fiscal outlook
- Tax hikes will help the government to keep its budget deficit well below the 3.0% of GDP specified in the
- Maastricht convergence criteria.
Chapter 3: Special Report
- Looking Beyond 2008
- The Future of The World, in Three acts
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
- subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
- US: The Rebalancing act
- Unwinding The imbalances
- China: What if We're all Wrong?
- Our Core Scenario For Chin
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with
- our expectations of the continued success of the urbanisation process and export-driven growth model
- underpinning our assumptions.
- Japan: immigration key To long-Term Growth
- Demographic Woes Portend long-Term Decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT analysis
- BMI Business Environment Risk Ratings
- Business Environment outlook
- Infrastructure
- Market outlook
- Security Risk
Chapter 5: key Sectors
- Freight Transport
Executive Summary
- For the 2008-2012 forecast period, we expect the transport and communications sector to achieve average
- annual growth of 7.0%.
- Defence
List of Tables
- Table: Slovak Cabinet & other key Posts
- Table: Economic activity
- Table: Balance of Payments
- Table: Exchange Rate Policy
- Table: Foreign Debt
- Table: Fiscal Policy
- Table: BMI Business and operational Risk Ratings
- Table: BMI legal Framework Ratings
- Table: Slovakia Annual FDI Inflows
- Table: Top Export Destinations, US$mn
- Table: Freight Carried, Domestic and international
- Table: army Enlargements