Slovakia Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	67
ISBN Number	1745-0705
Product Code	BMI02155

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Summary

The medium-term outlook for the Slovak economy remains bleak. In the Q3 2009 Business Forecast Report we underscore the severity of the challenges facing the centre-left government of Prime Minister Robert Fico. Though relatively better positioned than some of its peers in the emerging Europe region to weather the full brunt of the global economic crisis, the outright collapse in external demand from key export destinations, most notably Germany and the broader eurozone, will weigh heavily on the country's growth potential this year. To be sure, with latest data showing real GDP contracting by 5.6% in Q109 (with exports alone falling by 24.3%), we hold our projection that the economy will contract by 4.2% this year.

While public support for the Slovak government remains robust, ongoing corruption scandals within Prime Minister Robert Fico's centre-left coalition nevertheless pose a considerable risk to both shortand long-term political stability. In the immediate term, we are particularly concerned about how reports of alleged cronyism will impact the stability of the Smer-led coalition. Indeed, in early May, Prime Minister Fico dismissed Environment Minister Jan Chrbet (a member of the junior coalition partner Slovak National Party, or SNS) over suspected graft regarding the sale of Slovak carbon credits to Washington-based firm Interblue. Given the severity of the economic downturn facing the country, these scandals could prove detrimental to Bratislava's ability to develop a coherent policy framework in response to the crisis.

Budget figures for the first five months of the year reinforce our view that the government will be heavily in deficit in 2009. According to latest data from the finance ministry, state budget revenues in January-May came in at EUR3.94bn, representing a contraction of 10.8% year-on-year (y-o-y). In contrast, expenditures came in at EUR4.77 bn, expanding by 5.5% (y-o-y). While the government has been adamant that it will keep the deficit below the 3.0% of GDP limit set under the EU's Stability and Growth Pact, we maintain our view that the sharp deterioration in economic activity this year will make this target untenable. Revenue streams will be hit particularly hard as the deepening recession weighs heavily on corporate income tax and value added tax (VAT) receipts.

The National Bank of Slovakia (NBS) criticised the decision of rating agency Moody's on May 14 to downgrade the outlook of the country's banking sector to negative from stable, claiming that the downgrade did not reflect reality. In a statement explaining its decision, Moody's cited the deteriorating operating environment amidst a rapid contraction in economic output as a key risk which could weaken the banking sector's fundamentals. Though we are concerned by the ratings downgrade, we reiterate our view that compared to some of its regional peers, Slovakia's banking sector is better positioned to weather the economic downturn.

Content

Executive Summary
How Will Industry Cope with The Demand Slowdown?
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Allegations of Corruption to Undermine Political Risk Profile
- The Inability of Prime Minister Robert Fico's Centre-Left Government to Address Persistent Allegations of Corruption Will Likely Undermine Slovakia's Political Risk Profile Going Forward.
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Economy to Contract by 4.2%
- in Light of Our Recently Revised down 2009 Eurozone and German Growth Forecasts, We Now Project The Slovak Economy to Contract by 4.2% in 2009, down from Our Previous Forecast Which Saw Real Gdp Falling by 2.5%.
- Economic Activity Ii
- Euro Adoption Bodes Ill for Growth Potential
- Slovakia's Long-Term Growth Outlook Is Increasingly Downbeat.
- Fiscal Policy
- No Respite in Sight for Fiscal Deficit
- We Project Slovakia's Fiscal Deficit Expanding to 5.2% of Gdp in 2009 (from 1.1% in 2008), as The Economic Downturn Leads to Increased Social Expenditures and Lower Income Tax Receipts.
- External Debt
- Deleveraging to Take Root in 2009
- in Light of The Constriction of Global Credit Markets amidst The Ongoing Process of Global Deleveraging, We Believe External Financing Opportunities for Slovak Firms Will Remain Limited in 2009.
- Eurozone Monetary Policy
- End of Ecb Easing?
- The 25bps Interest Rate Cut by The European Central Bank (Ecb) in May Took The Benchmark Refinancing Rate to Our Year-End Target of 1.0%.
- Regional Outlook: Economic Activity
- after The Crisis: Slow Recovery, Lower Trend Growth
- with First Quarter Real Gdp Growth Figures in Key Emerging Europe Economies Confirming That The Region Has Entered into Its Deepest Recession since The Post-Soviet Transition, We Reaffirm Our below-Consensus 2009 Regional Growth Forecast of -5.6%.
- Regional Outlook: Banking Sector
- Real Sector Deterioration Is The Key Risk Now
- The Immediate Crisis Risks Facing The Central and Eastern European (Cee) Banking Sector in Q408 Have Subsided Markedly through H109, with The Stabilisation of Global Credit Markets Mitigating The Risks of Capital Flight in The Short Term.
Chapter 3: 10-Year Forecast
- The Slovakian Economy to 2018
- Convergence to Continue, Trend Growth Subdued
- over Our 10-Year Forecast Period, Slovak Real Gdp Growth Is Forecast to Average 2.2%, Peaking at 3.7% in 2013.
Chapter 4: Special Report
- The Outlook for Global Banking
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Real Estate
- Executive Summary
- Housing Prices in Slovakia Rose by 30% Last Year in Local Currency Terms.
- Defence
- Executive Summary
- Given The Recent Turbulent History in Dmd Holding, There Has Been Little Multinational Involvement in The Manufacturing Side of The Slovakian Arms Industry.
Chapter 7: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Slovakia Political Overview
- Table: Economic Activity
- Table: Fiscal Policy
- Table: Foreign Debt
- Table: Monetary Policy
- Table: Emerg Ing Europe Growth Forecasts
- Table: Slovakia Long-Term Macroeconomic Forecasts
- Table: Loa N-to-Deposit Ratios, Selected States
- Table: Loa N Growth (% Chg Y-O-Y), Selected States
- Table: Commercial Banking Business Environment Ratings, Selected States
- Table: Bmi Business and Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Labour Force Quali Ty
- Table: Europe, Fdi Annual Inflo Ws
- Table: Bmi Trade Ratings
- Table: Top Export Destinations
- Table: Construction and Industry Data, 2006-2013
- Table: Army Enlargement S
- Table: Glo Bal Assumptions
- Table: Glo Bal & Regional Real Gdp Growth
- Table: Commodities