Slovakia Business Forecast Report Q4 2008

Next Stop: Eurozone!

In the latest Slovakia Business Forecast Report we examine the countrys economic and political outlook heading into, and beyond, planned eurozone accession on January 1 2009. Of particular concern is the inflationary impact of accession. We forecast Slovak real GDP growth to average 4.9% between 2009-2012, well above our eurozone forecast of 1.6%. As such, we are concerned that the European Central Banks monetary policy will not adequately match Slovakias need to contain inflation in the coming years. Furthermore, we are also concerned about the impact that the loss of the Maastricht criteria policy anchor will have on the countrys fiscal policy. Heading into 2010s parliamentary election, we believe the centre-left coalition government of Prime Minister Robert Fico, while maintaining a budget deficit well below the required 3.0% of GDP, will begin exercising less restraint over future government spending.

Recent scandals involving members of Prime Minister Robert Ficos cabinet have shown that while Slovakias governing coalition remains strong, it is not immune to crises. We expect the Smer-led coalition to continue benefiting from high levels of domestic support, which is in large part a result of Ficos ability to redirect criticism of his government towards alternative targets. Indeed, in response to public criticism over the possibility of price rises following the adoption of the euro, in addition to the ongoing corruption allegations directed at members in his cabinet, the prime minister has stepped up his attacks on the media, retailers and foreign utility firms in recent months.

We have revised up our 2008 full-year real GDP forecast for Slovakia to 7.6%, from our previous forecast of 7.3%. Although we expect real GDP growth to slow over our five-year forecast period from the 10.4% rate of expansion recorded in 2007, we nevertheless expect growth to remain robust. We forecast the economy to grow by 6.5% in 2009, and to average 4.4% between 2010-2012. We retain our core view that the Slovak economy is undergoing a transition from a model of growth driven by exports and gross fixed capital formation (GFCF), to one fuelled primarily by private household consumption.

Prime Minister Fico stepped up his attacks on foreign utility companies when he threatened them with expropriation if they raised energy prices. Following domestic gas distributor SPPs second request to raise prices, Fico offered to repurchase the 49% controlling stake in the company, which is owned by western shareholders. URSO, the independent state regulator to whom the prime minister had granted increased powers to regulate prices earlier in the year, had already rejected the firms previous request for a price hike. While we believe these comments amount to little more than political posturing aimed at further cementing Ficos public support, we caution that the continuation of such rhetoric risks damaging the countrys attractiveness to foreign investors.