We continue to expect Slovakia's economy to expand by 2.0% in real terms in 2012, with growth largely driven by export performance. Household and government consumption are expected to remain weak due to austerity conditions and structural unemployment. Risks of fiscal slippage remain high, particularly given the election of a Smer-SD majority government. While we believe that the Robert Fico-led administration will broadly respect its fiscal commitments to the eurozone, we expect Slovakia to struggle to hit its targets on its current trajectory. We therefore forecast a fiscal deficit of 4.6% of GDP in 2012, before this narrows to 3.3% in 2013.
Major Forecast Changes
We have revised up our forecasts for Slovakia's current account balance in 2012 and 2013 on the back of robust exports coupled with a more pronounced slowdown in exports. We now expect Slovakia's current account to move into surplus this year, coming in at 1.7% of GDP, from a previous forecast of -0.6%, and 1.5% of GDP in 2013, from a previous forecast of 0.8%. Our revised forecasts are predicated mainly on expectations of a stronger trade balance, given that leading indicators point to continued export growth in the second half of the year, with industrial orders growing 15.6% y-o-y in May, and industrial production 10.8% in the same period. We have revised up our real GDP growth projections for 2012, which we now forecast at 2.0%. However, drilling down into the breakdown of expenditure confirms our view that net exports now remains the sole remaining driver of growth for Slovakia, with household and government consumption flat.
Key Risks To Outlook
Downside Risk To Growth Outlook: Slovakia's heavy dependence on the external sector for its economic growth presents a key downside risk to our forecasts. Indeed, a significant slowdown in external demand, in particular from Germany, would impact heavily on Slovakia's export-led economic recovery.
Table of Contents
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Fico Takes Aim At Private Firms In Public Markets
We believe that concerns that Slovak Prime Minister Robert Fico's plans for consolidation of the state's role in social welfare provision
may extend to the wider economy are broadly overdone, following the announcement he is considering the removal of private sector
involvement in the provision of both pension and public healthcare services
POLITICAL OVERVIEW
Long-Term Political Outlook
Convergence With West Remains Core View
We expect Slovakia to continue to converge with Western European policies and standards of living over the next ten years as the
small economy has benefitted greatly from inclusion in the bloc However, we stress that the country will face a number of challenges to
political stability including corruption, relations with the eurozone, ethnic tensions and population decline
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Exports To Remain Last Growth Driver
Strong performance in Slovakia's exports has prompted us to modestly revise up our real GDP forecast upwards to 2 0% in 2012, from
a previous forecast of 1 5% y-o-y However, Q112 readings support our view that economic activity is underpinned almost exclusively by
exports, and will remain vulnerable to further slowdown in the eurozone as a result
Fiscal Policy
Deeper Cuts On The Horizon
Despite robust economic activity by regional standards, Slovakia's weakened household segment is driving shortfalls in both
government income and sales tax revenues, with mid-year revenue deviating by 11 5% to the downside from official projections Given
Prime Minister Robert Fico's opposition towards raising socially regressive taxes, we believe that greater government spending cuts are
likely to be implemented in 2013 to keep the fiscal trajectory on track
Balance Of Payments
Current Account Surplus In 2012 and 2013
We have revised up our forecast for Slovakia's current account balance to 1 7% of GDP in 2012, and 1 5% of GDP in 2013, having
previously expected a deficit of -0 6% and -0 8% respectively This is predicated on impressively robust export growth and a
deceleration in imports
Monetary Policy
Euro Speculation Reaching Fever Pitch
Turmoil in the eurozone is fuelling speculation over the future of the currency union, with the sharp increase in short positions driving the
euro lower The volume of net short contracts has reached the highest level since the introduction of the euro, with the unit sliding down
to US$1 2461/EUR on June 8
Banking Sector
Outperforming In A Weak Region
Slovakia's banking sector is showing mild signs of recovery in credit growth, and we expect the sector to outperform relative to the
Central and Eastern Europe region However, despite the lack of major structural risks, we do not believe that the sector's growth
prospects are especially attractive at present, and do not expect a return to 30% loan growth rates experienced between 2004 to
over the next 36 months
TABLE: NPL THRESHOLDS IN CESEE
Chapter 3: 10-Year Forecast
The Slovakian Economy To 2021
Lower Trend Growth Ahead
Over our 10-year forecast period, Slovak real GDP growth is forecast to average 2 9%, peaking at 3 8% in 2015 We expect that the
country's entry into the eurozone on January 1 2009 will continue to provide a slight boost to the country's economic and political
convergence with Western European institutions over the long term, and expect a high degree of macroeconomic stability as a result
That said, we maintain the view that the drawbacks of having the euro (namely decreased cost competitiveness) will outweigh the
benefits that will accrue from decreased transaction costs and lower exchange-rate risks associated with membership in the common
monetary union
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment
Business Environment Outlook
Institutions
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
TABLE: LABOUR FORCE QUALITY
Infrastructure
TABLE: EMERGING EUROPE – ANNUAL FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
Market Outlook
Security Risk
Chapter 5: Key Sectors
Pharmaceuticals
TABLE: GENERIC DRUG SALES, 2008-2016
TABLE: OTC MEDICINE SALES, 2008-2016
TABLE: OTC MEDICINE SALES BREAKDOWN, 2004-2009
TABLE: PRESCRIPTION DRUG SALES, 2008-2016
TABLE: PATENTED DRUG SALES,BODY 12008-2016
Telecommunications
TABLE: TELECOMS SECTOR – INTERNET – HISTORICAL DATA & FORECASTS
ABLE: TELECOMS SECTOR – MOBILE – HISTORICAL DATA & FORECASTS
TABLE: ARPU FORECAST, 2009-2016 (EUR)
Other Key Sectors
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS
TABLE: AUTOS SECTOR KEY INDICATORS
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS
TABLE: OIL AND GAS SECTOR KEY INDICATORS
TABLE: FREIGHT KEY INDICATORS
Chapter 6: BMI Global Assumptions
Global Outlook
Q412 Update
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST 43
