Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

04 June 2013

Slovak Republic: 2013 Article IV Consultation—Concluding Statement of the IMF Mission


The mission concluded that policies should focus on identifying high quality measures to achieve remaining fiscal adjustment needs, stepping up efforts to tackle high unemployment, ensuring continued strength in the financial sector, and enhancing the business climate.

The Slovak Republic—among Europe's most dynamic economies in recent years, largely due to sizeable foreign investment in the auto sector that led to rising exports—registered 2 per cent growth in 2012. External risks are materialising, however, with weaker demand expected from trading partners, especially in Europe. This, coupled with still anaemic domestic demand, leads to a growth forecast of 0.6 per cent for 2013. The baseline scenario assumes a pick-up in activity in key export markets including Germany later in 2013 and into 2014. If weakness in Europe is deeper or more prolonged than expected, this could reduce export demand and contribute to uncertainty holding back investment. Domestic demand is expected to recover in 2014, but will remain restrained for some time due to ongoing fiscal adjustment as well as very high unemployment. Growth is expected to recover to about 2 per cent in 2014 and 3–3½ per cent over the medium term. Slovakia’s integration into international supply chains has brought great opportunities, but can also amplify risks from trade shocks, underscoring the importance of promoting new sources of growth and export diversification over the medium term.

Slovakia has demonstrated its strong commitment to sustainable public finances by reducing its fiscal deficit substantially since 2009, reaching 4.3 per cent of GDP in 2012. This commitment was recently reaffirmed in the country’s Stability Programme. Important structural reforms have been implemented, such as those that strengthen the pension fund’s finances, but other sources of revenue or savings have been temporary or had undesirable side-effects (e.g., lower use of EU funds reduces co-financing costs but delays potentially valuable projects). Slovakia’s public debt is manageable (52 per cent of GDP in 2012 on a gross basis, including contributions to support other euro area members and a healthy level of cash balances) and favourable financing conditions have allowed it to borrow at historically low rates while extending the average maturity of its obligations. To prevent debt from continuing to rise, however, substantial additional adjustment measures will be needed for a number of years. Action is also necessary if Slovakia is to avoid economically harmful effects from crossing a debt threshold (currently defined in terms of gross debt under its fiscal responsibility act) and to comply with targets agreed at the European Union level.

The 2013 budget and some additional steps taken so far should deliver a fiscal deficit a little over 3 per cent of GDP, factoring in the lower growth now forecast. There are risks to this scenario, including the possibility of still weaker growth or difficulties in achieving public sector wage reductions or savings from local governments, on which the state’s influence is limited. But the government’s strong commitment and readiness to take additional measures that would have little macroeconomic impact suggest the target can be met. Should growth disappoint such that additional action would be needed to meet the target, the mission recommends instead letting automatic stabilisers operate (e.g. lower tax revenue and higher benefits outlays) to avoid a further drag on output when growth is weakest.

Due to a largely deposit-funded system and high capital requirements, Slovakia’s banking system is strong, although subdued lending and a bank levy have led to lower profitability. While non-performing loans are relatively low and well-provisioned, tax policies could be modified to reduce delays in loan write-offs and potentially support additional lending. The size of the banking system has facilitated close supervision (and risks are low), but this approach could usefully be enhanced with a more developed framework for early intervention and if needed, resolution, in line with expected changes as part of a European banking union. The resources of the Deposit Protection Fund also might be strengthened. Implementation of a banking union would reinforce the importance of good cooperation among supervisory authorities.

Bank taxes have risen at a time when the operating environment is weak and credit to firms is declining. The staff team encouraged a lowering of the bank levy, which will decrease over time but is nonetheless high compared with others in Europe, and noted that the planned financial transactions tax could impose additional burdens on financial intermediation. In principle and keeping in mind potential changes at the European level, revenues from the bank levy could be allocated to a more well-defined special resolution fund, perhaps under the umbrella of the Deposit Protection Fund. Consideration of how EU and other funds could be used to enhance the availability of credit to small businesses and innovative firms is welcome.

Full press release



© International Monetary Fund


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment