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Slovakia Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 50 pages

Core Views

Prime Minister Robert Fico will continue to benefit from his party's outright majority in parliament, which has eased the policy formation and implementation process. While this is positive for political stability in the short term, it does not provide much space for consensus politics, with Fico's tax and welfare reforms likely to keep investors cautious.
Fico's failed bid for the presidency in March 2014 is a sign of growing voter wariness of single-party rule and mainstream political parties, with general elections in 2016 unlikely to give the ruling party another outright parliamentary majority.
The government will continue with its fiscal consolidation plan, with a shrinking deficit likely to buoy market sentiment. Creeping public debt will remain a concern for the authorities, however. The short-term economic outlook has brightened as export growth led growth of the previous years is beginning to translate to a visible pick-up in domestic demand. The current account will remain in surplus over the medium term, even as economic growth becomes increasingly weighted towards domestic demand.

Major Forecast Changes

We have revised up our real GDP growth forecast for 2014 and 2015 to 2.4% and 3.0% respectively, from 2.2% and 2.8% previously. This is based on robust strength of high frequency economic indicators in Q413 and early 2014 that point to a more broad based economic recovery taking hold.

Table Of Contents

Slovakia Business Forecast Report Q3 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Premier's Defeat Signals Rejection Of One-Party Rule 8
Slova kian Prime Minister Robert Fico's resounding defeat in presidential elections on March 29 has limited medium-term implications
for the economy, and we expect a high degree of policy continuity in the run-up to general elections in 2016. However, with voters
signalling a clear weariness of single-party rule, a transition towards consensus-building coalition politics will mitigate risks to the rule of
law in the country, supporting the long-term political backdrop for foreign investors.
Table: PolitiCAL Overview 8
Long-Term Political Outlook 10
Convergence With West Remains Core View 10
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 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
Domestic Demand Gaining Traction 14
Previously driven by net exports, real GDP growth in Slovakia will become increasingly weighted towards domestic demand in 2014 and
beyond. We forecast real GDP growth of 2.4% and 3.0% in 2014 and 2015 respectively.
Table: GDP BY EXPENDITURE 14
Balance Of Payments 16
Regional Recovery To Drive External Surplus Wider 16
External rebalancing in Slovakia has further to run, even as domestic demand becomes an increasingly important driver of growth in
2014 and 2015. We forecast current account surpluses of 1.8% and 2.2#% of GDP in 2014 and 2015 respectively, before narrowing
gradually in the long term as the economy transitions away from export-led growth.
Table: BALANCE OF PAYMENTS (Euro) 16
Fiscal Policy 18
Fiscal Consolidation Efforts Not So Impressive 18
Slovakia's fiscal consolidation is less impressive than headline figures suggest given its reliance on one-off measures. With public debt
rapidly approaching its constitutional debt limit, permanent budgetary measures will have to be adopted beyond 2014 to prevent a
significant deterioration of Slovakia's public finances and credit profile.
Table: FISCAL POLICY 18
Regional Exchange Rate Policy 20
EUR: Monetary Policy Decoupling Will Weaken The Euro 20
We expect euro strength against the dollar and on a trade-weighted basis to persist in H114. However, we continue to argue that the
economic and monetary policy cycles in the eurozone are lagging further behind peers in the US and UK, which will trigger a re-pricing
of the euro towards the end of 2014. Indeed, we believe that weak eurozone economic growth and lingering deflationary risks will spur
the European Central Bank into loosen monetary policy further.
Table: BMI Eurozone Currency Forecast 20
Regional Monetary Policy 22
ECB Holds Fire For Now, But QE May Be On The Way 22
The European Central Bank (ECB) continues to toe a cautious line and left its policy instruments unchanged at the April 3 monetary
policy meeting. However, a noticeably more dovish tone from ECB President Mario Draghi and indications that some form of quantitative
easing is a possibility, suggest that the central bank is paving the way for fresh monetary stimulus.
Table: Eurozone Monetary Policy 22
Regional Outlook 24
Macro Implications Of Ukraine Crisis 24
Even without an escalation of tensions, the Ukraine crisis will have significant macro and investment implications for Emerging Europe.
Russia's investment profile and growth potential will be the hardest hit, followed by the Baltic economies which rely heavily on Russian
import demand. From a sector perspective, the crisis will speed up the search for alternative sources of energy among Russia's western
neighbours, although some Russian exporters may benefit.
Chapter 3: 10-Year Forecast 27
The Slovak Economy To 2023 27
Lower Trend Growth Ahead 27
Macroeconomic stability and institutional convergence with Western norms will be bolstered in the long term by Slovakia's eurozone
membership. However, we believe the drawbacks of having the euro will outweigh the benefits, limiting potential growth in the next
decade. Nevertheless, we expect real GDP to average 2.7% over our 10-year forecast period, well above eurozone averages. 27
Table: Long-Term Macroeconomic Forecasts 27
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 30
TABLE: BMI LEGAL FRAMEWORK RATING 31
TABLE: LABOUR FORCE QUALITY 32
TABLE: EMERGING EUROPE - ANUAL FDI INFLOWS 33
TABLE: TRADE AND INVESTMENT RATINGS 34
Market Orientation 35
Table: Top Five Export Destinations (US$mn) 35
Operational Risk 36
Chapter 5: Key Sectors 37
Defence 37
Table: Defence Expenditure Data And Forecasts 37
Oil and Gas 42
Table: Proven Oil and Gas Reserves And Total Petroleum Data, 2018-2023 42
Table: Oil Production And Net Exports, 2012-2017 43
Table: Oil Production, Consumption And Net Exports, 2018-2023 44
Table: Gas Production, Consumption And Net Exports, 2012-2017 45
Other Key Sectors 47
Table : Pharma Sector Key Indicators 47
Table : Telecoms Sector Key Indicators 47
Table : Infrastructure Sector Key Indicators 47
Table : Food and Drink Sector Key Indicators 48
Table : Autos Sector Key Indicators 48
Table : Freight Key Indicators 48
Chapter 6: BMI Global Assumptions 49
Global Outlook 49
Chinese Economy Under Pressure 49
Table: Global Assumptions 49
Table : Developed States , Real GDP Growt H, % 50
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 50
Table : Emerging Markets , Real GDP Growth , % 51

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