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. Although Slovakia has been released from the European Commission's Excessive Deficit Procedure, the government will have to maintain a relatively tight fiscal stance in light of rising public debt loads and looming constitutional debt brakes.
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 now believe that Slovakia's current account surplus peaked at 2.1% of GDP in 2013, and will narrow gradually in the coming years as stronger domestic demand boosts import growth. We forecast a current account surplus of 1.7% and 1.5% in 2014 and 2015 respectively, from 1.8% and 2.2% previously.
Table Of Contents
Slovakia Business Forecast Report Q4 2014 Executive Summary.... 5 Core Views..5 Major Forecast Changes5 Key Risks To Outlook....5 Chapter 1: Political Outlook.. 7 SWOT Analysis.... 7 BMI Political Risk Ratings. 7 Domestic Politics .... 8 Ruling Party Popularity Well Past Its Peak8 The ruling Smer-SD party's efforts to boost its waning popular support through government spending are unlikely to restore its once dominant political position. Although Smer-SD will remain the most popular political party, widespread mistrust of the political class implies that a non-mainstream party could quickly rise to prominence. TABLE: Political Overview....8 TABLE: Corruption Perceptions InDex9 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 Growth More Balanced As Domestic Demand Rises...14 Real GDP in Slovakia will accelerate to 2.4% and 3.0% in 2014 and 2015, driven primarily by a recovery in domestic demand. Export growth will remain robust on the back of a eurozone recovery, but rising import volumes will mitigate its impact on headline GDP. TABLE: GDP By Expenditure.14 Balance Of Payments.. 16 Current Account Surplus Has Peaked16 We forecast Slovakia's current account surplus to be 1.7% and 1.5% of GDP in 2014 and 2015 respectively, and to remain positive over the next five years even as the shape of growth shifts towards domestic demand. The trade surplus will narrow as import growth outpaces that of exports, but will remain above 5.0% of GDP through 2017. TABLE: Balance Of Payments..16 Fiscal Policy.. 18 Looming Debt Brake To Keep Pressure On Fiscal Accounts....18 Despite being released from the Excessive Deficit Procedure by the European Commission after bringing its budget deficit below 3.0% of GDP in 2013, Slovakia will have to maintain a relatively tight fiscal stance in light of a rising public debt load and looming constitutional debt brakes. Nevertheless, the government's pro-growth rhetoric implies a slow pace of deficit and debt consolidation ahead and minimal buffers from any shock to the public finances. TABLE: Fiscal Policy....18 Regional Economic Outlook. 20 Assessing The Aftermath Of ECB Policy Action ....20 The European Central Bank (ECB) has delivered on nearly all of the policy options that we were expecting for the June 5 meeting. This is a step in the right direction in terms of warding off the risk of deflation and will be positive for European equities and sovereign bonds. However, we warn - as we have done countless times during previous easing rounds - that the efficacy of ECB policy action will be limited absent structural reforms in the eurozone at the national and federal level. Chapter 3: 10-Year Forecast 23 The Slovak Economy To 2023... 23 Lower Trend Growth Ahead..23 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. TABLE: Long-Term Macroeconomic Forecasts..23 Chapter 4: Business Environment 25 SWOT Analysis.. 25 BMI Business Environment Risk Ratings 25 Business Environment Outlook 26 Institutions ... 26 TABLE: BMI BUSINESS AND OPERATION RISK RATINGS...26 TABLE: BMI LEGAL FRAMEWORK RATING...27 TABLE: LABOUR FORCE QUALITY.28 TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS...29 TABLE: TRADE AND INVESTMENT RATINGS....30 Market Orientation.. 31 TABLE: Top Five Export Destinations, 2004-2011..31 Operational Risk .... 32 Chapter 5: Key Sectors.. 33 Pharmaceuticals and Healthcare.. 33 tABLE: Pharmaceutical Sales , Historical Data And Forecasts 34 tABLE: Healthcare Expenditure Trends , Historical Data And Forecasts .... 35 TABLE: Government Healthcare Expenditure Trends , Historical Data And Forecasts ... 35 TABLE: Pri vate Healthcare Expenditure Trends , Historical Data And Forecasts ... 35 Water... 36 TABLE: Water Extraction, 2011-2018 ....36 TABLE: Water Consumption, 2011-2018.37 Other Key Sectors.. 39 table: Food and Drink Sector Key Indicators...39 table: Infrastructure Sector Key Indicators.39 table: Oil and Gas Sector Key Indicators.39 table: Autos Sector Key Indicators.40 table: Telecoms Sector Key Indicators....40 table: Defence and Security Sector Key Indicators....40 table : Freight Key Indicators ....40 Chapter 6: BMI Global Assumptions. 41 Global Outlook... 41 Global Recovery Still On Track..41 Table: Global Assumptions....41 Table : Developed States , Real GDP Growt H, %.42 Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 42 Table : Emerging Markets , Real GDP Growth , %43