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Slovakia Business Forecast Report Q2 2014

  • January 2014
  • -
  • Business Monitor International
  • -
  • 45 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
The short-term economic picture has brightened as export growth
remained solid amid a slowdown in regional growth, and household
spending showed the first signs of a recovery.
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.

Major Forecast Changes

We have revised up our real GDP growth forecast for 2014 and 2015
to 2.2% and 2.8% respectively, from 2.0% and 2.6% previously. This
is based on strong industrial production and retails sales readings
in H213 that point to a more broad based economic recovery taking
Our forecast for Slovakia’s fiscal trajectory has been revised to reflect
the governments updated medium-term budget objectives, which
include a slower pace of deficit consolidation. While we previously
saw the budget deficit falling to 2.1% of GDP by 2015, our forecast
currently stands at 2.6%.

Key Risks To Outlook

The risks to our short-term growth forecast are well balanced, and
largely based on ongoing uncertainty over the regional economy.
With exports in 2013 representing approximately 100.1% of GDP,
Slovakia’s economy is vulnerable to any shifts in external demand.
The emphasis on revenue-boosting measures to achieve significant
fiscal consolidation leaves the deficit reduction programme vulnerable
to weaker-than-expected growth while also threatening investment

Table Of Contents

Slovakia Business Forecast Report Q2 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
Fico Presidency Puts Majority At Risk 8
Slovakian Prime Minister Robert Fico's decision to run for president in 2014 could have negative long-run implications for the Direction-
Social Democracy party's dominant political position, as Fico's popularity has largely driven its strong electoral showings in recent years
However, we expect a high degree of policy continuity until general elections in 2016, with fiscal consolidation remaining a top priority
Table: Political Table 8
Long-Term Political Outlook 9
Convergence With West Remains Core View 9
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 11
SWOT Analysis 11
BMI Economic Risk Ratings 11
Economic Activity 12
Rising Exports To Spur Domestic Demand Recovery 12
We forecast real GDP growth in Slovakia to reach 2 2% and 2 8% in 2014 and 2015, respectively, on the back of improving external
demand and a recovery in industrial production and exports However, in contrast to previous years, the shape of growth will be come
more weighted towards domestic demand, implying a diminishing contribution of net exports as imports rise
Balance Of Payments 14
Rebalancing Has Further To Run 14
Slovakia's current account surplus will peak at 3 2 % of GDP in 2015 before narrowing gradually over the long term, as domestic
demand growth drives a narrowing of the trade surplus Although the external account surplus precludes a reliance on foreign capital,
foreign direct investment will remain key to future export growth
Fiscal Policy 16
Falling Deficit Masks Fiscal Risks 16
Although we forecast Slovakia's fiscal deficit to fall to 2 8% of GDP in 2014 and 2 6% of GDP in 2015, we see important risks to the
country's medium-to long-term consolidation path stemming from an overreliance on temporary and one-off revenue raising measures
Regional Exchange Rate Policy 18
Euro Strength Unsettling The ECB 18
Passive monetary tightening and improved investor sentiment will compound policy inertia from the ECB has keep the euro strong
heading into 2014 However, weak economic growth, high unemployment, euro strength, deflation risks, a potential LTRO-cliff
and anaemic structural reform are becoming increasingly unpalatable for policymakers As such, we expect substantial monetary
intervention in 2014 If this comes in the form of an LTRO top-up, then the euro will initially hold firm before sliding by end-year as
growth will remain weak If, however, the ECB opts for negative deposit rates (a far more extreme option), expect a sharp and disorderly
euro correction
Table: Eurozone Currency Forecast 18
Business Monitor International Ltd www businessmonitor com 3
Regional Monetary Policy 20
ECB Cut: Pushing On A String 20
A cut in the ECB's refinancing rate will do little to ease monetary policy in the eurozone, given the fractured credit transmission channel
and passive tightening resulting from banks repaying LTRO funds While there are few easy options to ease policy in the near term, we
warn that if the long running disinflationary trend evolves into full blown deflation, the ECB may have to look at more aggressive forms of
policy stimulus
Operational Risk 31
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 6% over our 10-year forecast period to 2023, 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 26
Introduction 26
Institutions 26
Market Outlook 31
Table: Top Five Export Destinations (US$mn) 31
Chapter 5: Key Sectors 33
Autos 33
Table: Auto Sales, 2010-2017 33
Table: Auto Trade, 2010-2017 34
Table: Auto Production, 2010-2017 34
Food and Drink 35
Table: Food Consumption Indicators - Historical Data and Forecasts, 2010-2017 35
Table: Alcoholic Drinks Value/Volume Sales - Historical Data and Forecasts, 2010-2017 38
Table: Mass Grocery Retail Sales By Format - Historical Data and Forecasts, 2010-2017 40
Other Key Sectors 41
Table: Oil and Gas Sector Key Indicators 41
Table: Pharma Sector Key Indicators 41
Table: Freight Key Indicators 41
Table: Telecoms Sector Key Indicators 42
Table: Defence and Security Sector Key Indicators 42
Table: Infrastructure Sector Key Indicators 42
Chapter 6: BMI Global Assumptions 43
Global Outlook 43
Momentum To Continue In H114 43
Table: Global Assumptions 43
Table: Developed States, Real GDP GrowtH, % 44
Table: Emerging Markets, Real GDP Growth, % 45

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