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Slovakia Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Export-led growth of the previous years has translated to a visiblepick-up in domestic demand. We expect domestic demand growthto remain robust, driving growth in the coming years.The current account will return to deficit, but eurozone membershipand a stable, long-term external funding structure minimise associatedrisks and ensure a stable balance of payments position.We believe Slovakia is on a sustainable fiscal trajectory with fewimmediate risks to its solid sovereign credit profile. Long-term demographicchallenges are prominent however, posing long-term risks.While the ruling Smer-SD party lost its sole parliamentary majorityafter the March 2016 general election, we continue to expect broadpolicy continuity in terms of its conservative fiscal policy stance. Thesuccess of far right parties is a medium-term risk, especially if thegrowing backlash against the EU project continues.Major Forecast ChangesWe have revised down our real GDP growth forecast for 2017 from3.3% to 3.0% on account a weaker external outlook following theUK's Brexit referendum result.

Table Of Contents

Slovakia Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Headwinds Rising On Weaker External Outlook..8
We have revised down moderately our 2017 growth forecast for Slovakia on the expectation of higher uncertainty and weaker external
demand following the UK referendum on EU membership.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS..10
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: PUBLIC CONSUMPTION FORECASTS.10
TABLE: FIXED INVESTMENT FORECAST.10
TABLE: NET EXPORT FORECASTS.10
Outlook On External Position. 11
External Position Not A Major Source Of Risk11
Slovakia's current account deficit will remain at small, manageable levels in the coming years. The automotive sector will be a major
source of export growth and deficit financing, via foreign direct investment inflows.
TABLE: CURRENT ACCOUNT BALANCE FORECASTS11
TABLE: TOP 5 GOODS IMPORTS..12
TABLE: TOP 5 GOODS EXPORTS.12
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..12
Fiscal Policy And Public Debt Outlook 14
Public Finances On Strong Footing, Despite Long-Term Challenges.14
With public debt and deficit ratios comparing favourably to peers, strong growth and low borrowing costs will facilitate fiscal
consolidation in the coming years.
Structural Fiscal Position. 14
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES..14
Regional Monetary Policy. 15
Negative Rates: More Harm Than Good .15
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..15
TABLE: NEGATIVE INTEREST RATES - SUMMARY..18
Regional Economic Outlook 20
Brexit Contagion Could Reignite Eurozone Crisis20
The UK vote to leave the EU on June 23 will act as a significant drag on domestic and regional growth in the coming year. However, in
terms of systemic risks to the global economy, a deeper crisis would be much more likely to emerge from the eurozone as opposed to
the UK, via political contagion or banking sector instability. We highlight Italy as a potential next epicentre of instability.
Chapter 2: 10-Year Forecast. 23
The Slovak Economy To 2025 23
Growth Outpacing Eurozone Averages23
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 growth to average 2.6% over our 10-year forecast period, well above eurozone averages.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.23
Chapter 3: Political Outlook. 25
SWOT Analysis 25
BMI Political Risk Index. 25
Domestic Politics.. 26
EU Presidency To Resist Franco-German Centralisation26
Slovakia's ruling coalition will remain inherently unstable, a reflection of an increasingly fragmented political landscape. However, a
change of government is unlikely before 2017, during which time Slovakia will hold the rotating EU Council Presidency. The presidency
will provide an opportunity for Slovakia to push back against any Franco-German drive for closer EU integration post-Brexit.
TABLE: POLITICS TABLE 26
Long-Term Political Outlook.. 27
Slow Convergence With West Remains Core View.27
We expect Slovakia to continue to converge with Western European policies and standards of living over the next 10 years as the
small economy has benefited 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 4: Operational Risk. 29
SWOT Analysis 29
Operational Risk Index.. 29
Operational Risk. 30
TABLE: OPERATIONAL RISK30
Market Size And Utilities .. 31
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK.32
Labour Costs 35
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 36
Chapter 5:BMI Global Macro Outlook. 39
Global Macro Outlook. 39
Brexit Risk Casts A Long Shadow..39
TABLE: GLOBAL ASSUMPTIONS..39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..41
MACROECONOMIC FORECAST.43
TABLE: SLOVAKIA - MACROECONOMIC DATA and FORECASTS43

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