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Slovakia Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

A fragmented opposition, strong economy, increased social spendingand perceived security threats stemming from the EU migrant crisishave all boosted the electoral chances of the governing Smer-SDparty, which stands a good chance of retaining its absolute parliamentarymajority following the March 2016 general election.Although the government will have to maintain a relatively tight fiscalstance in light of looming constitutional debt brakes, we believeSlovakia is on a sustainable fiscal trajectory with few risks to its solidsovereign credit profile.The short-term economic outlook has brightened as the exportledgrowth of previous years has translated to a visible pick-up indomestic demand. We expect domestic demand growth to remainrobust, 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.Major Forecast ChangesNo major forecast changes

Table Of Contents

Slovakia Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Bullish Autos Outlook Underpins Solid Growth Trajectory8
Stronger EU car sales, as well as planned investments and capacity expansions within Slovakia's autos industry, underpin a healthy
outlook for Slovakian exports and fixed investment Private consumption will be the largest contributor to headline GDP growth,
however, with a strong labour market and rising disposable incomes supporting household spending We forecast real GDP growth of
33% in both 2016 and 2017
GDP By Expenditure Outlook 9
TABLE: PRIVATE CONSUMPTION FORECASTS 10
TABLE: PUBLIC CONSUMPTION FORECASTS 10
TABLE: FIXED INVESTMENT FORECAST 10
TABLE: NET EXPORT FORECASTS 10
Fiscal Policy And Public Debt Outlook 10
Spending Pledges Won't Derail Public Finances10
Strong growth and record low borrowing costs will enable modest deficit and debt consolidation in the coming years even as the
government meets various social spending pledges made ahead of the March 2016 general election
Structural Fiscal Position 11
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES 12
External Trade and Investment Outlook 13
Auto Investments Boosting Export Outlook13
Slovakia's current account will remain in deficit in the coming years on the back of strong domestic demand growth, but a bullish outlook
for automotives production and exports will keep the deficit at small, manageable levels Eurozone membership and foreign direct
investment into the auto sector will ensure a stable funding structure and overall balance of payments position
Outlook on External Position 14
TABLE: TOP 5 GOODS IMPORTS IN 2014 15
TABLE: TOP 5 GOODS EXPORTS IN 2014 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 16
Regional Monetary Policy 16
ECB: Underwhelming But Still Substantial Easing16
The European Central Bank's monetary policy easing on December 3 2015 disappointed markets in terms of its depth and breadth
However, strengthening economic and inflation conditions in the eurozone suggest that the ECB may be better off holding fire, and in
our view, the easing is still fairly significant despite disappointment on the headline figures We continue to forecast a weaker euro in
Chapter 2: 10-Year Forecast 21
The Slovak Economy To 2025 21
Growth Outpacing Eurozone Averages21
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 27% over our 10-year forecast period, well above eurozone averages
TABLE: LONG-TERM MACROECONOMIC FORECASTS 21
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index 23
Domestic Politics 24
Majority In Reach For Smer-SD After March Elections24
Slovakia's fragmented opposition, strong economy, increased social spending and perceived security threats stemming from the EU
migrant crisis have all boosted the electoral chances of the governing Smer-SD party, which stands a good chance of retaining its
absolute parliamentary majority following the March 2016 general election
TABLE: POLITICAL OVERVIEW 24
Regional Political Outlook 25
What Would The End Of Schengen Mean?25
While the collapse of the passport-less Schengen zone would mark a major step backwards for EU integration, it would not necessarily
portend the end of the EU, and could in fact alleviate growing public concerns surrounding security and the impact of mass immigration
While cross-border trade, tourism and the establishment of 'eurodistricts' would be impeded in the short term, the continent's security
outlook would improve markedly at a period of heightened risk
Long-Term Political Outlook 28
Slow Convergence With West Remains Core View28
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 4: Operational Risk 31
SWOT Analysis 31
Operational Risk Index 31
Operational Risk 32
TABLE: OPERATIONAL RISK 32
Trade Procedures And Governance 33
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISKS 33
TABLE: HIGH LEVELS OF BUREAUCRACY DELAY TRADE 34
TABLE: TRADE PROCEDURES BREAKDOWN 34
Vulnerability To Crime 35
Chapter 5: BMI Global Macro Outlook 37
Global Macro Outlook 37
Unfinished Business In 201637
TABLE: GLOBAL ASSUMPTIONS 37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %38
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %39
TABLE: SLOVAKIA - MACROECONOMIC DATA and FORECASTS 41

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