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Slovakia’s economic performance continues to be favorable, with real per capita GDP growing at the average annual rate of 3 percent over the past five years. Growth has been supported by predominantly domestic demand. Private consumption continued to benefit from strong credit growth, robust job creation, and rising wages, while investment reversed its temporary decline from 2016 that was due to a slow start in the implementation of new EU funds programming period. Unemployment reached a record low of 7.7 percent at end-2017. The output gap is slightly positive with inflation picking up recently, likely reflecting both strong domestic demand and a tight labor market. On the back of strong economic growth, fiscal consolidation has continued putting public debt on a firmly downward trajectory. The banking sector is well-capitalized and profitable. Despite a declining interest margin, banks have maintained their profitability by increasing lending volumes.

Real GDP growth is projected to accelerate to 4 percent this year and 4.2 percent in 2019, reflecting additional investment in the automotive industry and expanded export capacity, before converging towards its potential of 3½ percent in the medium term. The current account balance is expected to continue improving along with the trade balance. On the external front, rising trade protectionism constitutes the main downside risk for Slovakia’s export-dependent economy as well as possible financial turmoil in the euro area. On the domestic front, downside risks arise from labor shortages, particularly for skilled workers, and vulnerabilities related to the fast credit growth. On the upside, growth can become stronger if there is a pick-up in investment, including from higher absorption of the EU funds.

Notwithstanding the favorable outlook, Slovakia faces some important structural challenges. As in other countries, post-crisis productivity growth has slowed significantly. Some initial progress has been made on structural reforms, including plans to expand the provision of formal childcare and pre-primary education, and efforts to enhance public administration transparency. However, challenges remain, including acute labor shortages, significant gaps in quality of education and institutions relative to EU peers, and an ageing workforce.

Executive Board Assessment

Executive Directors welcomed the Slovak economy’s favorable performance, with robust real per capita GDP growth, record‑low unemployment, and sustained improvement in fiscal balances. Strong real convergence has been facilitated by increasing and successful integration into the European Union and the euro area. Growth is expected to accelerate in 2018 and converge to its potential over the medium term. However, Directors noted risks from rising international trade tensions, persistent labor shortages, and a potential sudden downturn in the property market. Directors urged the authorities to decisively address these challenges.

Directors noted that labor shortages and low labor force participation of women and disadvantaged groups pose constraints to potential growth. They highlighted the need to focus structural policies on increasing labor supply and improving education and institutional quality to strengthen productivity and potential growth.

To address rising labor shortages and skills mismatches, Directors supported recent measures to streamline the issuance of work permits for foreign workers, and recommended further simplification of administrative procedures. Focusing active labor market policies on training, job counseling, and enhancing labor mobility will be important. Directors also welcomed the planned expansion of formal childcare services and broadly encouraged greater gender flexibility in the use of childcare‑related leave.

To close the education gap, Directors encouraged further measures to enhance the attractiveness of the teaching profession and strengthen collaboration between vocational schools and employers. Investment in R&D will also be important to foster innovation and move up the export value chain. On governance, Directors underscored the importance of the effective implementation of the recently approved Civil Service Act and Anti‑Offshore Law, as well as a more competitive public procurement system.

Directors supported the authorities’ fiscal policy efforts which, together with robust growth, are helping to improve fiscal balances and create policy space. The planned fiscal path to achieve a balanced position in the medium term would create sufficient buffers to weather macroeconomic shocks within the framework of the Fiscal Responsibility Law. Continued efforts to improve public sector efficiency would unlock resources to finance policy priorities, such as measures to increase domestic labor supply and address gaps in infrastructure and education quality. Against this backdrop, Directors welcomed planned measures to combat tax evasion and further improve tax administration, and urged the authorities to fully capture the savings identified in the ongoing public expenditure reviews.

Directors concurred that the banking system is well capitalized, liquid, and profitable. However, they cautioned that increased household indebtedness renders households and the banking sector vulnerable to adverse macroeconomic shocks and a property market downturn. In this respect, Directors commended the authorities for proactively using macroprudential policies over the past four years to curb lending to risky and highly‑indebted borrowers. They viewed these measures as striking an appropriate balance between financial deepening and safeguarding financial stability, and welcomed the authorities’ readiness to further tighten macroprudential measures if needed. Many Directors also saw scope to raise property taxes or reduce tax subsidy to help manage housing demand.

It is expected that the next Article IV consultation with the Slovak Republic will be held on the standard 12‑month cycle.

   

Slovak Republic: Selected Economic Indicators, 2015–2020
  2015 2016 2017 2018 2019 2020
      Est. Projections
National income, prices and wages (Annual percentage change)
Real GDP 3.9 3.3 3.4 4.0 4.2 3.8
Inflation (HICP) -0.3 -0.5 1.3 2.4 2.1 2.0
Inflation (HICP, end of period) -0.5 0.2 2.0 2.5 2.0 2.0
Employment 2.0 2.4 2.2 1.6 1.1 1.0
Unemployment rate (Percent) 11.5 9.7 8.1 7.4 6.8 6.4
Public finance, general government (Percent of GDP)
Revenue 42.5 39.3 39.4 38.4 38.1 38.6
Expenditure 45.2 41.5 40.4 39.1 38.6 38.6
Overall balance -2.7 -2.2 -1.0 -0.8 -0.5 0.0
General government debt 52.3 51.8 50.9 49.3 46.7 44.9
Monetary and financial indicators (Percent)
Credit to private sector (Growth rate) 9.6 9.7 11.0 10.3 9.7 9.0
Lending rates1 2.7 2.0
Deposit rates2 1.0 0.9
Government 10-year bond yield 0.9 0.5
Balance of payments (Percent of GDP)
Trade balance (goods) 1.3 2.0 0.8 0.3 0.9 1.5
Current account balance -1.7 -1.5 -2.1 -1.8 -0.9 -0.3
Gross external debt 85.2 90.9 110.8 110.0 108.9 108.0
             
Sources: National Authorities; and IMF staff projections.
1Average of interest rates on new housing loans to households and loans of less than €1 million to nonfinancial corporations (all maturities).
2Average of interest rates on new deposits with agreed maturity (up to 1 year) from households and nonfinancial corporations.

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