For the first time in many years, Slovakia was the focus of world attention in 2011. In October, as a result of internal political wrangling, it became the last country in the eurozone to vote on changes to the European Financial Stability Facility (EFSF) scheme which European leaders had agreed in July in an effort to calm increasingly jittery global markets. Slovakia failed in its initial attempt, on October 11, to approve the changes, making it the only eurozone country to reject them, and threatening to stymie the whole scheme. As it happened, a second vote two days later passed easily, but by then the Slovak government had paid the ultimate price: the centre-right administration led by Iveta Radičová was out and early elections had been scheduled for March 10, 2012.

After failing to reach a deal with one of the ruling coalition parties, Freedom and Solidarity (SaS), which strongly opposed Slovakia’s ratification of the bailout changes, Radičová turned the vote on the EFSF into a vote of confidence in her own government, arguing that prompt action and responsibility towards Slovakia's European partners was needed. However, SaS still refused to vote in favour, as did the main opposition party, Smer, and the motion failed, bringing down the government in the process.

Only two days later, parliament ratified the changes to the bailout, this time with the help of Smer, who agreed to support it in return for early elections.

Though the centre-right government will remain in power until the March elections, its authorities have been significantly curbed: Smer leader Robert Fico described its responsibilities as being limited to “heating and lighting”. As a result, the Radičová government has had to shelve many of its plans, including reform of the payroll tax system, changes to the financing of local government and, as seems likely, the transformation of state-run hospitals to joint-stock companies – with no guarantee that any future government will resurrect them.

Nevertheless, during its 16 months in power, the Radičová government did manage to push through changes to bring more transparency to public procurement, allow more public oversight of the judiciary and introduce more flexibility in the labour market.

Irrespective of the next government's complexion, Slovakia will have to defend the credibility of
its deficit-reduction plan and continue with at least some measures to tighten public expenditure.

No compromise

In the debate leading up to the bailout vote, Finance Minister Ivan Mikloš argued that rejecting the EFSF changes would have immense consequences, great economic and social costs, and could pose a threat to the European single currency, which Slovakia joined in 2009. On several occasions he said that opposition to the EFSF was being used as a “tool of populist politics, which harm not only Slovakia but cause problems all around the world”.

Earlier in 2011, SaS had released a 16-page pamphlet entitled “The Bailout Mechanism: A Road to Socialism” in which SaS boss Richard Sulík wrote that European politicians were using what he called senseless arguments such as “this is no longer about Greece, this is about the euro” to justify what he called continuation of “a moral hazard” and offered the analogy that “just as it is impossible to put out a fire with a fan, it is not possible to solve the crisis with new debts”.

After the failed EFSF vote, Radičová, albeit with a limited mandate, represented Slovakia at a key eurozone summit in late October and managed to negotiate what she described as a compromise: though Greece will receive €21 billion more in its second bailout on top of the €109 billion agreed by European leaders in July, Slovakia will not contribute to the difference.

“Overall, we will not save; only the structure in terms of the programme for Greece and other countries will differ,” Mikloš stated on October 27, adding that he is pleased that the summit reached agreements “which I believe could really be the unavoidable moves that will protect and save the euro”.

The slowing economy

Apart from the stormy political discourse, the government also faced the challenge of adjusting the state’s budget plan in the face of a fall in Slovakia’s predicted economic growth. The economy has been affected by a slowdown in Germany, one of its largest trading partners.

In early November, the Slovak Finance Ministry revised its forecast for GDP growth in 2012 from 3.4 percent to 1.5 percent. The change in the Finance Ministry forecast assumes a further gap of €450 million in the public finances.

Earlier in 2011 the ministry said it could find €95 million in reserves it had planned to create; about €40 million more will come from a disputed banking tax; another €40 million from a one-time payment connected with the switch from analogue to digital broadcasting; and about €30 million will come from the so-far undivided profits of the Nuclear and Decommissioning Company, JAVYS. About €29 million more will be raised by a higher tax on tobacco which will be introduced one year earlier than originally planned, in March 2012.

In October the central bank's regular poll of banks in Slovakia suggested that they were expecting GDP growth in 2012 at only 1.9 percent in annual terms, down from the 2.7 percent expected in September and 4.3 percent forecast as recently as July.

Also in October the European Bank for Reconstruction and Development (EBRD), in a cut to its growth forecast for central Europe, made a particularly drastic reassessment of Slovakia's prospects. In July it was predicting that the Slovak economy would grow by 4.1 percent in 2012, but by October that forecast had been reduced to just 1.0 percent. According to the same prognosis, Slovakia’s economy will grow by 3.1 percent in 2011, SITA reported.

The challenging budget and shelved plans

For the rest of 2011, the passage of a realistic 2012 state budget – without which the state would be forced to operate using a provisional budget – was set to remain a significant challenge.
Although opposition leader Robert Fico said that having an agreed budget would be better than going into next year with just a provisional budget, he also said his party would oppose the interim government's proposed budget, details of which had not been approved by the time this edition of the Investment and Advisory Guide went to print.

Fico added that even if the Slovak Democratic and Christian Union (SDKÚ), Christian Democratic Movement (KDH) and Most-Híd parties were to pass a budget with the help of SaS deputies, priorities would change if Smer returned to power in the March elections.

Several laws required to meet next year's budget targets, as originally planned by Mikloš and his ministry, have encountered a rather rocky path. Parliament’s attempt to override a presidential veto on a revision to the law on construction savings accounts was blocked by five MPs from SaS. The legislation would have brought additional annual revenue of €33 million to the state from 2013 by reducing the bonus that the state pays to those saving for a home from €66 a year to €15 a year, tied to a reduction in banking fees associated with the savings programme.

The interim government has also abandoned changes to the way Slovakia calculates mandatory payroll levies. The government had pitched its proposals as a reform that would develop a unified system for collection of income taxes, customs duties and mandatory payroll levies and said that it would ease the administrative burden on employers as well as employees. This aspect of the proposal won widespread support, but self-employed people had protested that the changes as originally laid out would result in them having to shoulder a much heavier burden through higher income tax and levies.

The tax-mix and the bank tax


The Finance Ministry had also proposed a change in how Slovakia’s local and regional governments would be financed in the future, arguing that in challenging economic times all recipients of public finances, including municipalities, needed to tighten their belts. Smer rejected the ministry’s plan, which also encountered considerable opposition from local governments. As of late October, however, it seemed that the plan would have to undergo significant changes in order to get through parliament.

The ministry originally proposed that municipal governments would no longer be funded solely by revenues from personal income tax. Instead, beginning in 2012, their funding would come from a mix of taxes comprising personal income tax, corporate income tax, value added tax and excise taxes. The Association of Towns and Villages of Slovakia (ZMOS), which represents 96 percent of the country’s municipalities, called for preservation of the current financing system based solely on personal income tax.

While the government has not managed to change the funding of municipalities, it did manage to impose an additional tax on the banking sector.

Smer had proposed a special tax on banks operating in Slovakia, to be levied at a rate of 0.7 percent of their liabilities, and went as far as to make this one of the party’s flagship policies. However, on October 20 parliament passed an initiative proposed by the outgoing centre-right government for a special levy on banks at 0.4 percent of liabilities, after equity capital and deposits covered under Slovakia’s deposit protection system are deducted.

The Slovak Banking Association (SBA) opposed the measure, saying that it represented a potential threat to the stability of the country’s banking sector. The ministry expects the levy to generate €80 million in revenue. If the state had gone for the Smer version of the tax then total revenues, at least according to Smer, would have been €189 million, the SITA newswire reported.

Pain in the health sector

Meanwhile, the Radičová government also looked set to abandon another major change, which it said was designed to improve the financial condition of the health-care sector: the transformation of state hospitals into joint-stock companies. Mikloš argued that such a transformation was an effective way to cut costs and eliminate waste.

Nevertheless, 2,411 physicians in 34 hospitals out of a total of 6,500 doctors employed in state-run hospitals across Slovakia did not share his opinion, as they demonstrated in late September. Listing a halt to the transformation process as one of their demands, they submitted notices of resignation en masse as part of a nationwide protest action. If they stick to their promise, the doctors' contracts will end as of December 1.

According to media reports in early November, the action means some hospitals could be forced to postpone surgical operations, merge wards and even layoff nurses if the doctors do not withdraw their resignations. But at the same time Health Minister Ivan Uhliarik, who was leading the process and had earlier in the year secured the backing of parliament, handed the decision on whether to push ahead with the transformation of hospitals back to his colleagues in the cabinet.

The revised Labour Code brings more flexibility


One measure that was approved well before the fall of the government in Slovakia was the modified Labour Code, which became effective on September 1, erasing some of the amendments of the previous government of Robert Fico.

“The legislation is more accommodating towards employees and their families, and it protects those who need it,” Radičová said as she introduced the changes. They immediately attracted the criticism of Fico, who argued that they weakened the legal protection of working people.

Businesses have generally welcomed the changes, suggesting that the modified code will help create jobs.

The changes introduced by the amendment to the Labour Code include: cancellation of parallel entitlement to a layoff notice period and severance pay; longer periods for fixed-term employment, which can now be agreed for up to three years, with extensions or renewals allowed three times in a three-year period; a longer layoff notification period for employees with long service in the same job; and greater protection for mothers and pregnant women.

The amendment also restricts the voice of unions who represent small numbers of workers in a single workplace and sets a 3-percent limit on the profit margin for companies selling meal vouchers. In addition, it removes a restriction on longer overtime hours; eases drawing of compensatory leave; sets lower premium payments for overtime work; allows for more night shifts and mandates a longer probationary period for managers, among others.

Unemployment a growing problem

In September 2011, the unemployment rate in Slovakia reached 13.37 percent, according to the Labour, Social Affairs and Family Centre (ÚPSVaR), its highest level in six years. There were more than 390,500 job applicants registered at job centres in September. Though market watchers said the increase could be attributed partly to the large numbers of school leavers joining the ranks of the unemployed in that month, high joblessness remains one of the country's main challenges, with long-term unemployment a particular problem.

Labour Minister Jozef Mihál expressed hope that the revised Labour Code would make a positive contribution to the employment landscape and said it needed time to take effect.

More transparency


The requirement to publish all contracts involving public funds on the internet was a flagship measure secured by the Radičová administration. Praised by observers and transparency watchdogs, it has helped to increase transparency within the public sector and reveal several dubious contracts.
Under the law, all institutions which fall under the Freedom of Information Act – ministries, state offices and their budgetary organisations, public organisations, town councils, village councils and regional governments – must publish their contracts online.

Meanwhile, Justice Minister Lucia Žitňanská initiated changes to bring what she called more light into the judicial system. One of her first changes was to establish a new system for the selection of judges, using commissions composed of representatives of courts, the Justice Ministry and parliament.

No longer topping the charts, but aspiring to be among the best

Slovakia has seen its position decline in various competitiveness rankings over recent years, and 2011 was no exception. According to the 2012 edition of the World Bank overview of 'Doing Business' in 183 states, Slovakia dropped by five places and ended up 48th. But in this chart Slovakia at least remained a leader among its counterparts in the Visegrad Group: Hungary came in 51st, Poland 62nd and the Czech Republic 64th, the only one of the four countries to have improved its position. The Index of Economic Freedom, designed by the Heritage Foundation and the Wall Street Journal, showed Slovakia dropping to 37th position, down from 35th in 2010. In another ranking, the Global Innovation Index by INSEAD, Slovakia retained its 37th position in 2011, but remained behind most of its central-European neighbours.

The latest Global Competitiveness Report by the World Economic Forum ranked Slovakia as the least competitive country in central Europe; it scored even lower than Vietnam or Azerbaijan. Slovakia dropped nine places and ended 69th among the 142 countries evaluated.

The World Economic Forum identified the low enforceability of Slovakia's laws as the country's greatest competitive disadvantage, followed by a high rate of cronyism, the extraordinarily low trust of the public in politicians, and a lack of transparency in public procurement, the executive director of the Business Alliance of Slovakia Robert Kičina told The Slovak Spectator. According to Kičina, Slovakia's air transport infrastructure also significantly lags behind competitors' infrastructure.

“The high public-finance deficit, ineffective agricultural policies and the low quality of the education system, including economic schools, are also competitive disadvantages of the country,” said Kičina. “Among the most significant competitive advantages of Slovakia’s economy are the country’s openness to foreign ownership of companies, low customs barriers, openness to foreign investments bringing new technologies to Slovakia, the low spread of interest rates, the high correlation between the volume of wages and labour productivity, the spread of the internet and the healthy banking sector.”

During 2011, the government unveiled an ambitious plan to improve conditions for doing business which became known as Project Singapore, inspired as it was by the rapid economic development of that Asian city-state. The main goal of the project is to improve the commercial environment in Slovakia through 100 measures which are intended to decrease the administrative burden on businesses. Thanks to these measures, Slovakia aims not just to improve its position among the neighbouring countries of central and eastern Europe, but to advance onto the list of the 15 best economies in the world. Despite its shortcomings, investors agree that Slovakia remains an attractive destination for investments thanks to its location and its adoption of the euro.

Highways


After years of politically-charged debate over highway construction, a new 46-kilometre dual carriageway dubbed Pribina after a historical Slav, has been added on October 28 to Slovakia’s highway network. The stretch of the R1 highway connecting Nitra with Tekovské Nemce is the first tangible product of a public-private partnership (PPP), constructed over a period of 26 months with a price tag of €800 million. The Pribina section is the longest and fastest-built highway stretch constructed at one time in Slovakia, and with the heaviest price tag, said Transport Minister Ján Figeľ.

The Granvia construction company claimed that the new highway will shorten the drive between Nitra with Tekovské Nemce by 26 minutes. The road is also expected to contribute to road safety since the previous undivided road was nicknamed the “death route” because of its high number of fatal accidents.

A contract signed on November 2 between the National Highway Company (NDS) and the Doprastav-Strabag consortium covers the construction of a 11.2-kilometre stretch of the D1 highway between Fričovce and Svinia in Prešov Region. Doprastav-Strabag won the public tender with its €114.6 million bid after another bidder, Hant, was excluded from the tender. The construction, which the ministry said will cost about €153 million less than if it had been carried out via a PPP is expected to be finished in November 2014, TASR newswire reported.

Earlier this year, the National Highway Company signed a contract with the Žilina-based Váhostav-SK construction company to build an almost 16.5-kilometre-long section of the D1 highway from Dubná Skala to Turany near the city of Martin in northern Slovakia.

More information about Slovak business environment you can find in our Investment Advisory Guide.