Slovakia expects solid growth, new carmaker boosts prospects

Prime Minister Robert Fico’s government has passed two packages of social measures. Many of the elements, like free rail travel for students and pensioners, have already been implemented. Fico has hinted that the government will come up with one more such package in the upcoming months, although the implementation of those will most probably be planned for after the elections.

The political situation has also been influenced by the major international issues unfolding in Europe including the situation in Ukraine, Slovakia’s immediate neighbour. However, none has loomed larger in the second half of 2015 than the EU’s refugee crisis.

Slovakia is not among the places refugees, coming to Europe by the hundreds of thousands by land and sea, would like to settle en masse. Despite that, public discourse has been affected by the movement of people from Syria and other countries in the Middle East and Africa and Slovakia stands out among the EU member states due to its resistance to the planned redistribution of refugees among the member states and has since set about suing the EU for using qualified majority voting to pass the plan.

Health care scandals

The domestic political scene has been dominated by scandals in health care ahead of the elections. The beginning of 2015 was still marked by the major scandal with the overpriced CT device almost purchased by the Piešťany hospital that had begun the year before. In September 2014, the police charged eight people, including the hospital director Mária Domčeková, with the crime of violating duties when administering public property. The fallout saw Health Minister Zuzana Zvolenská and Parliament Speaker Pavol Paška, and his deputy Renáta Zmajkovičová resign.

Since then, Zvolenská’s successor Viliam Čislák has faced two no-confidence votes initiated by the parliamentary opposition. The most recent, in late October, came on the heels of scandals surrounding the state-run health insurer Všeobecná Zdravotná Poisťovňa (VšZP) and its former head Marcel Forai.

Other changes in the government happened in the Economy Ministry, which has been headed by three people during this election term. The current minister, Vazil Hudák, replaced Pavol Pavlis who served in the post for less than one year and left over allegations of nepotism.

On the European level, Slovakia’s Maroš Šefčovič was assigned to head the energy union portfolio in the European Commission, a key project for the current EC headed by President Jean-Claude Juncker.

Energy challenges

In Slovakia, events in the energy sector were dominated by the attempts of the Italian energy group Enel to sell its majority stake in Slovenské Elektrárne (SE), Slovakia’s largest power producer. In early October, the Slovak-Hungarian consortium of the Slovnaft refinery and the MVM company withdrew from the negotiations, citing significant legal and economic risks in the transaction, especially the delays to completing the third and fourth blocks of the nuclear power station at Mochovce as well as the continual increase in the project’s price. The Czech-based Energetický a Průmyslový Holding (EPH) has thus remained the only official potential buyer, and has reportedly reached a general agreement on acquisition of about 30 percent stake with Enel. Neither EPH nor Enel have confirmed the sale as yet.

In the meantime the Slovak cabinet continues analysing its possibilities for increasing the state’s stake in SE and criticising SE for overly slow construction of the remaining two units of the nuclear power station in Mochovce. In early October, SE launched operations in the main control room in the third block, which is said to be 90 percent complete.

Enel owns a 66 percent share in SE. It also had an agreement to rent the Gabčíkovo hydroelectric power plant. Earlier in 2015, in response to Slovak demands, SE returned Gabčíkovo to the state, a transaction which has resulted in each side demanding hundreds of millions of euros in compensation from the other.

An investigation into the activities of SE, related to Gabčíkovo and launched in 2014, saw five people charged with violating duties when administering other people’s property.

Nord Stream II criticised

Plans to expand the Nord Stream pipeline, which would further enable the transit of Russian gas to bypass Ukraine as well as Slovakia en route to Europe, have prompted criticism in Slovakia, as well as in Ukraine and Poland. Some analysts and media commentators question effectiveness of the new pipeline. Gazprom and western energy companies BASF, E.ON, ENGIE, OMV and Shell signed a September 4 shareholders’ agreement to construct Nord Stream II pipeline with capacity of 55 billion cubic meters by 2019.

The expansion of Nord Stream and bypassing Ukraine and Slovakia may cost Ukraine billions of euros and Slovakia hundreds of millions of euros each year, said PM Fico, who rejected the notion that the deal between Gazprom and the European energy companies is only a matter of business. He claims that these companies operating in other EU countries have betrayed Slovakia as another EU member country.

President Andrej Kiska is also critical of the project. “Nord Stream II is a pipeline that endangers security of Ukraine. If it is built Russia can simply blackmail Ukraine,” he said at a summit held near Hungary’s Lake Balaton earlier in October and attended by presidents of the Czech Republic, Poland, Hungary, Croatia and Slovakia. The presidents shared the opinion that the plan is politically driven.

In the meantime the semi-state operator of the natural gas transit pipeline via Slovakia, Eustream, is looking for alternatives to maintain Slovakia as a key gas transit point. Its Eastring project seeks to make minor additions to existing gas infrastructure and connect Slovakia with the Balkans so as to bring gas from western Europe. Though the European Union has acknowledged it sees the project as a possibility, the competing Tesla project is also being discussed.

Another carmaker

In mid-August carmaker Jaguar Land Rover (JLR), owned by India’s Tata Group, chose Nitra in western Slovakia as its preferred location for a new manufacturing plant. JLR cited its desire to tap the country’s existing know-how and experience with production of luxury cars and network of sub-contractors. A final decision about the €1 billion investment is expected by the end of 2015.

“With its established premium automotive industry, Slovakia is an attractive potential development opportunity for us,” Jaguar Land Rover CEO Ralf Speth said.

The plant in Nitra would be Land Rover’s first on the European continent.

The government has not only offered subsidies to JLR, but it has already changed construction laws to making the arrival of JLR to Slovakia smoother.

Solid growth expected

The government and the central bank expect the JLR plant to help boost growth. The new car plant is expected to have an effect on the economy initially by bringing fresh investments in construction and technology and, at a later stage, in the production and export of vehicles.

In general, economic forecasts look positive too. The National Bank of Slovakia (NBS) and the Finance Ministry estimate that the Slovakia’s economy would grow by 3.2 percent in 2015, although they recently reduced their forecasts for following years.

“The new prognosis responds to the current cooling of the global growth, especially from the side of the developing economies,” NBS Governor Jozef Makúch said on September 29 when introducing the central bank’s latest prognosis for 2015 and next two years.

While the planned JLR investment is not taken into consideration, the NBS forecasts that Slovakia’s economy would grow 3.4 percent in 2016, a decrease by 0.4 percentage compared with its June’s prognosis, and 3.3 percent in 2017, down 0.2 percentage points. The Finance Ministry slashed its forecast for 2016 by 0.6 percent to 3.1 percent and left the forecast at 3.6 percent for 2017. Bank analysts forecast that the economy would grow by 3.3 percent in 2015 and by 3.4 percent in 2016.

The NBS as well as the Finance Ministry see high public investments due to the final year of the current EU funds programming period as one of the reasons behind the economic growth this year, a phenomenon that will not repeat during the next two years.

Labour markets are also looking up, according to the NBS, accelerating to 2 percent growth in employment 2015. The central bank left its forecast for 2016 and 2017 at 1.2 percent and 0.8 percent, respectively. This should reflect in reduction of unemployment from more than 13 percent in 2014 to a pre-crisis level of 9.6 percent by 2017.

Given the current structure of the economy’s growth, new workplaces should be created in all sectors, but the most in services, according to Makúch. Inflation is forecast at -0.3 percent as a consequence of a further fall in energy and food prices. Real wages are expected to grow faster than originally expected, by 3 percent in 2015, 2.5 percent in 2016 and 1.9 percent in 2017.

Ambitious budget presented

Amid the positive growth forecast the government has presented an ambitious draft state budget at the end of its term, with continuing consolidation of public finances moving toward a balanced budget in 2018.

The Finance Ministry projects the deficit of the general government to decrease to 1.93 percent of GDP next year. It should continue shrinking to 0.42 percent in 2017 and in 2018 the government expects a balanced budget. The overall debt of the general government should decrease as well to 52.1 percent of GDP in 2016, 51.3 percent in 2017 and 48.9 percent in 2018.

“Everything in the numbers is achievable,” Finance Minister Peter Kažimír said after the cabinet passed the draft on October 7. “Actually the scope of consolidation is half compared with the years 2011 or 2013.”

The state budget deficit for 2016 is projected at €1.97 billion (down from €2.984 billion projected in 2015) on revenues of €14.027 billion and expenditures of €15.997 billion. The budget is based on macroeconomic projections that the country’s economy will grow at 3.1 percent, the unemployment rate will fall to 10.6 percent and the inflation rate will be 0.9 percent in 2016.

Finance Minister Peter Kažimír (source: TASR)

The budget for 2016 already includes costs of measures from the so-called second social package that reduces the value added tax (VAT) on selected foodstuffs, includes natural gas refunds for households and boosted support to underdeveloped regions. The cabinet also proposes to increase wages of about 350,000 employees in the public sector by 4 percent.

The budget for 2016 contains also a reserve of €20 million for mitigating the migration crisis, €50 million will be put aside for settling debts of medical facilities and almost €76 million is put aside for important investments.

The government planned to adopt the budget by the end of November, though the final budget had not been passed by the time the Investment Advisory Guide went to print on November 20.

Minimum wage up

Prime Minister Robert Fico’s government has increased the minimum monthly wage by €25 to €405 as of 2016, a move applauded by trade unions but disappointing employers.

Employers oppose minimum wage increases generally but also argue that increases should occur in a more predictable manner.

The cabinet decided about the minimum wage hike on October 7 after representatives of trade unions, employers and the cabinet had failed to agree on it collectively. While the trade unions proposed to raise the minimum wage to €410, employers’ organisations wanted to keep the minimum wage at the current €380. The Labour Ministry proposed a hike to €400, but in the end the cabinet increased the minimum wage to €405 per month.

Tax licences

The year 2015 was the first that companies were obliged to pay the fee on tax licences, a policy that was initiated by the Finance Ministry in response to the fact that roughly 60 percent of corporate entities did not pay any corporate income tax in 2013. Alongside the tax licences the corporate tax rate was reduced from 23 to 22 percent.

Tax licenses fetched €77.7 million for the year of 2014 when the original estimate was €112 million, the Institute of Financial Policy (IFP), a government think tank, wrote in a report. Collection of the fees this year applied to the year 2014.

Lower than estimated revenues from tax licenses can result from closure of companies but also from the increased willingness of companies to declare profit, according to Radovan Ďurana, an analyst at the INESS economic think tank.

Tax licences however remain controversial, with some analysts saying they discourage launching of new companies.

“Tax licences aren’t so high that they would eliminate innovations but they might put on hold projects that are at the brink of profitability already at their inception,” Ďurana told The Slovak Spectator.

Startups

While new companies are vulnerable to negative impacts of tax licences, the plan exempts startups from payment of tax licenses for three years.

“It is a priority of the current government to speed up the development of the Slovak economy based on innovations and entrepreneurship and intensify research and development,” said the Finance Ministry’s spokeswoman Alexandra Gogová.

Analysts however point out that such support for startups might put other entrepreneurs at a disadvantage.

Support for startups and innovation has been a declared priority of the current government. Also, Kiska stresses innovation in his economic diplomacy activities. In late October, Kiska opened a Slovak Innovation Contact office in the Finnish town of Espoo. The facility should ease communication and cooperation between Slovak and Finnish scientists. Two more such offices are planned to be opened, one in the United States and another in the United Kingdom.

The TechMatch startup conference, a major event organised in mid-October by the Slovak Business Agency (SBA) and financed from public resources, was organised to support startups. It, however, made media headlines due to allegedly inflated costs. Audits are pending and the head of the semi-state SBA, Branislav Šafárik, could yet lose his job.

Dual education

After years of negotiations, parliament adopted a new

law introducing a dual education scheme aimed at training secondary school students in skills currently lacking on the market. Though employers praise the opening of the first dual education classes on September 2, student interest is lagging.

Under the new rules adopted by parliament in March 2015, the theoretical part of the education process takes place at schools, while practical training will be entrusted to companies. In practice, employers who decide to join the project will enter into learning contracts with secondary school students, who will undergo practical training at the company.

The dual education system has been joined by a total of 89 companies and 422 pupils, mainly in Trenčín, Nitra and Košice regions, where most employers are situated. The ministry admitted their surprise over the low number of students. Originally, it expected some 1,500 students to take part.

Doing Business report

Slovakia kept 29th place in the Doing Business 2016 report, which compares the business environment of 189 countries across the globe. The Finance Ministry perceived the ranking as positive and attributed it to the reforms and “many specific measures”.

Slovakia improved the most in the paying taxes category, where it moved up 36 positions to 73rd place. It also improved in the starting a business category (up by three positions to 68th place).

On the other hand, it dropped the most in dealing with construction permits and getting credit.

Of the Visegrad Group (V4) countries, the best business environment is in Poland which placed 25th. The Czech Republic and Hungary reported worse results than Slovakia, placing 36th and 42nd, respectively.