THE EUROPEAN Commission’s spring forecast, which projects that Slovakia’s government deficit will remain just below 3 percent and that the country’s economy will gather pace in 2014, led Finance Minister Peter Kažimír to claim that “Slovakia will no longer belong among the European sinners”. But that rosy outlook is being tempered with caution from analysts who insist that fiscal consolidation must continue with debt, not deficits, as the biggest risk.
Prime Minister Robert Fico heralded the EC report and noted that Slovakia will exit the Excessive Deficit Procedure (EDP), a programme that requires EU countries to trim their deficits under schedule and threat of penalties. The EC forecasts the Slovak economy to grow at 2.2 percent in 2014 and 3.1 percent in 2015, with employment growing modestly over that period and inflation expected to remain low.
Fico also noted that Slovakia’s economic growth could be the fourth-highest across the EU in 2015. The spring prognosis assumes that the composition of growth is to become more balanced “as the main driving force shifts from net exports to domestic demand”. Still, observers are preaching caution.
“Unlike in the pre-2009 world, a forecast of deficits close to 3 percent of GDP is no reason for complacency and reminds us that much work in bringing budget finances into balance is still ahead: both due to our domestic constitutional restraints, as well as due to the EU-wide fiscal consolidation commitments,” Vladimír Vaňo, chief analyst with Sberbank, told The Slovak Spectator.
The OECD
Meanwhile, the club of affluent nations, the Organisation for Economic Co-operation and Development (OECD) has increased its growth estimate for Slovakia in 2014 by 0.1 percentage points to 2 percent and kept the estimate for 2015 unchanged at 2.9 percent. This would be the second-highest GDP growth among OECD members that are part of eurozone, the OECD said.
The OECD too believes that the government will manage to keep the public-finance deficit under 3 percent of GDP in 2014 and 2015, and that the public debt will not exceed 57 percent.
The OECD assumes that the expected revival on the labour market will result in an increase in household consumption for the first time in five years. Slovakia’s growth should also be driven by exports, which should thrive due to expected positive developments in the eurozone.
The interpretations
When responding to the EC report Kažimír said that Slovakia will rank among EU countries with the most responsible financial management.
“What matters is that we have stabilised public finances for the future and in a sustainable way, as the European Commission expects the deficit to be below 3 percent both this year and the next,” Kažimír said.
As for the country’s exit from the EDP, the EC will assess the numbers in June. Commissioner Maroš Šefčovič suggested that by exiting the EDP, Slovakia will also avoid fines that could have reached €150 million.
“I am convinced that the Slovak Republic will be able to use these funds in a very effective way,” Šefčovič said, as quoted by the SITA newswire.
Vaňo, however, warns that “one should be careful not to read too much into the relatively optimistic outlook”.
“First of all, the expected narrowing of the budget deficit is based on expectations of a relatively solid revival of economic activity, which should be more broadly based than in the previous years, with both investments and household consumption contributing to the growth,” he said, adding that the ongoing escalation of geopolitical tensions might alter conditions significantly. “Hence, the forecast of significant growth recovery is subject to a slightly higher degree of uncertainty and so is the assumption of commensurate recovery in budget revenues.”
The EDP is a mechanism that was implemented and exercised especially during the “calm” period before the start of the global recession in 2008, said Vaňo, adding that the “turbulence in the real economy and the European bond markets that we have witnessed since then required the adoption of additional commitments and restraints in the fiscal area”.
Moreover, the Slovak parliament adopted its own constitutional law on the public debt ceiling and given the current level of public debt, the provisions of this constitutional act will require additional fiscal constraints, Vaňo said.
The EC noted in its report that in 2013 the public debt exceeded one of the thresholds defined by the domestic debt brake, and thus the government will have to cut spending.
Slovakia’s debt brake legislation suggests that if the debt reaches 53 percent of GDP, the government is required to adopt a package of measures and freeze its own salaries. At 55 percent, it is no longer possible to increase expenditures for the following year, while at 57 percent the government will have to prepare a balanced budget. If these measures do not work and the debt still reaches the 60-percent ceiling, the government must initiate a vote of confidence.
The EC estimates that general government debt will rise to some 56 percent of GDP in 2014 and increase further by 1.5 percentage points in 2015. However, “this outcome is conditional upon the implementation of privatisation plans in the telecom sector in 2015 and the use of the proceeds for debt reduction”, the EC suggested.
“Hence, though exiting the EDP is good news and proves that the Slovak government has done its share of fiscal healing homework so far, it is by far not the end of the necessary and inevitable process of fiscal consolidation and narrowing the budget deficit to levels much lower than 3 percent of GDP,” Vaňo said.
When asked about the influences with the strongest impact on the economy in the upcoming period, Vaňo said that although external demand is expected to continue to be the main driver of recovery, increased household consumption will also contribute.
“One should not underestimate newly emerging risks to the Slovak economic recovery, which are associated with the escalation of geopolitical tensions in the East,” Vaňo said. “This tension might hit Slovakia adversely indirectly, through undermined growth of Germany (our key export market) and through a potential increase in the investors’ risk aversion.”
Meanwhile, on the same day Fico was praising the EC forecast as good news for Slovakia, he also said that if the EU imposes the strictest economic sanctions on Russia, Slovakia’s economic growth “would drop by almost half”, SITA reported. Fico declined to share the exact numbers, saying that these stem from a confidential analysis.
Employers remain cautious
The Federation of Employers’ Associations (AZZZ) said that the prognosis in question was good news, however its president, Rastislav Machunka, warned about the growth in overall state debt.
“We’ve broken free of the EDP, which is good,” Machunka said, as quoted by the TASR newswire. “We also appreciate some of the consolidation measures that have been carried out, although their structure could have been set differently - focused more on public saving, particularly in the social sphere.”
Employment is projected to increase over the forecast horizon, but only modestly so due to its low responsiveness to economic growth, said the EC.
“The unemployment rate is also expected to fall somewhat, but it will remain close to 13 percent given the structural nature of unemployment as shown by the high rate of long-term unemployment,” the EC said in its forecast.
Slight growth at the forecasted levels alone will not be sufficient to bring unemployment down to pre-recession single digit levels; however it will contribute to the slight recovery of employment growth, Vaňo opined, adding that “creating a conductive environment for investments will be a paramount element in bolstering the labour market in the upcoming years”.
The OECD expects the unemployment rate to fall from 14.2 percent in 2013 to 13.9 percent in 2014, and further to 13.2 percent in 2015.
