Are Slovak firms reliable?

WHILE one of the country's major consulting firms claims that Slovak firms were much less disciplined last year when it came to paying their bills, a major business alliance says they're doing just as well as they did in the past.

WHILE one of the country's major consulting firms claims that Slovak firms were much less disciplined last year when it came to paying their bills, a major business alliance says they're doing just as well as they did in the past.

Since payment risk indexes are important indicators not only of the strength of the economy but also how much foreign investors can trust the whole business environment, the difference between the two assessments raises some questions.

Coface, a leading consulting firm that prepares annual payment risk reports, said that according to its index, the risk of Slovak companies not paying their bills on time - or at all - almost doubled in 2006. It's now about the same as the average of all the countries Coface analyzed.

The firm says companies became less reliable in their claim payments before last year's parliamentary elections because they worried that the new government might abolish reforms started by the previous government, and thus worsen the conditions for doing business in Slovakia. This made them less willing to pay claims on time, the company said.

Peter Meier, director general of Coface Slovakia, is quick to point out that Slovak companies are still more reliable in their claims payments than those in countries such as Hungary.

"The decline in payment reliability in Slovakia has not reached an extreme. Slovakia has gone from a very good level to an average one," he said.

Czech and Polish companies improved in the second half of last year and climbed to a better position than Slovakia. At the beginning of last year, Slovakia and Slovenia were among the top countries, Meier said.

Coface Slovakia said a successful period for the construction sector brought down the overall payment reliability level of Slovak firms. Construction firms usually pay their suppliers later than other sectors do. After construction firms complete an order, they do not receive the full payment, as part of it remains in the project as a deposit for a trial period that might last several years. All this stretches the period of maturity.

The automotive industry has also increased the payment risk numbers since two large car manufacturers, Kia and Peugeot, launched their production only last year.

Large investments brought by current economic growth also decrease the amount of funds available for paying claims to suppliers. The firms have less cash and their potential to borrow is lower, too.

But the Business Alliance of Slovakia (PAS) has not recorded any decline in payment reliability, according to its Business Environment Index survey.

The approximately 50 PAS member firms who respond to the quarterly survey see the reliability and the payment discipline of their partners improving, PAS executive director Róbert Kičina said.

They have also noticed an improvement within their own companies as they become more liquid and more capable of settling liabilities.

It is possible that some PAS members showed moderate improvement in their payment discipline, but that might not be the case across the country, Meier said.

"If there is a positive trend in the group of 50 PAS members, one needs to take it as a fact that applies to the case of PAS members. Naturally, I do not know the contents of the PAS questionnaire," he said.

Yet at the same time, major Slovak banks have not reported a worsening of payment reliability either.

"In the last couple of years, the trend in payment reliability of corporate entities has not changed significantly, and it is possible to say that our clients are very disciplined in paying their claims," said Tatra Banka spokeswoman Terézia Copláková.

Payment reliability is also connected to the improving economic situation of Slovak companies, which is relatively stabilized now. Firms' payment discipline has improved compared to five years ago, Copláková said.

The effects of declining payment reliability can be felt on a microeconomic level. Firms need loans to cover operating fees because of the added financial burden, and that inflates costs and pushes down profit, Meier said. Companies might also lack the resources for potential development and investments.

"In case of a significant worsening, it could transmit a negative signal to foreign investors," Meier said. "I do not assume this might happen, however any substantial worsening of payment discipline might have a negative impact on the country's rating."

Firms can improve their payment reliability in two ways, said Meier.

"The firms themselves should make sure that the rules of the game in commercial relations are clearly set," Meier said. "Preventing bad claims through screening commercial partners should be a priority, along with drafting good contracts specifying all the commercial conditions."

Then the companies should strictly adhere to the rules and react strongly to any delayed payments, he said. The later and less systematic the reaction is, the more expensive the project gets with ever smaller chances of success.

The second set of measures, Meier said, is linked to legal measures and norms.

Any measures that lead to greater protection and enforceability of creditors' rights - for instance, improving bankruptcy legislation - would improve payment reliability for Slovak firms, said Kičina.

Meier doesn't expect payment risk to increase for companies in Slovakia because fears of abolished reforms were never confirmed, so the political risk of worsening business conditions has been removed for now, he said.

At the same time, proposed changes to the Labour Code could have an impact.

"A question could be the influence of the planned changes to the Labour Code, which could take a portion of resources from businesses that will have to be used for covering higher costs of employees," Meier said. "They could have less for paying suppliers' claims and damage their trust in a favourable business environment."

Other influences on payment reliability should not change in the near future, he said.

Kičina predicts the payment risk situation will gradually improve because the economy is booming and firms have favourable conditions for doing business - meaning they have more money.

"Commercial relations are heading towards greater transparency. Business partners have increasingly better ways of checking mutual trustworthiness before concluding a contract," Kičina said.

He added that sooner or later there will have to be changes in the judiciary aimed at making the law easier to enforce, which will also help improve business partners' payment reliability.

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