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COUNTRY'S EURO PROSPECTS STILL UNCLEAR

Eurostat statement leaves Slovakia in the dark

EUROSTAT has spoken. However, the EU statistics authority has said less than Slovakia hoped to hear.
Eurostat has asked Slovakia to inflate its general government deficit for 2006 by 0.3 percentage points to 3.69 percent of the GDP, requesting that the country include the performance of the public service Slovak Radio and Slovak Television in the general deficit.
What the country has not yet been told is whether the performance of the National Highway Company should be calculated into the general government deficit as well.

EUROSTAT has spoken. However, the EU statistics authority has said less than Slovakia hoped to hear.

Eurostat has asked Slovakia to inflate its general government deficit for 2006 by 0.3 percentage points to 3.69 percent of the GDP, requesting that the country include the performance of the public service Slovak Radio and Slovak Television in the general deficit.

What the country has not yet been told is whether the performance of the National Highway Company should be calculated into the general government deficit as well.

While some local media suggested the revision could throw a major hurdle between Slovakia and the euro, market watchers have remained optimistic, saying Slovakia should still meet its euro target on time.

The country's Finance Ministry was also quick to announce that even with the Eurostat adjustment, the country will keep its public finance deficit for 2007 under three percent of the GDP, which is one of the Maastricht criteria that Slovakia must meet in order to adopt the euro in January 2009.

"The fulfillment of the Maastricht criterion is not threatened regardless of the Eurostat decision," the ministry announced.

"I can almost certainly say that the deficit of 2.9 percent of GDP (for 2007) will not be exceeded and that we will continue with a cautious budgetary policy," Finance Ministry State Secretary František Palko told the SITA newswire shortly after the Eurostat announcement on October 22.

The day after the announcement, on October 23, the Finance Ministry released a revised estimate for this year's deficit. The new figure would be Sk7.1 billion (€213.5 million) lower - a total of about 2.5 percent of the GDP - thanks to savings and higher tax revenues, even after the public media performances are included. If the National Highway Company's performance is also added to the deficit, it should still not exceed 2.7 percent of the GDP in 2007, the ministry said.

The ministry also said that by the end of the year, the government will avoid any measures that could have a negative impact on the general government coffers.

The general government deficit was at 3.39 percent of the GDP last year, according to the original figures from the Slovak Statistics Office. Speculations started surfacing in September that Eurostat might ask the country to revise the figure for 2006 by as much as 0.7 percentage points, as Slovakia had failed to add the deficits of the public media and the National Highway Company to the general deficit basket.

Slovakia had originally planned its general government deficit for 2007 to be 2.94 percent of the GDP, just below the three-percent threshold.


Ministry and analysts not worried


Market watchers seem to share the ministry's optimism, suggesting that the Eurostat statement has not really hurt the country's chances in the home stretch of the euro marathon.

"Considering the fast growth of the economy, I think the ministry's revision is realistic," Silvia Čechovičová, an analyst with the ČSOB Bank, told The Slovak Spectator.

"The risk that Slovakia will not meet the Maastricht fiscal criteria has not increased substantially after the revision," said Martin Lenko, an analyst with the VÚB Bank. "Actually, the revision came in brighter than market observers previously expected, because the 2006 deficit was revised upwards by only 0.3 percentage points instead of 0.7 percentage points."

The optimistic economic outlook, along with the government's option of decreasing or even completely cutting some public expenditures, means the deficit has a good chance of staying below the three-percent Maastricht ceiling in 2007, Lenko said.

"However, the question that remains is if the government will be able, or really wants, to cut expenditures when it's needed," he told The Slovak Spectator. "For now it seems that the risks are more on the political side than on the economic side."

An analyst with Slovenská Sporiteľňa, Mária Valachyová, suggests that 2006 has not been very relevant for assessing the Maastricht criteria.

"The upward revision reflects a change in methodology (regarding the accounting of social contributions and taxes) and more precise estimates of the government's interest yields, so it was a rather one-off issue," Valachyová told The Slovak Spectator.

The inclusion of the public media debt will have a small impact, she added.

Finance Ministry spokesman Miroslav Šmál has confirmed that the impact of the public media's performance on the general government deficit is close to zero. The highest deficit item would definitely be the National Highway Company, he said.

Even if Eurostat eventually decides to include the highway company in the deficit calculations, the revised deficit figure of 2.7 percent would still leave Slovakia with a comfortable margin of 0.3 percent below the Maastricht limit, said Juraj Valachy, an analyst with Tatra Banka.

Other analysts agree.

"Including the highway costs might increase the 2007 deficit, which is relevant for the euro, by around 0.2 percentage points of the GDP, which is in line with the Finance Ministry's estimate," Valachyová said. "I think the ministry can reduce some expenses to create a reserve in case the highway bills have to be added to the public finances. So I see meeting the fiscal criterion as likely."


Crown not affected


The Slovak currency has had a fairly neutral reaction to the Eurostat word on the revised data, market watchers said.

"Though the Slovak koruna weakened against the euro on October 22, it was connected to selling pressures in the whole V4 region [Visegrad Four] on that day rather than Eurostat's revision of the public finance deficit for 2006," Lenko said.

Valachyová also said the Slovak crown's performance coincided with regional weakness, as the US dollar firmed against the euro that day.

"The markets are closely watching news about the 2007 figure for the most part," she added.

But market watchers also agree that any other changes to the methodology would make the market more jittery.

"From this perspective, the koruna would likely stay on weaker levels against euro - close to or above 34 EUR/SKK - and would likely be exposed to higher depreciation pressures within the V4 region, rather than resuming its appreciating trend from the beginning of this year," Lenko said.


What constitutes public deficit?


Eurostat does not specify which institutions should or should not be included in the public sector, said Valachy of Tatra Banka.

"That is because the set-up of the institutions differs across countries - the state's share in a company, its involvement in decision making and financing, etc.," he said. "Therefore, Eurostat only provides guidelines according to which the national Statistics Office should decide whether to include it or not."

This is also the case for the Slovak National Highway Company (NDS) - the national Statistics Office will discuss with Eurostat whether the NDS meets the criteria for a public company or not, he said.

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