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DOMESTIC FIRMS STILL SHORT ON CASH FOR MODERNISATION

Record trade gap spurred by tech imports of foreign firms

Although Slovakia reported its highest ever first quarter trade deficit April 27 - 19.2 billion crowns - the burgeoning divide has been driven by a rush of technology imports which analysts and the government say is good news for the economy in the long-term.
Foreign firms are pouring money into technologies from overseas, and the investments should soon result in increased production and rising exports which will in turn narrow the trade gap.
But analysts say there is a dark lining to the silver cloud: cash-strapped domestic firms are still unable to join the technology investment spree, many managing to stay afloat but lacking the funds to invest in new machinery.

Although Slovakia reported its highest ever first quarter trade deficit April 27 - 19.2 billion crowns - the burgeoning divide has been driven by a rush of technology imports which analysts and the government say is good news for the economy in the long-term.

Foreign firms are pouring money into technologies from overseas, and the investments should soon result in increased production and rising exports which will in turn narrow the trade gap.

But analysts say there is a dark lining to the silver cloud: cash-strapped domestic firms are still unable to join the technology investment spree, many managing to stay afloat but lacking the funds to invest in new machinery.

"It's the highest ever [trade deficit] figure for the first quarter," said Radovan Varga, head of the department for foreign trade policy at the Economy Ministry. "The good thing about it is that it's driven by an increase in foreign investment, and consequent investments into technologies. Unfortunately, few domestic companies have managed to do the same."

Stimuli key to tech imports

In 2000, Slovakia registered its highest ever annual foreign direct investment (FDI) - $2 billion. The FDI rush brought with it a 36% increase in imports of machines and technologies in the first quarter of 2001 over the same period last year.

Almost all of these imports have come from foreign companies beefing up production and opening or expanding current operations. Domestic firms have been excluded from investment incentives that give larger foreign firms the financial breaks to make investments in machinery affordable.

Swedish card-board packaging producer AssiDomän, which has operations in the southern Slovak city of Štúrovo, is one such firm. It recently decided to invest 369 million crowns into modernising production, all the money coming entirely from its profits.

"We realise that it's only foreign firms importing technology, which is a pity because every company needs to invest and reinvest, and even more so in an industry like ours that needs to keep up with every new development," said Assidoman spokesman Róbert Kiss.

Still not welcome in the fold?

The situation is unlikely to change soon. The government is planning to implement a new investment incentive package from September this year that will allow both foreign and domestic businesses to qualify for a 10-year tax holiday. The current tax break is five years, and excludes domestic entities.

Analysts say the upcoming package will permit domestic firms to take advantage of incentives and expand operations for the first time, allowing them to ease off on tax payments and come to banks with stronger financial plans to back up loan requests. They add, however, that the qualification criteria will still prevent many Slovak firms from benefiting from the scheme.

To obtain the tax breaks, a company must invest a minimum of 400 million crowns ($8.69 million) in new operations, or 200 million in an area where unemployment is above 10%.

According to Ton Verbraeken, senior tax manager at KPMG auditing and advisory firm, the government's package will be useless for the majority of Slovak companies, few of whom have that amount of money to invest. "It will be almost impossible for them to manage," said Verbraeken.

According to the 1999 financial results of Slovak corporates, only tyre-maker Matador Púchov, among non-state-owned Slovak firms, recorded a profit high enough to permit it to participate in the upcoming scheme - 240 million crowns. Next in line was chemicals firm Duslo Šaľa, where profits were only 165 million crowns.

In the Czech Republic, where legislation similar to that proposed by Bratislava is already in place, merely 8% and 10% of domestic businesses have qualified for investment tax incentives.

Slovakia's government investment agency SARIO says the upcoming package will be aimed at cash-rich foreign investors, but that its criteria do not necessarily preclude domestic firms from qualifying for incentives.

"The legislation will be there, which is important. Domestic companies can take advantage of it, and I don't see any reasons why some of them wouldn't," said Alan Sitár, chairman of the board at SARIO.

"Conditions for domestic and foreign businesses in the incentives package have to be equal. We simply cannot come up with more incentives for domestic businesses, because it would be unjustifiable and discriminatory," Sitár added.

The Finance Ministry has repeatedly balked at tax breaks for domestic firms out of fear of losing tax revenues.

But some cash-strapped domestic businesses say what they need to start importing new machines and investing into modernising production would cost the government far less than any lost revenues from an incentive package.

"All we want the government to do is sell us electricity for the price it sells it abroad, which is about 1,000 crowns per megawatt hour, instead of 1,400 crowns as we are charged. We would be able to generate 100 million crowns extra per year and create jobs for 440 people," said Milan Kupec, a spokesperson with northern Slovak alloy producer OFZ.

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