The year 2000 is shaping up as one of the most crucial years for economic reform in Slovakia's short history. The government has pledged to continue and even speed up last year's drive to transform the economy. Significant changes affecting the capital market, the macro-economy and micro-economy announced in 1999 now have to be realised. The Slovak Spectator spoke with analysts and government officials to find out what to expect this year in these three areas.
Shares Issues with the Highest Market Capitalisation at Year-End, 1999
1. Slovnaft 600 10 719 571 800 7.11%
2. Slovakofarma 1989 3 212 937 117 2.13%
3. Závod SNP 30 2 465 936 080 1.64%
4. VSŽ 144 2 420 995 472 1.61%
5. Tatra Banka 40 600 2 038 769 600 1.35%
The current state of Slovakia's stock market can be summarized in three words: untrusted, ineffective, stagnant. New legislation is planned for early 2000 to revive the stock market by making it transparent, protecting minority shareholders and generating liquidity by reforming the state's pension schemes. These laws, Finance Ministry officials hope, will catch the attention of both foreign and domestic investors and bring life back to the market.
Foreign investors may also be drawn in to the Bratislava Stock Exchange if the National Property Fund (FNM) follows through with plans to float shares in viable state-owned companies on the capital market. Investors have already expressed curiosity in how many shares the FNM might issue and at what price.
According to Michal Horváth, the head of the capital market section at the Finance Ministry, a crucial law to kick-start the process has just taken effect. "We have a new Law on Collective Investment, valid since January 1, 2000," he said. "The law guarantees the protection of small shareholders in collective investment schemes. Before, they often didn't know what happened with their shares because they were accumulated collectively."
Horváth explained that the Finance Ministry wanted to make collective investment schemes (ie. mutual funds) an integral part of the capital market and to create an alternative to savings accounts in banks for citizens. "We believe that collective investment will in the future become an alternative to saving money in banks, and that's why we wanted to prepare this legislation," he said.
More laws will follow. A revised Bond Law, which is currently incompatible with similar laws in western countries, should be passed by the end of this year. Also on the agenda is a Law on the Office for the Capital Market, which would establish an independent body to oversee the capital market, the insurance sector and later the banking sector.
"These laws will serve as a cure for the limping capital market and help to change the [investment] climate," said Horváth. "They will be compatible with laws valid on the capital markets of western countries, and thus make the Slovak capital market more attractive for foreign investors."
Ivan Chodák, an equity analyst with CA IB Securities, said that the legislation planned for the year 2000 was on the mark. "I hope that the new legislation will be much better than the laws we have today, which were formulated ambiguously."
However, Chodák said he believed that laws alone could help, but not cure, the current situation. "A lot has to be done on the side of both offer and demand. Here, the most important is pension reform," Chodák said.
Horváth agreed, saying that pension funds should be formed from the contributions of companies paying for employee's pensions and retirement plans, and then placed on the capital market. "Pension funds would then positively influence the liquidity of the capital market as they do in most western countries." But Chodák predicted that this wasn't likely to happen until the year 2001.
Foreign investors are keen to know how the FNM will dispose of its big stakes in lucrative firms such as the Slovnaft refinery and the Nafta Gbely gas storage firm. "This is what all market participants are waiting for, because it is expected that the FNM will trade them on the market," Chodák said.
An important factor, according to Chodák, will be how many of these shares the FNM will trade; if the number is insufficient to attract investor interest, Chodák is gloomy about the future of the Bratislava Stock Exchange. "If the situation doesn't change, the Slovak stock market will die a slow death," he said.
By the end of 1999, the Dzurinda government had managed to pull off a macro-economic turnaround, bringing Slovakia back from the brink of disaster to the verge of respectability. Now, however, with very little room remaining for revenue-generating measures, analysts are expecting the government to slash expenditures, principally by reforming the public sector.
Having managed to keep the budget deficit slightly under the target of 15 billion Slovak crowns (see briefs, this page), the government has won credibility for its 2000 state budget targets: a deficit of 18 billion crowns, inflation of 10% and unemployment of around 16%.
Kudos have also flowed in for the government's feat in reducing the trade deficit from over 10% of GDP for the previous three years running to under 6% of GDP in 1999. The Economy Ministry predicts the trade deficit will be cut in half again to 20 billion crowns in 2000.
"Macro-economic balance has been created, and now the most important thing is to manage its sustainability," said Katarína Mathernová, an advisor to Deputy Prime Minister for Economy Ivan Mikloš.
Ján Tóth, a senior analyst with the Dutch investment bank ING Barings, cautioned that the government was not completely out of the woods yet, and would have to press ahead with price deregulation if Slovakia's macro-economic progress was to be maintained. "If price deregulation is not carried out, people will have high inflation expectations, which is one of the worst things for the economy," he said.
The government at the end of 1999 approved its third so-called 'austerity' package, including increases in regulated prices for gas, housing and electricity, which is scheduled to take effect in February and April.
Mathernová explained that macro-economic sustainability could now be achieved largely by cutting state budget expenditures. "We are preparing several reforms to do this, including mainly reform of social benefits and pension schemes, as well as of the school and health sectors," she said. "Reform of the public sector will also be very important."
Tóth agreed that almost all bolts on the revenue side of the state budget had been shot. "In the year 2000, the key should be to limit public sector expenditures through pension and health insurance reform, and improvement of the system of funding for schools and agriculture," he said.
Tóth was supported by Martin Barto, the head of strategy at the SLSP state bank, who said that these reforms should be made as quickly as possible. "In the health sector, reform should increase the participation of patients in health insurance, because from this point of view the current system is ineffective," Barto said, adding that the government should seriously discuss reducing subsidies to the agriculture sector. "Cuts in this sector are more than necessary too," he said.
Cuts and stricter eligibility rules were also the medicine Barto prescribed for the social benefits system, where, he said, "the government is simply giving money to people who are registered at the Labour Office but working at the same time." The same firm hand should be taken with the civil service, he added, where the government has declared its intention to cut 10% of public sector employees. "I'm not talking here about teachers and policemen, but about people working in the state administration and government ministries, where they are very numerous," Barto said.
Finally, analysts agreed, the macro-economy as a whole would benefit enormously from and airing of issues like corruption and transparency in public tenders in 2000. "It is very needed to talk more about corruption and approve the Information Law, which would give common people better access to information," Barto said.
A draft of a new Information Law is due to be discussed by the cabinet in January.
Macro economic forecast for 2000
Fiscal Deficit 18 billion Sk
Trade Deficit 5% of GDP
Many of the medium-term plans announced in 1999 by the Dzurinda government for the micro-economy remain to be carried out this year. Foreign investment will undoubtedly play a large role in many important firms; stakes in the country's three largest state banks are due to be sold off, while strategic investors are being actively courted for the telecom monopoly Slovenské Telekomunikácie (ST), steelmaker VSŽ and the Slovnaft refinery. Investors may even be offered a stake in utilities like SPP (gas) and Transpetrol (gas transit).
And yet, the most important task in the micro-economy - corporate restructuring, which will weed out ailing firms and bolster viable enterprises - has only barely begun. A functional bankruptcy law, which is the key to the entire process and was promised for the end of 1999, has still not been brought before the cabinet.
"The most important law to passed this year in the area of the micro-economy will be the Bankruptcy Law, which has been discussed by the government's legislative committee and should be approved by parliament before the end of February," said Katarína Mathernová, an advisor to Deputy Prime Minister for Economy Ivan Mikloš. She added that the Bankruptcy Law presupposes revisions to the Commercial and Civil Codes, which are also scheduled to occur in the year 2000.
Mathernová added that the effect of the bankrupcy law, which strengthens the position of creditors in the bankruptcy process and puts decisions on failing companies on an purely economic footing, will be enhanced by improvements in the performance of commercial courts. "Commercial courts in Slovakia are extremely slow, so we have prepared reforms to touch mainly this area. We have to speed up the work of the courts if we expect laws such as the Bankruptcy Law to bring the desired results," she said.
Analysts, however, were critical of the delays that had created a legislative backlog in these crucial economic laws. "The fact that the Bankruptcy Law still hasn't been approved, even though it was on last year's economic agenda, is due to nothing else but sloppy policy," said Ján Tóth, an analyst with the Dutch investment bank ING Barings. "It's such an important law that it should have been passed last year in order to be valid from the beginning of 2000."
On the other hand, Tóth welcomed the fact that the process of restructuring and selling off state banks had already begun. "Better banks can provide better loans, so this process of restructuring and privatisation, which is to continue on this year's agenda, is something that will help the entire economy," Tóth said.
Martin Barto, an analyst with the state-owned SLSP bank, added that he expected a significant impetus to the economy from the privatisation of state monopolies such as ST and possibly SPP.
But Barto too said that corporate restructuring would be the year's main micro-economic story. "Nowadays, apart from bringing a company into bankruptcy, there is no other way to solve the problems of troubled companies," he said. "The legislation being prepared, the most important of which is the Bankruptcy Law, will give cokmpanies avenues to restructure, which will undoubtedly be positive."
Companies and banks to be privatised in 2000
Slovak Telecom 51% 2Q of 2000
State stake in Globtel 36% 2H of 2000
IRB bank 100% 2H of 2000
VÚB bank more than 51% 2H00 or 1H01
SLSP bank more than 51% 2H00 or 1H01
Transpetrol up to 49% 2H00 or 1H01
part of SPP utility up to 49% 2H00 or 1H01
VSŽ steelmaker 28% 2000
Slovnaft refinery 35% 2000