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Slovakia shielded from global turmoil

Since a symbol of the most powerful economy in the world, the twin towers of the World Trade Centre in New York, was reduced to rubble in terrorist attacks September 11, concerns have arisen over the impact the attacks and a threatened global economic downturn might have on economies across the world.
Although Slovakia, as other emerging markets in central Europe, felt some immediate effects of the US attacks, especially on its currency, government officials and analysts predicted that the wider impact on the country's economy has yet to be experienced.
However, they added, the longer-term effects would likely be slight and indirect, similar to those felt by other countries in the region.

Since a symbol of the most powerful economy in the world, the twin towers of the World Trade Centre in New York, was reduced to rubble in terrorist attacks September 11, concerns have arisen over the impact the attacks and a threatened global economic downturn might have on economies across the world.

Although Slovakia, as other emerging markets in central Europe, felt some immediate effects of the US attacks, especially on its currency, government officials and analysts predicted that the wider impact on the country's economy has yet to be experienced.

However, they added, the longer-term effects would likely be slight and indirect, similar to those felt by other countries in the region.

Despite recent high-profile American foreign investments in Slovakia, for example, the country has not established significant trade ties with the US market, and is thus not vulnerable to changes in US consumer behaviour. The latest figures show that Slovak exports to the US in the first six months of 2001 made up 1.3% of total exports, while 1.9% of total imports came from America.

"I think that in the longer run, the consequences of the attack won't be dramatic for Slovakia. The main impact has been on the currency, and there is concern about potential rises in prices of crude oil and gas following the attack," Deputy Prime Minister Ivan Mikloš told The Slovak Spectator September 17.

In the aftermath of the terrorist action, the US dollar fell 1.8% to the Slovak crown, from 48.20 crowns to 47.35 crowns, reaching a minimum for the month of 46.90 crowns six days after the attack. In contrast, the euro strengthened 0.5% from 43.25 crowns before the attack to 43.45 crowns after, peaking at a record figure for this year of 43.85 crowns on September 17.

Although oil prices rocketed on major international markets, they fell back to previous levels later in the week of the attack.

Knock-on effects

Although there are few significant economic ties between the US and Slovak economies, any shake-up in the world's largest economy, analysts said, would have an indirect, knock-on effect on other world markets, especially that of the European Union (EU), Slovakia's largest trading partner.

More than 60% of Slovak exports go to the EU, while imports from the union's member states account for 50% of all goods coming into Slovakia.

The EU economy had slowed already before the attacks in New York and Washington. While in 2000 GDP growth in the 15 member bloc was 3.3%, projections for this year had been revised from 2.4% down to 1.7% before September 11.

The effect of the slowdown, analysts said, had already been seen in lower demand for Slovak exports in the EU. Growth of Slovak exports has gradually fallen to about 10% year-on-year in June and July after seeing 30% rises last year.

On the other hand, import growth has been impressive, driven by imports of new machinery and equipment largely by foreign firms, and has translated into a skyrocketing Slovak trade deficit of 50.07 billion crowns for the first seven months of 2001, 8.3 billion crowns higher than the total figure for 2000.

The American Federal Reserve lowered key interest rates by 0.5% to protect the economy from further recession following the attacks. However, analysts warned that if the cuts were not effective in stabilising the US economy, Slovak exports might suffer further.

"If the recession in the United States deepens and produces a further economic slowdown in the EU, it will affect growth in Slovak exports and the trade deficit," said Róbert Prega, an analyst with Tatra Banka.

But according to Matthew Vogel, a senior analyst with Merrill Lynch in London, the Slovak economy is expected to have enough funds from privatisation and foreign direct investment next year to counter the impact of any potential global turmoil on its current account, of which the trade balance is a component.

"Privatisation revenues will offset any potential balance of payments problems, and if not there is still an appetite for eurobond issues if [an issue is] needed. I expect the Slovak current account will be well funded," Vogel said.

He added: "There isn't much that the Slovak government can do to compensate for the [export] slowdown. They have done a lot to give guarantees [of political stability] and increase transparency in fiscal policy. They've managed to carry out a monetary programme with the International Monetary Fund, have established a good track record from the privatisation of Slovenská sporiteľňa [SLSP] and Všeobecná úverová banka [VÚB], and have been fairly clear with a timetable for receiving funds from the privatisation of Slovenský plynárenský priemysel [gas utility]."

He added that privatisation of SPP, which is expected to be the largest state sell-off in Europe this year and could bring in as much as $3 billion to the Slovak treasury, would be "positive for the balance of payments and fiscal outlook".

Both analysts and state officials added that neither the recent attacks nor their potential knock-on impact would damage foreign investments, one of the most effective tools for lifting the Slovak corporate sector out of its state of near suspended animation.

"An external shock would have to be huge to bring about a drop in foreign investment to Slovakia," said Marek Gábriš, an analyst with ČSOB bank.

"We are expecting about 40 billion crowns in privatisation revenues from the sale of SLSP and VÚB. Other foreign investments to Slovakia are planned, as well as the privatisation of SPP, so the [balance of payments] deficit will be covered. I certainly don't see any reason for a slowing of foreign investment to Slovakia," said Peter Ševčovic, monetary policy director at the National Bank of Slovakia.

He added that cheaper production costs in comparison with western European states would keep Slovakia an interesting investment destination for foreign investors, all the more so in the event of a further EU economic slowdown.

"If there was a threat that multinational firms would cut production at their facilities [because of an EU recession], it wouldn't affect Slovakia. Why, for example, would Volkswagen close its Slovak facility when its production costs are cheaper here than at its branches in western Europe? I don't think they would," Ševčovic said.

The only concrete worries that have been expressed regarding investment since the US attacks came from the lips of Finance Minister Brigita Schmögnerová on September 17. The minister referred to fears that global insurance firms would be hit hard by the twin towers collapse, which in turn might dampen enthusiasm for December's planned sale of the state's 67% stake in insurance house Slovenská poisťovňa (SP).

"We'll have to wait and see what the concrete effects of last week's crisis will be on privatisation in general, and that of SP in particular," she said.

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