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Lagging reforms may protect economy

Privatisation, cheap labour and low trading volumes with the US may allow Slovakia to stave off some of the most serious effects of a predicted global recession, analysts and international financial institutions say.
Reports from senior research houses and international bodies such as the European Bank for Reconstruction and Development (EBRD) suggest that central Europe as a whole is among the regions most prepared to weather the expected economic storm from a global market turndown over the next 12 months.
However, within that, analysts and economists say, Slovakia has not only a good chance of riding out that storm, but maybe even profiting from it.


With less foreign capital and a more sheltered economy than some other developing nations, Slovakia does not expect to witness frantic scenes like those seen on major stock markets last month.
photo: TASR

Privatisation, cheap labour and low trading volumes with the US may allow Slovakia to stave off some of the most serious effects of a predicted global recession, analysts and international financial institutions say.

Reports from senior research houses and international bodies such as the European Bank for Reconstruction and Development (EBRD) suggest that central Europe as a whole is among the regions most prepared to weather the expected economic storm from a global market turndown over the next 12 months.

However, within that, analysts and economists say, Slovakia has not only a good chance of riding out that storm, but maybe even profiting from it.

"Asian countries that have strong US trading connections will be most susceptible to a US turndown. In comparison, countries like Slovakia have a pipeline of privatisations still to complete that will keep FDI (foreign direct investment) coming in, and low labour costs that could see those western firms that do expand go to cheaper locations with lower costs, such as Slovakia," said Steve Gilmore, an analyst at Morgan Stanley in London.

Last week, conferring with many other top economists, the European Bank for Reconstruction and Development's (EBRD) chief economist, Willem Buiter, said that growth in central European countries would not see "a dramatic deceleration" next year, possibly only dropping by between 0.5 and one percentage point from forecasts made in March.

The EBRD had previously forecast 3.7% growth for central and eastern Europe and the Baltic States for 2001. International Monetary Fund (IMF) forecasts, which some independent economists say are generally optimistic, predict growth in the European Union at 1.8% this year, and the US economy at 1.3%. Next year's growth is forecast for both economies at 2.2%, while the central and eastern European region is expected to see growth of 4.2%.

Forecasts for EU countries and the US have been pegged back amid uncertainty on world markets following the September 11 terrorist attacks on New York and Washington.

However, while a slowing US economy is expected to affect many world markets, including Slovakia's largest trade partner, the EU, Slovak-US trade runs at just under 2% of total Slovak trade. This, analysts argue, will lessen the knock-on effects from the world's largest market plunging into recession.

"Slovak [trade] links to the US are just secondary, mainly through the EU and the US slowdown's effect on that market," said Radomír Jac, an analyst at Commerzbank Capital Markets in Prague.

On top of this, other analysts argue, the nature of Slovak exports could also play a key factor in keeping exports from tailing off dramatically. Demand for the relatively cheaper goods produced by major manufacturers is unlikely to be hit as hard as demand for more expensive product lines, as consumers and companies cut back expenses.

"It's an advantage for Slovakia that it produces VW cars and not Mercedes," said Jeff Gable, an analyst at Deutsche Bank. Volkswagen Slovakia is the country's largest exporter, accounting for 16% of total Slovak exports.

The country's privatisation programme, derided by many senior financial institutions such as the World Bank as being years behind those of its regional neighbours, could now become a trump card in bringing crucial investment to the state as western European economies slow.

"There is a lot of FDI which Slovakia can look forward to in privatisation. Many of its regional neighbours, such as Hungary and Poland, have already sold most things off. Slovakia hasn't," said Gable.

Slovakia's biggest privatisation, that of a 49% stake in gas company SPP, is due to be completed this year. The expected $3 billion revenues from this and other planned privatisations will cover a burgeoning trade deficit and pension reform.

However, while government ministers say that Slovak GDP growth targets of 4-5% per year every year until 2010 can be met, analysts warn that the Slovak economy, and investment into the country, is unlikely to be completely immune from problems on other much larger markets.

"In Euroland [countries in the European Monetary Union], corporate profits are going to be hit and with that investments. There just may not be the funds around for investment," added Gable.

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