"There's room for short-term measures on the fiscal side which would slow the growth of the deficit."
Ľudovít Ódor, analyst at the Slovak Rating Agency
The Slovak trade deficit recorded a dramatic increase in October with figures indicating the highest monthly deficit since December 1996.
The monthly deficit, reported by the Statistics Office on November 29, was Sk9.65 billion ($199 million), boosting the trade deficit for the first 10 months of 2001 to Sk74.6 billion ($1.54 billion), Sk51.9 billion more than in the same period last year.
If the significant discrepancy between imports and exports which underlies the deficit is not covered by revenue from foreign direct investment, it could threaten Slovakia's currency and national economy, making the country in turn a less viable destination for investors.
Although government officials say there is little risk from the deficit given the substantial foreign investment flowing into Slovakia, Finance Minister Brigita Schmögnerová has said the cabinet will monitor developments closely and take action to curb the deficit in February 2002 if necessary.
The minister rejected the use of administrative measures opposed by world trade bodies, such as an import surcharge or higher customs duties.
But analysts and international experts said the latest figures should set alarm bells ringing and prompt officials to consider immediate short-term countermeasures.
"The question is how long we can sit and wait for a miracle to happen. There is room for short-term measures on the fiscal side which would slow the growth of the deficit," said Ľudovít Ódor, an analyst at the Slovak rating agency.
Ódor said that the government should reconsider its autumn decision not to increase natural gas prices for domestic users by 19.3% as had been proposed. The cabinet should also rethink its decision to increase public sector wages by over 14% in 2002, the analyst said.
Fernandez Ansola, chief of the central European division at the International Monetary Fund, said another possibility was to cut from the Sk12 billion ($248 million) in planned public spending on highway construction next year.
"The general point about possible fiscal measures is that there are places for the government to cut expenditures and still have a reasonable state budget for 2002 with substantial increases in real wages and sizable capital spending growth," Ansola said.
Mária Kačurová, head of the department for financial policy strategies at the Finance Ministry, said that the cuts cited by Ódor and Ansola would need approval from the broad government coalitio, and might find little support in an election year.
She added that a committee of senior cabinet ministers overseeing the economy had dismissed concerns with the latest trade deficit figures, concluding that with substantial foreign investments coming to Slovakia in 2001 and 2002 there would be few problems financing the massive deficit.
"A trade deficit doesn't necessarily have to mean a high level of risk," she said.
Although estimates for foreign direct investment to Slovakia in 2001 stand just under $2 billion, the same as the year before, revenues from the privatisation of a 49% stake in gas utility SPP are expected to bring as much as $3 billion next year - considerable help for the current account.
Both analysts and government officials said that the development of the trade deficit in the coming months would also depend on the revival of the Eurozone economy in the aftermath of the September 11 attacks on New York and Washington. More than 60% of Slovak exports go to EU countries.
While imports to Slovakia increased by 7.4% in October from the same month a year ago, exports only grew by 1.3%.
However, Peter Ševčovic, the central bank's monetary policy director, said that a revival of the EU economy was expected to come in the second half of 2002. "We are expecting a gradual decrease in the trade deficit next year," he said.
For his part, Ansola said that government officials should not rely entirely on external factors. "Clearly, accelerated restructuring of the corporate sector in Slovakia which would support exports is also crucial at this stage."
"If nothing is done and the EU economy does not recover as planned, then the deficit may go over 10% of GDP. This would be a worrying sign and would also put any new government elected in September 2002 in a difficult situation," Ansola said.
Looking at the structure of imports, Ševčovic said he was optimistic about the prospects for a drop in the trade gap since about one third of imports were machines and inventories imported by foreign investors who had launched operations in the country.
Major exporters including car maker VW Slovakia and steel-maker US Steel are also modernising their machines, and have therefore slowed production.
"At some point these machines have to start turning out new products, and major exporters have to start using new machines. This will increase exports, but also decrease imports because some of them will produce also for the domestic market. We just have to wait for this to happen," he said.
Despite the central bank director's optimism, some analysts said the deficit would not improve next year.
According to Marek Gábriš, an analyst with ČSOB bank, imports of machines would continue and appetite for consumer goods would grow because people were expected to spend their income from privatisation bonds redeemed this year.
"We don't expect the current trend to change much in 2002," Gábriš said.