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Analysts pull faces at budget draft

The Slovak government on November 11 approved a state budget for the year 2000 that fell short of analysts' demands for radical expenditure cuts and a reduced role for the state in the economy.
The budget draft, which was submitted to parliament on November 15, plans a deficit of 18 billion Slovak crowns ($433 million), or 2.0% of gross domestic product, on revenues of 183.58 billion crowns and expenditures of 201.58 billion crowns. Health care, education, agriculture and defense will enjoy priority status in this year's state budget.

The Slovak government on November 11 approved a state budget for the year 2000 that fell short of analysts' demands for radical expenditure cuts and a reduced role for the state in the economy.

The budget draft, which was submitted to parliament on November 15, plans a deficit of 18 billion Slovak crowns ($433 million), or 2.0% of gross domestic product, on revenues of 183.58 billion crowns and expenditures of 201.58 billion crowns. Health care, education, agriculture and defense will enjoy priority status in this year's state budget.

Analysts were generally skeptical that the government would manage to meet its main deficit, growth and inflation targets. Branislav Matušek, a forex trader at ING Barings, said that "the important question will be whether the government will manage to stick to the 2.0% of GDP deficit, which is a good level."

"The government has proclaimed the will to reduce expenditures, but not much of that has actually happened... Until these cuts, particularly in state administration, are carried out, the budget will remain tight," agreed ČSOB Bank analyst Ľudovít Odor.

In the budget draft, the government estimated GDP growth at 2.5% in 2000, average inflation at 10-11% and unemployment at 16-17%. "(This) GDP (growth rate) seems fairly brave... We consider it a risk too. We see little room for such high growth, and we think it will be closer to 1.0%," said Odor.

Pavol Ondriška, an analyst for Slávia Capital brokers, said that he doubted the inflation target as well, since the government has still not issued a schedule of regulated price increases for the year 2000.

Unemployment would likely be at least one percent higher than the draft expected, added Ivan Chodák, an equity analyst at CA IB Securities, but the effect of this on budget expenditures would be mitigated by reduced social benefits payments in 2000.

Total deficit risky

Other budgetary risks were visible below the surface of the draft's main objectives, analysts said.

The burden of state guarantees on loans, granted mainly for construction programmes by the previous cabinet and representing some 12% of GDP, was seen as a major risk factor. "I see state guarantees, along with deficits in the social insurance and health sectors, as the main risks of the 2000 budget," said Martin Barto, head of strategy at state bank SLSP

The total deficit of public finances, which besides the state budget includes social benefits, unemployment and health insurance funds, the FNM national privatization agency and municipalities, was also seen by analysts as a soft target. According to the budget draft, it should not be more that 28 billion crowns, or 3% of GDP.

However, some estimates put the real deficit of public finances at around 40 billion crowns next year, or 4.5% of GDP. The draft expects state funds, for example, to show a two billion crown surplus in 2000, but the State Road Administration Fund alone intends to borrow 8.3 billion crowns next year, which under IMF methodology cannot be counted as budget revenue, and thus brings state funds into a six billion crown deficit.

The state insurer Sociálna Poisťovňa has predicted a shortfall of 6.7 billion crowns in 2000; the National Labour Office will be 0.5 billion short, while state health insurance companies will run up a deficit of 1.6 billion.

Furthermore, the government intends to use almost eight billion crowns of the 26 billion it expects to receive from privatisation sales next year for budgetary 'development' projects, meaning that this sum should also really be added to the deficit. These programmes include financing for housing construction, integration into NATO, environment and agricultural projects, a tax and customs information system, construction of a gas pipeline network and the completion of the new national theater.

Another 10 billion crowns will go to cover state guaranteed loans, while six billion will pay the overdue debt of Slovak Railways (ŽSR) and three billion will settle overdue health care debts.

CA IB's Chodák said the main danger of the privatisation revenues was that no one could predict with any certainty how much they would be, or whether they would come at all. "It's not sure income," said Chodák, "which is always risky."

Finally, nearly 18 billion crowns in budget income will be from non-tax revenues, a category that analysts traditionally regard as risky given the vagaries of the economy and the tendency of governments to forgive tithes from state companies. The state wants to collect 3 billion crowns from gas utility SPP, and another 2 billion crowns in dividends from Slovak Telecom, Transpetrol and other state-owned companies.

As the budget makes its way through parliament, one final risk emerges - that deputies will vote for changes to the draft, such as lowering corporate income tax from 30% to 25%, meaning that budgetary incomes and expenditures will have to be re-calculated by the authors.

-With contributions from
Reuters and TASR

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