Negative trade deficit trends set to continue in 2002

TRENDS that have led to a trade deficit of more than 10 per cent of GDP are unlikely to be reversed in 2002, one of the country's top research houses claims.
Falling demand in EU economies and consumer imports will continue to have a negative effect on the deficit - which reached Sk87.2 billion from January to November last year - in 2002, analysts at ING Bank claim.
And while a possible pick-up in EU economies in the last half of the year, however, is expected, wage growth and inflation levels in an election year are likely to see the currency under pressure as 2002's trade deficits continue to be affected negatively.


Stalled production at VW Slovakia has contributed to the record trade deficit.
photo: Spectator archives

TRENDS that have led to a trade deficit of more than 10 per cent of GDP are unlikely to be reversed in 2002, one of the country's top research houses claims.

Falling demand in EU economies and consumer imports will continue to have a negative effect on the deficit - which reached Sk87.2 billion from January to November last year - in 2002, analysts at ING Bank claim.

And while a possible pick-up in EU economies in the last half of the year, however, is expected, wage growth and inflation levels in an election year are likely to see the currency under pressure as 2002's trade deficits continue to be affected negatively.

"We have a huge trade deficit - 10 per cent of GDP. This is not sustainable in the long run. The guideline for the size of deficit which can be sustained long-term is 5 per cent of GDP. Above that and institutional investors start to ask questions about its long-term finance and we would then see an effect on the currency," said Ján Tóth of ING Bank.

"There are some one-off reasons behind the deficit, but there are also some longer-term ones. We are already seeing some consumer exports in the trade figures and with this year being an election year we will see inflation drop - there will be no rises in regulated price- but wages will grow.

"We could see a net wage growth of 6 per cent and this, combined with a continuing EU slowdown in the first half of the year, means we expect the negative trends that have influenced the trade deficit to continue this coming year."

Tóth added: "This will make the Slovak crown a less safe bet than it has been and we expect to see some weakening of the currency this year."

The November trade deficit came in at Sk12.9 billion, bringing the figure for the first 11 months of 2001 to Sk87.2 billion - up Sk56.1 billion on the same period of 2000.

While government has admitted the figures were bad, many economists pointed to some positives in the data. Import growth had been fuelled by the import of new technology related to foreign direct investment.

Companies under new foreign management are investing in new technologies to improve competitiveness and production levels. The first benefits of this, increased exports from these firms, are expected in 2003.

A large dent in exports had been made as production dropped at the country's largest exporter. Auto giant VW Slovakia stalled production on one of the three models it produces in 2001 and, according to the Slovak Statistics Office, exports have dropped as much as 20 per cent year-on-year in recent months.

However, the production of a new fourth model by the company this year is expected to see exports rise again. "We view the export fall from VW as just a one-off," said Tóth.

The government is banking on the company's performance picking up soon, along with demand in the EU.

Almost 60 per cent of Slovak exports go to EU countries and recent downturns in economies across the Union have hit hard trade partners outside the EU that rely on its demand heavily, such as Slovakia.

"Hopefully the trends will become better. There should be a growth in production at VW and in the economies and demand from EU countries," said Vladimír Tvaroška, economic advisor to Deputy PM for the Economy, Ivan Mikloš.

"Admittedly the trade figures are bad, but the deficit is only dangerous if poor trends continue," he added.

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