"Slovakia is an unusually rich country not to be getting an investment grade rating, but it has a number of serious underlying risks."
Edward Parker, Fitch ratings agency
Domestic analysts said they had expected the trade deficit figure, which broke a previous high set in 1998. Weak demand on EU export markets, imports of technology to support record foreign investment inflows in 2000 and 2001, and "booming" consumer demand were responsible for the trade data, they said.
However, market watchers also expressed worry at the trade gap. Ratings agency Fitch said the trade deficit was one reason it was leaving Slovakia at speculative grade, while the National Bank of Slovakia Governor Marián Jusko urged the government to tighten fiscal policy to prevent the deficit from spiralling out of control.
"If we don't succeed in lowering this deficit it will become unsustainable in the long run, and we'll have to take these fiscal measures sooner or later anyway," Jusko said.
The 2001 deficit was Sk20.3 billion higher than the 1998 mark and a Sk61.5 billion rise from the 2000 figure. Exports at Sk610.7 billion grew 11.3 per cent from last year, but imports worth Sk713.9 billion were up 20.9 per cent.
The central bank's trade report said the main engine of higher imports had been "goods connected with growing investment inflows" and estimated that 43 per cent of the growth over 2000 had been connected to foreign domestic investment (FDI).
Slovakia attracted almost $2 billion in FDI in 2000; the central bank's balance of payments sheet for January to September 2001 showed a $791 million FDI surplus against a $1.3 billion trade deficit. The bank has yet to release final FDI figures for 2001.
Many new investors have been importing the machines and technology they need to set up or expand production.
The bank also said that a slowdown in auto exports and "slower economic growth among our largest trade partners" was behind disappointing export figures.
VW Slovakia, which last year accounted for almost 15 per cent of exports, made only 841 more cars than the 180,000 that came off assembly lines in 2000. Turnover grew only Sk3.8 billion to Sk88.8 billion after rising 25 per cent in 2000. Analysts blamed the sluggish 2001 figures on production changes at VW, which in the summer switched over to a new model.
Finally, the bank said that falling prices for crude oil on world markets had inevitably reduced the value of exports produced by chemical firms and refiner Slovnaft.
While the bank expressed only moderate concern at the trade figures, saying they were bound to improve as FDI-related technology imports cooled off, analyst Tomáš Kmeť of the Slovenská sporiteľňa bank said he was more worried by strong consumer demand.
"At the beginning of the year everyone was saying not to worry, but as we got into the second half of 2001 and booming consumption started to play a greater role in the trade deficit, people took it as a bad sign," he said.
At 10.7 per cent of GDP, the 2001 trade deficit is below the 11 per cent of GDP seen in 1998, and is being covered by FDI inflows rather than the speculative 'hot money' seen at the end of the Vladimír Mečiar government's term. "It's certainly not a catastrophe, since the structure of the deficit is different than it was in 1998, and we haven't had any problems so far financing it," said former Finance Minister Brigita Schmögnerová.
But for Fitch, which expects the 2001 current account deficit to come out at 8.9 per cent of GDP, the trade situation "is already constraining interest rate cuts and so economic growth".
The agency said it was also worried that the planned privatisation of a 49 per cent stake in gas utility SPP, on which the government expects to make some Sk150-200 billion, would be "scuppered" by left wing politicians, making the trade deficit unsustainable in the near future.
"These are alarming figures and we are genuinely concerned," said Edward Parker from Fitch's London office. "Slovakia is an unusually rich country not to be getting an investment grade rating, but it has a number of serious underlying risks."
In addition to the trade figures and uncertainty over SPP Parker mentioned Schmögnerová's forced departure from government last month and September parliamentary elections as factors that had the agency worried.
"I can't put my finger on any one risk - the problem is in the way they interact," he said.
11. Feb 2002 at 0:00 | Tom Nicholson