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1998 GDP results spread gloom

Official figures released on March 19 showed that the annual growth of the Slovak economy slowed to barely 0.5% in the fourth quarter of 1998. The news, which arrived as parliament prepared to debate the 1999 state budget draft, sent market analysts and government strategists back to their drawing boards to script an even more sombre picture of this year's GDP performance.
"It was quite surprising for everybody on the markets," said Ivan Chodák, an analyst with CA IB Securities. The fourth quarter result lowered the 1998 full-year GDP from the expected 5% to 4.4%, Chodák said, confounding the predictions of "the OECD, the IMF, the World Bank, domestic analysts - nearly everybody."
Few could have been more surprised - or dismayed - than the government, whose official target for GDP growth in 1999, as stated in the budget draft, is 3 to 4%.


Deputies from the opposition HZDS party plan strategy during a March 23 parliamentary debate on the 1999 draft budget. Former Finance Minister Miroslav Maxon (left) instructs former Parliamentary Speaker Ivan Gašparovič (rear) and other colleagues.
photo: TASR


Official figures released on March 19 showed that the annual growth of the Slovak economy slowed to barely 0.5% in the fourth quarter of 1998. The news, which arrived as parliament prepared to debate the 1999 state budget draft, sent market analysts and government strategists back to their drawing boards to script an even more sombre picture of this year's GDP performance.

"It was quite surprising for everybody on the markets," said Ivan Chodák, an analyst with CA IB Securities. The fourth quarter result lowered the 1998 full-year GDP from the expected 5% to 4.4%, Chodák said, confounding the predictions of "the OECD, the IMF, the World Bank, domestic analysts - nearly everybody."

Few could have been more surprised - or dismayed - than the government, whose official target for GDP growth in 1999, as stated in the budget draft, is 3 to 4%. After the release of the 1998 GDP figures, Deputy Prime Minister Ivan Mikloš said publicly that 2% growth was a more realistic aim for this year. Mikloš also expressed doubts about the government's ability to keep unemployment under 15%, as promised in the budget draft.

Mikloš' misgivings only heightened the tension in parliament as politicians debated the 1999 state budget. If the government's GDP target is not met, analysts predicted, many of the budget's other macroeconomic goals may be in jeopardy as well, making the task of achieving political consensus and passing the budget by the March 31 deadline even more difficult.

Cause of the crash

Economic analysts said they had been surprised by the 4Q98 GDP results, but stressed that it was not yet time to sound a general alarm. "It was kind of shocking," said Miloš Božek, an economist with J&T Securities, "but if you look at the breakdown of the GDP [figures], you can see why it happened."

Božek said that two economic factors - Slovakia's worsening trade balance and falling inventories, or 'stocks' - were behind the unexpected slowdown.

Chodák agreed with Božek's analysis. "Expectations that the Slovak crown would devalue last fall led to higher imports beginning in October," he said. "In 4Q98, imports were 15.7% higher in constant prices than in 4Q97."

Chodák added that increased demand for imports had lowered consumer appetites for domestic goods, thus slowing GDP growth.

As for falling stocks, Chodák said that in 4Q98 the inventories of Slovak firms had dropped a surprising 23.5 billion crowns for a FY98 figure of minus 26.1 billion crowns. "The GDP thus decreased by this figure," he said.

Neither Chodák not Božek, however, could explain why producers had begun to sell from what they had in inventory rather than from what they were producing. "This decrease in stocks is a tricky and very volatile figure in GDP measurement," said Chodák. Božek agreed, saying that the stocks figure was "probably more driven by statistical and methodological problems" at the Statistical Office than by what really occured in the economy.

While the 4Q98 GDP numbers caught many by surprise, analysts have been predicting since last fall that 1999 would see modest growth if any.

"The declining trend was in line with expectations," said Chodák. "Everyone knows the Slovak economy will have difficult days in the next few years, so growth will not be expected to match previous figures."

Chodák said he had revised his 1999 GDP growth forecast to "zero to 1.5% - we're being quite conservative at the moment."

But the cabinet, clearly, cannot revise its budget figures with the same liberty as analysts, given the ripple effect on economic calculations that such revisions have.

Even if Mikloš's estimate of 2% growth proved right, Chodák explained, the government could miss several of its budget draft targets, including total revenues (set at 179.9 billion Slovak crowns) and fiscal deficit as a percentage of GDP (projected to fall from 5% in 1998 to below 2% in 1999).

"Tax and revenue forecasts are based on expectations of 3% GDP growth," Chodák said, reasoning that if 1999 growth was 1%, the fiscal deficit - set for 15 billion crowns - might rise to 17 or 18 billion, representing over 2.5% of GDP. "This wouldn't be a disaster, but it wouldn't be 2% of GDP," Chodák said.

The implications of missing budget targets were made clear on March 23, the first day the budget was discussed in parliament. The National Bank of Slovakia (NBS) released a statement making "a fiscal deficit of public budgets not exceeding 2% of GDP... imperative... for the stabilisation of economic and monetary development."

Ordering fiscal policy to NBS demands may prove difficult. Early in the morning on March 23, cabinet approved a wage freeze for certain classes of public sector employees like judges and police. The move brought an immediate protest from the Slovak Association of Judges and the Police Union.

Another plan to increase basic VAT rates and generate increased income, mooted by Mikloš earlier in March, was flatly refused by the coalition member Democratic Left Party (SDĽ), which has proposed an import surcharge instead. The VAT increase was also opposed by the country's largest trade unions, which have called a May 1 strike to protest the way in which they have been treated by the government.

And even if the coalition parties manage to agree on measures to compensate for lower growth, getting the budget approved by parliament in time for the March 31 deadline may prove impossible. As the raucous budget debate opened on March 23, fully 77 MP's had signed up to deliver comments on the draft. On the first day of debate, there was time for only six MP's to address the chamber.

Slovakia has been under a provisional budget since January 1 because, following September 1998 elections, the new government was not formed in time to approve the 1999 state budget. The provisional budget is set to expire on March 31.

Grain of salt

Božek, for his part, said he was working on his 1999 GDP forecast "at this very moment," and expected one or two percent growth. He warned, however, that all predictions should be taken with reserve.

"Conditions this year will be unique - we have had a change of government, new fiscal policies, price liberalisation, cost-cutting in extra-budgetary funds, a floating crown, and we may see further privatisations," Božek enumerated. "No one can say what will happen."

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