The Slovak cabinet finally approved its draft proposals to heal the nation's macroeconomic imbalances on January 7, but foreign analysts have already criticised the 'economic package' for being too short on specifics and too long in preparation.
"We have seen the government's desire, knowledge and understanding of the need to implement reform, but I think that the problems they are facing are much bigger that they understand right now," said Matthew Foger, a senior economist with Merrill Lynch in London, on January 13.
Foger visited Slovakia from January 5-8 and discussed the economic package with Finance Minister Brigita Schmögnerová, vice-premier for economy Ivan Mikloš and other cabinet officials. "We've discussed the main issues and now we need to see more specifically what they intend to do," Foger said.
The good and the bad
The package includes 75 measures designed, among other things, to restore fiscal discipline, reduce budgetary expenditures and increase revenues. The other main target of the package is corporate, bank and economic restructuring, including price increases in transportation, gas for households and electricity for corporations to take effect on April 1 (see Capital Markets, page 4, for further details).
According to Foger, the cabinet's intentions were not only vague but occasionally unrealistic. "I'm very skeptical about their plan to keep GDP growth at three percent this year. There's a threat that they've overestimated the ability of economy to react to the new situation," Foger said, adding that the dysfunctional banking sector would be a big problem for the cabinet to resolve. "They can't underestimate these problems," he added.
On the other hand, Foger said, some elements of the package deserved praise. "I find positive the fact that the cabinet had their parameters established for the fiscal deficit, and the fact that the package was agreed to without too much conflict inside the coalition," he said.
Other western financial experts said that the package did well to concentrate on reducing the fiscal deficit.
"What really needs to happen is that they [the government] cut domestic fiscal expenditures very sharply," said Ehsun Khan, vice-president of the Fixed Income Division at Morgan Stanley in London.
In order to reduce state expenditures, the cabinet package plans to cut superfluous state personnel, freeze wages and slash expenditures in all state administration bodies.
According to Mikloš, the cabinet also plans to make financing of the deficit and state debt more flexible by tapping into the savings of private citizens.
Domestic analysts, who have watched the drafting of the package more closely, were inclined to be more generous than their western counterparts. "I wouldn't take [the criticism of western analysts] as dramatic, because it was essential for the credibility of the government to set out on the right path," said Martin Barto, a senior analyst with the Dutch investment bank ING Barings.
Slow to act
The Slovak media have also been critical of the cabinet for failing to launch its reform package earlier. Cabinet had promised to have the package approved by December 23, but failed to secure the agreement of labour unions and business groups in time for the deadline.
The timetable was then set for january 7, but the package that was eventually approved on that day was described by Mikloš as "an outline of intentions" rather than the expected concrete measures.
Mikloš, Schmögnerová and Labour and Social Affairs Minister Peter Magvaši have now been tasked with submitting a list of specific measures to cabinet by January 20.
But Barto again defended the cabinet, saying that ministers had had to spend considerable time analysing the economic situation inherited from the government of ex-Prime Minister Vladimír Mečiar, and that they had also been distracted by unforeseen crises.
"They had to deal with unexpected time bombs," Barto said, referring to steel giant VSŽ's recent default on a $35 million loan, as well as construction firm Vodohospodárska Výstavba's demand that the government pay $13 million in maturing interest payments on state-guaranteed loans the firm couldn't cover.
All's well that ends well
One of the main aims of the package is to attract foreign investment to Slovakia, and analysts said that the reforms proposed in the package were a step in the right direction.
"Foreign investors have avoided the country for a long time due to the political situation, but the effort of the new government seems to be coherent and cohesive," maintained Foger, adding that continuing efforts of Slovakia to move towards the EU and NATO and "bring itself back to western Europe would be a major factor in helping them attract foreign investment."
Foger said that before potential investors would enter the Slovak market, however, "they would look at things like whether the country has good laws that will support their ownership, sufficient transparency, communications, good infrastructure, good human capital and political stability."
Barto, for his part, said that it was within cabinet's power to attract investors, but that concrete reforms would have to be undertaken immediately. "No one will come and tell us what to do, so if the government wastes its time now, it will be much harder in the future," he said.