The credit crunch experienced by Slovak companies has led big corporations to borrow abroad, and left small and medium businesses to starve from lack of capital. Experts say, however, that even foreign sources are beginning to dry up as Slovakia nears its borrowing limits.
Economic analysts agree that unless the government balances its books and cuts back on infrastructure projects, the domestic credit crunch will continue unabated after September's elections. The bad news for the Slovak corporate sector is that only one party out of the six likely to secure parliamentary representation advocates a swiftly balanced budget and an infrastructure freeze. Ironically, it is the reformed communist SDĽ party.
Reaching the limits
"We are approaching the threshold where it is difficult to borrow any further [abroad]," said Daniela Zemanovičová from the Center for Economic Development. "Beyond that threshold, you can still borrow, but it is much more expensive," she added, explaining that lenders are becoming much more wary of Slovakia, especially in the wake of the Asian crisis.
Debt shoots up
According to data provided by the National Bank of Slovakia, Slovakia's gross foreign debt grew from $8.5 billion in May 1997 to $11.2 billion in May 1998, the latest month for which figures are available. "The Government and the NBS borrowed only $2.2 billion," explained Ivan Paška, the head of NBS Press Department. "Corporations and commercial banks borrowed the rest - currently $8.9 billion." One year ago, that figure was $6.4 billion, representing an annual growth of 40%.
Government sucks up capital
According to Zemanovičová, the reason behind the growing debt is simple. "The government sector sucked domestic resources out of the market and left domestic entrepreneurs reliant on foreign money," she said. NBS figures bear out her statement. The domestic net government borrowing requirement - how much the government owes domestic banks altogether - has grown by 80% since 1996 (in real prices) and reached 114.4 billion Sk ($3.3 billion) in July of this year, driving interest rates to stratospheric levels of between 20 and 30%.
Even the government's $750 million in foreign-currency bonds, sold abroad in May and July, did not substantially relieve the domestic market's high rates. According to an official NBS report, the funds flooding in allowed the government in the short term to refuse high-interest bond sales and keep money markes rates down. "The Ministry of Finance [successfully] tried to keep maximum rates...on government bonds below the 20% threshold...by low acceptance of higher yield demands," the report said.
However, soon the NBS itself was forced to drive rates back to their previous level. Peter Ševčovič, the Director of the NBS Currency Department, told the TREND weekly that the reason for the rate hike was that the government was changing the foreign currency it borrowed into Slovak crowns. "That money has inflationary influences," he said.
Debt to equity ratios rise
According to Vladimír Zlacký, an analyst with ING Barings, the problem is compounded by the dysfunctional capital market, in consequence of which "Slovak companies finance their needs almost exclusively from loans," he said. "If we look at the [corporate] debt to equity ratio, it has been growing for three years now. It is getting to a point where it is not possible to sustain it any further," added Zlacký.
Small and medium enterprises are not encountering problems with a rising debt/equity ratio, however. According to a Center fro Economic Development study, 75% of small enterprises have no outstanding loans. The same study shows, for example, that while enterprises with less than 10 employees account for 31% (16.2 billion Sk) of profit created in the Slovak corporate sector, they supply only 8.6% (15.9 billion Sk) of the total corporate investment figure. In other words, small to medium firms draw investments almost exclusively from profits.
The reverse is true of big corporations. According to Economic Center study, their share of investment is 61.7%, far outstripping their 34% share of profit creation. The reason for the anomaly is that they can more easily borrow funds to invest on both the domestic and the foreign market.
"In the last two years, the gap between big, strong corporations and small and medium ones has widened [in this respect]," said a top manager at a major Slovak company who requested anonymity. "Banks know the big players, they have a lot of property to use as collateral, not to mention the fact that the paperwork is so immense it discourages a lot of small borrowers," he said. He also noted that "[domestic] money is currently too expensive for everyone." The result is that even the big corporations have been heading abroad in increasing numbers to borrow in foreign currencies, which is the top reason for the rapid growth of the country's foreign debt.
"What would really help the situation is a minor devaluation," said Zlacký, explaining that it would bring interest rates down somewhat and serve as a lesson to those borrowing too much abroad. "It is necessary to punish corporations [which borrow extensively], to make them realize that the rate they pay abroad is not LIBOR + something, but LIBOR + something + risk of devaluation," explained Zlacký, adding that "currently, they just treat these funds as a cheap loan."
But the previously mentioned top manager said he did not fear devaluation. "It all depends on how much [each company] borrowed and how much they export. If they [proportionally] export more than they borrowed, the increased loan payments caused by the devaluation are going to be more than offset by profits from increased export prices in crowns," he said. The biggest private Slovak companies, such as VSŽ Holding, Slovnaft, Duslo and Matador, are all export-heavy.
However, the government and infrastructure corporations with heavy government stakes, such as Slovak Telecom, Slovak Railways and motorway construction companies, would be hit much harder.
Solutions to the debt dilemma are not likely to come quickly from Slovakia's next government. Only the leftist SDĽ advocates cutting back on infrastructure projects, while both the largest opposition party (the SDK) and the ruling HZDS party declare full steam ahead for job-creating programmes.
Nor do Slovakia's parties reckon to eliminate the fiscal deficit quickly. The SDĽ, again, would balance the budget in 2 years, but the HZDS envisages a fiscal deficit all the way to 2005.
7. Sep 1998 at 0:00 | Miroslav Beblavý