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Economic time-bombs await fresh government solutions

The Slovak Spectator asked Slovakia's most prominent market analysts what economic problems the next government would face, and then asked the country's top six parties what they planned to do. Here's what they said:
While Slovak politicians gear up for September's election campaign, the country's economic problems are steadily worsening and threaten to plunge a new government into crisis. Business and economic experts say that whatever party wins the elections, years of economic hardship await Slovak citizens.
Among the most troubling aspects of the stagnating Slovak economy, say analysts, are a dysfunctional financial system, a soaring current account balance deficit, a runaway fiscal deficit and industrial inefficiencies caused by a corrupt privatization process.

The Slovak Spectator asked Slovakia's most prominent market analysts what economic problems the next government would face, and then asked the country's top six parties what they planned to do. Here's what they said:

While Slovak politicians gear up for September's election campaign, the country's economic problems are steadily worsening and threaten to plunge a new government into crisis. Business and economic experts say that whatever party wins the elections, years of economic hardship await Slovak citizens.

Among the most troubling aspects of the stagnating Slovak economy, say analysts, are a dysfunctional financial system, a soaring current account balance deficit, a runaway fiscal deficit and industrial inefficiencies caused by a corrupt privatization process.

"Slovakia is facing a second recession [caused by its economic] transition," said Ivan Mikloš, former Minister of Privatization and currently head of MESA 10, a Bratislava economic think tank. "Many of the shortcomings of the last four years have not yet really begun to appear, and will show up in the near future."

One of the first 'shortcomings' to raise its head after September will be Slovakia's worsening financial health, experts said. The country has received only $1.3 billion in foreign direct investment since 1993, a figure that is ten times smaller than Hungary's and four times less than the Czech Republic's totals.

With virtually no foreign capital entering the country, both the government, banks and businesses have been forced to finance their activities through loans; total foreign indebtedness reached $10.74 billion at the end of April.

"When the current government asked foreign banks for loans, they accepted the conditions, whatever they were. But with the constantly increasing interest payments, the next government will find it much harder to get money from abroad," said Martin Kabát, an analyst at Slávia Capital, a Bratislava brokerage house.

But not only has overall indebtedness risen sharply in recent years: The nature of the debt burden has also become more problematic. "The share of short and medium term debt is rather high, so the real problem is bad debt time structure," said Juraj Renčko, an economics and strategy advisor at the Slovak Academy of Sciences. According to official figures, short-term debt accounted for 45.6% of Slovakia's total debt at the end of April 1998.

One of the reasons that Slovakia has grown so reliant on foreign funds is the weakness of the country's domestic banking sector. Some analysts reckoned the share of classified loans in the credit portfolios of Slovakia's biggest three banks at over 30%, and said that the need to create reserves for these huge debts was further decreasing financial flows in the country.

"This has persisted since the beginning of the transformation process, and is eating the banking sector like a cancer," said Martin Barto, an analyst at ING Barings. "The banking sector needs to recover, because companies don't have a chance to get loans, and it is a millstone around the neck of the entire economy."

Chronically short of funds, the next government will have to explore ways of attracting FDI and reviving moribund capital markets. "The next government will have to create more attractive political and economic conditions to secure more FDI, not just portfolio investment," said Kabát. Barto chimed in with the warning that "there will be no competitor for the banking sector here without the clear reformation of the capital market," and added that improved transparency and minority investor protection would do wonders for investor confidence.

Trade balance woes

Without a swift infusion of capital, analysts said, Slovakia's small and medium enterprises would soon be unable to perform the restructuring needed to survive in a global market. Slovakia recorded a 1998 first half current account balance deficit of 38.4 billion Slovak crowns ($1.1 billion), equal to 11% of GDP. The export sector is in deep need of revitalization, currently producing revenues equal to less than 50% of GDP.

"The next government will have to create a comfortable environment for medium and small enterprises," said Kabát, "including tax breaks and lower interest rates." Vladimir Zlacký, another ING analyst, added that no business incentive would be effective as long as the government continued to eat up such a large share of investments.

Analysts agreed that the problem of Slovak industry was not simply a lack of liquidity, but also the fact that the attempt to restructure production processes had been abortive. MESA's Mikloš is currently the only opposition party member on the board of the National Property Fund, Slovakia's state property agency. For him, privatization methods have been at the root of the problem.

"Slovakia is a perfect example of the fact that you can't separate economics from politics," Mikloš began. The country's privatization process had involved "narrow groups of people who privatized a large number of diverse enterprises," Mikloš said, "but taking care of these companies requires full attention. These owners have often 10-15 businesses, and therefore it's totally unlikely that they will be able to improve them." Lack of transparency in the privatization process, Mikloš continued, had allowed hidden owners to tunnel their companies "and place the capital in a safe place, like foreign banks."

"Privatization didn't bring money, markets or an improvement in managerial skills," agreed Renčko. "This is a problem, as it resulted more in losses than in income." David Brown, principal advisor with the Slovak National Agency for Foreign Investment and Development (SNAZIR), said that "the route the government went down with privatization explains why foreign investment has been so low."

But most analysts warned that any attempt to "reprivatize" former state properties now in the hands of inefficient or corrupt managers would spell economic disaster for a future government. ING's Zlacký said that "the number of illegally privatized companies is not so high, so 'reprivatization' would not affect too many companies. But on the other hand, if the new government carried out reprivatization on a large scale, that would be very unfortunate, because it would paralyze the companies and their market activities."

"More than 80% of GDP is now produced by the private sector," said Renčko. "The government shouldn't privatize anything else in Slovakia."

Finally, analysts said, the new government would have to tighten fiscal discipline and improve tax collection. Although the forecast 1998 state budget deficit was 5 billion Sk, the real figure hit 8.9 billion at the end of July. "The next government has to give up deficit spending and try and create a balanced budget," said Kabát. "This would improve the stability of the currency and would allow the government to stop issuing expensive short term paper, but it would cause a decline in industrial output and would affect ordinary people quite severely."

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