Spectator on facebook

Spectator on facebook

Current account deficit skyrockets

Slovakia's current account deficit soared to 38.4 billion Slovak crowns ($1.1 billion) for the first half of 1998, almost 11 percent of the country's GDP. The Ministry of Economy, however, took the news in stride, predicting confidently that the troubling figures should decline to 8% of GDP by year's end. Slovak macroeconomic analysts were less optimistic, saying that a figure of 10% of GDP was more realistic.
Analysts ascribed the deficit to high investment imports, expansive fiscal policy, high domestic consumption and continuing problems in the Slovak export sector.
"The unpleasant developments in the first half of 1998 in the current balance deficit were caused by higher investment imports," said Martin Barto, an analyst with ING Barings investment bank. Barto also stressed that weak export figures played an important role in the deficit figure. "Slovak exports are not able to handle competition from Asian and eastern European countries. And 20% of our exports go to the Czech Republic, where purchasing power decreased in the first half of 1998," he said.

Slovakia's current account deficit soared to 38.4 billion Slovak crowns ($1.1 billion) for the first half of 1998, almost 11 percent of the country's GDP. The Ministry of Economy, however, took the news in stride, predicting confidently that the troubling figures should decline to 8% of GDP by year's end. Slovak macroeconomic analysts were less optimistic, saying that a figure of 10% of GDP was more realistic.

Analysts ascribed the deficit to high investment imports, expansive fiscal policy, high domestic consumption and continuing problems in the Slovak export sector.

"The unpleasant developments in the first half of 1998 in the current balance deficit were caused by higher investment imports," said Martin Barto, an analyst with ING Barings investment bank. Barto also stressed that weak export figures played an important role in the deficit figure. "Slovak exports are not able to handle competition from Asian and eastern European countries. And 20% of our exports go to the Czech Republic, where purchasing power decreased in the first half of 1998," he said.

Juraj Renčko, an analyst with the Institute for Forecasting at the Slovak Academy of Sciences, said that "the result is worse than expected. It is probably due to the high dynamics of economic growth, which was fed by a continuous growth in foreign debt."

But Štefan Burda, director of the foreign trade section at Ministry of Economy, said that mid-year results "are often worse than results for the second half of the year. We are where we want to be."

Details

Analysts were divided on their predictions of full-year current account balance results, but agreed on the short and long term measures necessary to effect an improvement.

ING's Barto sided with the ministry's forecast. "Our estimate for 1998 is that the deficit will be about eight percent of GDP. The reason is that the current account is mostly dependent on the trade balance, and we expect it to improve in the second half of 1998."

But both Renčko and Jan Tóth, a research economist and strategist at Tatra banka, predicted that the current account balance deficit would hit at least 10%.

Pressed for details as to his ministry's plans to achieve an 8% of GDP figure, Burda said that "the current account balance deficit will not exceed 60 billion crowns by the end of the year as long as tighter fiscal policy is applied. If there is no increase in the amount of Slovak money in circulation, there will be no increase in imports. There will simply be no money for [an increase in imports]."

There was widespread agreement among analysts that tighter fiscal policy and a lower budget deficit would improve matters considerably. Tóth suggested that public sector investments were far too high, and pointed to the Slovak government's climbing fiscal deficit, which reached 8.9 billion crowns ($256 million) in July, up from 3.9 billion crowns in June. "Lower investments into building highways and other public projects would have a positive impact on the current account balance," he said.

Tóth argued that Slovak export products were not competitive because of their low quality, and stressed the need for pro export institutions, such as the Slovak Chamber of Commerce and Eximbanka, to play a more effective role in supporting export sector changes. But Renčko warned that these bodies were ill-positioned to make a difference. "Eximbanka started a short time ago, and does not have the resources to do more at the moment," he said.

Most analysts agreed that long-term improvements depended on higher direct foreign investment. "Higher FDI would be very helpful for the restructuring of companies, and increased household savings would be handy as well."

Renčko advised that for these investments to occur, interest rates would have to fall sharply. "It is absolutely necessary to put the financial capital market and the banking system in order," he said

Agreement was also reached on the seriousness of the situation. "A decline in the current account balance must take place, because it is not possible to keep a situation like this under control for a long time," said Renčko.

Nomura, a Japanese investment bank, highlighted Slovakia's continuing problems with its current account deficit in its July Eastern European economic research bulletin, and warned that the deficit made the Slovak crown a likely candidate for devaluation after September's general elections. Slovak analysts agreed. "An eight to ten percent devaluation of the currency would bring the trade balance to zero in short order," said a Slovak financial analyst who wished to stay anonymous. "Depreciation of the Slovak crown would help," Barto agreed.

The country's current account deficit figures cannot be compared with those for 1997, because the Slovak Statistic Bureau changed the methodology of their calculation starting January 1, 1998.

Top stories

LGBTI people in the regions: We change people’s minds

Bratislava will dress up in rainbow colours this August again, for the seventh time. This will be for the Bratislava Dúhový Pride diversity festival. But the colours of the rainbow are less bright in the regions,…

Slovakia’s LGBTI community seeks to expand their rights.

Things that make us different also make us stronger

On August 19, a rainbow flag will fly over the US Embassy in Bratislava to represent the firm commitment of the United States to defending the human rights of LGBTI people, writes Ambassador Sterling.

The rainbow flag flew over the US Embassy in Bratislava in 2016.

Blog: 5 things you should do on your visit to the north of Slovakia Photo

Here is a list of tips by an experienced tour guide - including things you have probably not tried before.

Bratislava growing high Photo

High-rise buildings sprouting up in Bratislava

Visualisation of the future skyline of Bratislava