"For GDP growth to be sustained [at 1997 levels], there would have to be enormous growth in the service sector, and this won't happen,"
Vladimír Zlacký, ING Barings analyst
Government officials hailed the figures as a vindication of their macroeconomic policies. "Last year's results were quite favorable for us," said Michal Baránik (HZDS), Chairman of the Parliamentary Committee on Budget, Finances and Currency. "It's not just an accident, but instead the continuation of a trend that has been ongoing since this government took power in 1994."
But both independent analysts and opposition deputies maintain that the National Bank of Slovakia's (NBS) restrictive monetary policy, the absence of effective bankruptcy laws, the scarcity of investment capital and excessive public sector spending meant that GDP growth would fall sharply in 1998 and continue to decline in 1999.
"The 1997 figure was surprisingly high," said Ján Tóth, an analyst with Tatra Banka. "Growth simply must slow this year as interest rates are unlikely to decrease."
Vladimír Zlacký, an analyst with ING Barings, agreed. "We are predicting four percent GDP growth for 1998," he said, adding that the strong 1997 figures had been brought about by "a high growth in fixed capital formation [by 14.5 percent] and exports [by 9.2 percent]."
Zlacký said that the 7-percent import surcharge, imposed last July, had artificially stimulated demand for domestic goods and boosted domestic production. "The surcharge made foreign goods more expensive," he explained, "encouraging households and companies ro buy more domestic goods and creating a kind of substitution effect."
But Zlacký warned that 1998 would not see the same kind of GDP figures. "Industrial output [0.8 percent annually in January] has been very small for the last three or four months," he said.
1997's nominal GDP of 653.9 billion Sk ($19.6 billion) was largely fuelled on the supply side by an 11.1 percent increase in the service sector. "[But] for GDP growth to be sustained [at 1997 levels], there would have to be enormous growth in the service sector, and this won't happen," Zlacký said.
"The absolute figure for GDP growth concerns me less than the quality of this growth," said Brigita Schmögnerová, an SDĽ economic expert, in reference to the fact that last year's growth was funded to a great extent by foreign loans. "If we calculate the 1997 growth financed by domestic sources, it falls from 6.5 to 2.4 percent, which is very important, because Slovakia's foreign debt has increased immensely over the last two years and now exceeds $11 billion."
"That makes me laugh," Baránik reacted. "Mrs. Schmögnerová is mistaken - the whole world lives on loans, and the prosperity of most states began on the basis of foreign sources, so what she calls 'negative signals' I would call positive."
Baránik explained that a high level of foreign debt was in fact a sign of the country's economic health and credibility, since foreign creditors never extended loans to companies that had not been thoroughly checked out and judged to be credit-worthy. "In contrast, loans extended by Slovak banks go to projects which often fail," he said.
Schmögnerová vs. Mečiar
But for all that foreign banks have judged Slovakia credit-worthy, foreign investors have shown no such confidence and have stayed away in droves. According to the NBS, only 41.2 billion Sk ($1.17 billion) worth of foreign capital was invested directly in Slovakia in 1997, a figure which is equal to about one percent of GDP, and which is very low when compared to other EU-associated countries. Since 1990, the NBS added, Slovakia has pulled in six times less foreign direct investment (FDI) per capita than the Czech Republic and ten times less than Hungary.
Schmögnerová said that low FDI was just another ominous link in a long chain of problems that she wanted to discuss publicly with Prime Minister Vladimír Mečiar. "I would like to ask him how he would explain the fact that foreign investors do not want to invest in Slovakia, that we have the lowest per capita FDI in the region," she said. "I would like to ask Mečiar if he really is well informed of economic indicators and to what extent he understands what these indicators mean."
But Baránik claimed that Slovakia's low FDI was a result of the country's relative youth. "As an independent state, we had to rebuild the entire investment apparatus, because the Czechs took the system that had been functioning in Czechoslovakia," he said. "Investors didn't have contacts with Slovakia, because foreign capital had been focused mainly on Prague. The Hungarians, meanwhile, have been working on their system for 18 years."
9. Apr 1998 at 0:00 | Tom Nicholson