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FINANCIAL TIMES, WEDNESDAY, OCTOBER 23, 1996

Nation served raw by power struggle

Slovakia received an unusually high degree of attention in the English-language press last month. Below are excerpts from two publications that focused on the nation's current state of affairs. Until Prime Minister Vladimír Mečiar was forced by the constitution to meet President Michal Kováč in August to discuss changes to his cabinet, the two former allies had not met officially for 14 months. For much of the four years since the country achieved statehood its transition to democracy has been blighted by a power struggle between its head of government and its head of state. Slovak politics is served raw.
This domestic tension has damaged Slovakia's image abroad. Its economic achievements are among the best of any of the transition countries of central and eastern Europe, but this performance has been overshadowed by the doubts expressed in western capitals about its adherence to democratic, free market values.

Slovakia received an unusually high degree of attention in the English-language press last month. Below are excerpts from two publications that focused on the nation's current state of affairs.

Until Prime Minister Vladimír Mečiar was forced by the constitution to meet President Michal Kováč in August to discuss changes to his cabinet, the two former allies had not met officially for 14 months. For much of the four years since the country achieved statehood its transition to democracy has been blighted by a power struggle between its head of government and its head of state. Slovak politics is served raw.

This domestic tension has damaged Slovakia's image abroad. Its economic achievements are among the best of any of the transition countries of central and eastern Europe, but this performance has been overshadowed by the doubts expressed in western capitals about its adherence to democratic, free market values.

Already it is threatened with exclusion from the first group of central European countries to be considered for membership of NATO and of the European Union, and yet there is little sign of the domestic political conflict abating.

Hamžík finds his hands full

As the debate on the possible expansion of the European Union and NATO grinds on, Slovakia appears to be slipping behind its neighbors in the race to join. Entry to both remains the overriding foreign policy goal, but western governments are not convinced that the country is ready to become a member of either.

The government finds itself constantly on the defensive, and notably lacks a friendly EU "sponsor". Pavol Hamžík, appointed foreign minister in August, faces a big challenge in changing western perceptions of Slovakia, and many observers feel he will not be able to do so in time to secure the country's place at the forefront of integration. Mr. Hamžík, who was ambassador to Bonn until his appointment, is immediately handicapped by the foreign ministry's lack of clout within the government. Mr. Mečiar dictates foreign policy, but that is hostage to his domestic policies. Only a more concilliatory approach at home will win new friends abroad, observers say.

Mr. Hamžík admits that his first task is to secure a formal meeting between Mr. Mečiar and Germany's Chancellor Helmut Kohl, which would go a long way towards ending Slovakia's isolation. "There have not been heads-of-government contacts as often as I think are necessary," the foreign minister says, adding that a Mečiar-Kohl meeting could be forthcoming by the end of the year.

He will also have to move quickly to fill some key diplomatic posts abroad which have been vacant for some time. Slovakia currently has no ambassador in London, Rome or the United Nations, and his former post in Bonn will also have to be filled.

Economically ahead of its peers

Doubts abroad about the country's political leadership continue to hamper its efforts to attract foreign investment, but Sovakia's economic performance is still outstripping its more favored neighbors, the Czech Republic, Hungary, and Poland.

It is forecast to achieve one of the highest levels of economic growth, combined with one of the lowest inflation rates, of any of the transition countries of central and eastern Europe in 1996 and 1997. It has one of the lowest levels of external debt in the region and a balanced government budget.

According to a recent report by the Organization for Economic Cooperation and Develpment (OECD), the club of the world's richest industrial nations which Slovakia hopes to join next year, gross domestic product (GDP) is expected to grow 5 to 6 percent both this year and next. The economy expanded by 7.4 percent in 1995.

The rate of inflation fell to 5.2 percent year-on-year in September from 8.8 percent a year earlier, and is forecast by the OECD to remain at around 6 percent next year. The exchange rate, one of the anchors in the fight against inflation, has been stable against the D-Mark and the US dollar for the past three years.

Unemployment has fallen from the peak of 15.2 percent reached in early 1994 to around 12.5 percent at present. Around two-thirds of GDP is now generated by the private sector thanks to the number of small and medium-sized enterprises, although state influence still prevails in several sectors of heavy industry.

The OECD is critical of Slovakia's "turbulent" privatization policies and has warned that the state of the Slovak banking system "remains a cause for concern."

Higher interest rates have attracted renewed capital inflows and have also led to a strengthening of the currency. Central bank reserves have grown despite the large outflows on the current account, where ING Barings, the investment bank, ir forecasting a deficit of $1.3 billion for the full years. The surplus on the capital account could be as large as $1.5 billion this years, more than compensating for the deficit on the current account.

Bank privatization is critical issue

VÚB and IRB...remain, along with the savings bank [Slovenská Sporitelňa], virtual arms of the state bureaucracy: they are intimately linked to the government's industrial privatization policy, sources of limitless but expensive credit to clients that may already be in default but which, because of the paucity of bankruptcy legislation, need not fear having the credit switched off.

The question arises of how to privatize the Big Three. Foreign bank participation in the sector is already high - 45 percent of total bank equity is either fully or partially owned by foreign, including Czech, banks. While Sergej Kozlík, the finance minister, says further foreign partnerships are not ruled out, it may not be politically acceptable.

The government and the NBS have to decide if the Big Three need strategic partners and who they should be.

If domestic strategic partners are the solution, then the only ones available are VSŽ or Slovnaft, a petrochemicals group, or other large industrial concerns. Mr. Kozlík suggests institutions such as the European Bank for Reconstruction and Development (EBRD) as potential partners. Given the EBRD's experience at Slovnaft, where it owns 10.5 percent but was angered by the sale without its knowledge to management of 39 percent, the bank may be reluctant to take on such a role again.

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