ALL THAT'S left for Slovakia to pass through gates of the Eurozone is a turn of the key. That was the enthusiastic reaction of market watchers to the European Commission's spring economic forecast for 2008 and 2009, which will serve as the basis for the May 7 assessment of Slovakia's application to join the single European currency.
The forecast estimates that average inflation will increase to around 3.8 percent in 2008 and then decrease to around 3.2 percent in 2009. Brussels' prediction that inflation will fall is an important moment for Slovakia, since the country's ability to contain inflation within the Maastricht criteria had been fuelling concerns.
"The spring prognosis confirms that Slovakia is on the right path," said Prime Minister Robert Fico on April 29, according to the Sme daily. His finance minister, Ján Počiatek, said that the prognosis displayed faith in Slovakia's ability to sustain its inflation within the Maastricht criteria.
Market watchers too share the ministers' enthusiasm.
"After the publication of the European Commission's prognosis, we can say with almost complete certainty that Slovakia will get a green-light for its entry to the Eurozone," Silvia Čechovičová, a macroeconomic analyst with the ČSOB Bank, told The Slovak Spectator.
"It was already known that [Slovakia is] meeting all the nominal Maastricht criteria and uncertainty surrounded only the sustainability of the inflation criterion," Čechovičová added.
A senior analyst with the VÚB Bank, Martin Lenko, said that the published macro-economic estimate has removed the last major concern regarding the sustainability of meeting the Maastricht criteria.
"I expect that the EC assessment which will be published on May 7 will be positive for Slovakia," Lenko told The Slovak Spectator.
According to the report, so-called harmonised (HICP) inflation in Slovakia dropped significantly, to just below 2 percent, in 2007, thanks mainly to smaller increases in energy prices combined with strong exchange rate appreciation.
"However, since the last quarter of 2007, rapidly growing food and energy prices have resulted in gradually rising HICP inflation, which is expected to peak in the third quarter of 2008," reads the EC prognosis.
Favourable underlying effects at the end of 2008 should ensure some moderation in the inflation rate, especially if there is no further surge in commodity prices on world markets, the EC said.
Even though the European Commission is expecting inflation in Slovakia and the European Union to slow in 2009, the difference between the target level for the inflation criterion and Slovakia's 12-month average harmonised inflation will shrink considerably from around 1 percent now to 0.2 percent, Lenko explained.
"Thus, the criterion is expected to be met, but it will probably be tight," Lenko added.
As far as keeping prices under control, except for state regulation of energy prices - which, according to Lenko, is not a systematic or market-friendly solution, since it creates economic deformities for the future - the entire burden of influencing the level of national inflation will shift to fiscal policies.
"After the exchange rate is fixed, the process of harmonising domestic and foreign prices will happen only through domestic inflation," Čechovičová said. "This is why stricter fiscal politics will be necessary so that inflation is kept at a relatively low level and so that an inflationary spiral is not set off."
Lenko agrees that the government will have to take a more careful approach towards managing public spending so that it prevents excessive growth in demand pressures.
In the light of the EC's spring assessment, Slovakia's eurozone experience is likely to be different to that of Slovenia, where prices rocketed after the country entered the Eurozone in January 2007.
"Slovenia, unlike Slovakia, used several administrative measures, such as freezing salaries and some prices, for example of energy, to keep inflation at low levels," Čechovičová said.
According to Lenko, the fast rise in prices in Slovenia at the beginning of last year was not related solely to the adoption of the euro.
"Slovenia's bad luck was the fact that the rapid global growth of food prices and energy caught them exactly at the same time as euro adoption, which contributed to the negative perception of the adoption of the euro itself," Lenko said. "The faster growth of food prices compared to other countries was also linked, according to the Slovenian finance minister, with a lack of competition on the part of retail chains."
In Slovakia this situation should not arise since there is strong competition among food retailers, with new companies expected to arrive and hence further sharpen competition, said Lenko.
As far as energy prices were concerned, their faster growth in 2007 was linked to the fact that Slovenia had in the past regulated energy prices more significantly than in Slovakia, Lenko said
"Considering the fact that energy prices in Slovakia are almost at the level of energy prices in the EU, it is less probable that the Slovenian experience will be repeated in Slovakia," Lenko concluded.
Predictions remain rosy
As for other macro-economic indicators, the EC expects economic growth to ease to around 7 percent in 2008 and 6.25 percent in 2009.
"Domestic demand is likely to remain the main driving force of economic expansion," said the EC.
The commission expects further improvements in the labour market and sustained credit expansion to continue to support growth in private consumption, which should remain well above 5 percent.
According to the EC, gross fixed capital formation should remain robust at around 7 percent, helped by further foreign direct investment in the automotive and electronics sectors and the subsequent arrival of related suppliers.
The EC expects unemployment to fall further in 2008 and 2009, thanks to expanding export production that is likely to continue to create jobs.
The January 2008 increase in excise taxes, which caused a larger-than-expected accumulation of stocks of cigarettes by consumers and enterprises at the end of 2007, resulted in extra revenue of some 0.5 percent of GDP compared to the 0.25 percent of GDP predicted in the budget, the EC report said.
This effect, together with higher-than-expected GDP and employment growth and lower-than-budgeted spending on co-financing for EU funds, ensured that the general government deficit dropped to 2.25 percent of GDP in 2007.
Continued strong growth combined with limited wage increases in the public sector should ensure that the general government deficit falls to some 2 percent of GDP in 2008.
Gross public debt is expected to remain broadly stable over the forecast horizon, EC report said.
