PREPARATIONS for the euro and the global financial crisis had the most significant influence on Slovakia’s economy this year.
In 2008, key figures connected to Slovakia’s readiness to join the eurozone were released and evaluated by the European Union.
In the second half of the year, the economy’s performance was mainly influenced by the global economic crisis. In response to the crisis, the government drafted a bundle of crisis measures, moved towards greater regulation of energy prices and revised the country’s pension system, citing the spreading global crisis as justification.
The crisis also began affecting growth in Slovakia, which this year has reached 7 percent. Slovakia has decreased its GDP projections for 2009, but will remain one of the fastest-growing economies in the EU .
It will start using the European single currency on January 1, 2009.
On January 16, National Bank of Slovakia (NBS) Governor Ivan Šramko said that Slovakia’s prospects for meeting the Maastricht criteria for accession to the eurozone were very good. In the months following this statement, Slovakia was to release figures on public finances, inflation and other measurements which together contribute to judgement of compliance with the Maastricht criteria.
Just months before the European Commission approved Slovakia’s preparedness for the euro, the Slovak crown decided to flex its muscles for the last time. Powered by the economy’s performance, Slovakia’s commitment and favourable prospects for euro adoption, the Slovak crown began strengthening. In February it got to a level of below 33.000/€. It continued strengthening over the next months, and arrived at under 31.000/€ in May.
The government amended the law to grant state-owned Slovak Post (Slovenská Pošta) the exclusive right to deliver hybrid mail, which had been open to competition for several years. Hybrid mail is generated when customers transmit content electronically to a postal operator, which then prints, posts and delivers it.
On March 20, the Finance Ministry released preliminary data showing the national deficit in 2007 had reached 2.2 percent of GDP and national debt stood at 29.4 percent of GDP. This suggested that Slovakia was fulfilling the Maastricht fiscal criteria. On April 19, the European Union's Statistical Office, Eurostat, confirmed the data.
On April 11, parliament approved the cabinet’s draft bill on retail chains, which was drafted to eliminate “inappropriate conditions” and increase regulation. The law defines inappropriate conditions as selling products or services to consumers for prices lower than production cost or the purchase price for which the goods were supplied. It will come into effect on January 1, 2009.
On April 16, Eurostat and the Slovak Statistical Office released data on harmonised inflation for the twelve-month period ending in March 2008. Based on this data, Slovakia fulfilled the nominal inflation Maastricht criterion with a cushion of one percentage point below the permitted ceiling of 3.2 percent. The twelve-month average of harmonised inflation in Slovakia reached 2.2 percent.
On May 7, a convergence report issued by the European Commission stated that the country’s fulfilment of the Maastricht Criteria was sustainable. In doing so, the EC recommended Slovakia’s accession to the eurozone as of January 1, 2009. A few weeks later, Slovakia’s accession was approved by the European Parliament and then by the Council of EU economy and finance ministers.
Following the crown’s highs, eurozone ministers, representatives of the ECB and other countries in ERM II agreed to Slovakia’s request to revalue the crown’s ERM II central parity by 17.6472 percent. Therefore, overnight on May 28-29, the parity was revalued from Sk35.4424/€ to Sk30.126/€. This was the second revaluation of the central parity. On Slovakia’s entry into ERM II, the parity had been set at Sk38.455/€. The first revaluation happened in March 2007 by 8.5 percent to Sk35.4424/€.
The parity revaluation became the centre of a political affair. The opposition alleged that financial groups had learned of the revaluation in advance and used it to reap large profits in foreign exchange transactions. The opposition accused Finance Minister Ján Počiatek of leaking the confidential information. However, on June 17, NBS Governor Šramko said that the bank had no information on which it could state that classified information had been disclosed.
The second, or capitalisation, pillar of the pension system closed after opening for six months in January. More than 103,000 people left it and over 21,000 joined in those months. In 2005, when the Mikuláš Dzurinda government reformed the pension system, more than 1.5 million savers joined the pillar.
The Economic and Financial Council of the European Union (Ecofin) decided on July 8 that the conversion rate at which the Slovak crown would be converted after Slovakia’s changeover to the euro on January 1, 2009 would be Sk30.126/€, the same as the existing central parity rate.
In July the Regulatory Office for Network Industries (ÚRSO) gained more power to control energy prices. Prime Minister Fico said the move would prevent low-income households from spending a higher share of their income on energy than anywhere in the European Union. Prices would be capped from 2009 until the share of household income expenditure on energy reaches the EU average.
The Moody's rating agency upgraded Slovakia's foreign currency debt and deposit ceilings to ‘AAA’. Slovakia now has higher credit ratings from the trio of major rating agencies - Moody’s, Standard & Poor’s and Fitch - than the Czech Republic, Poland or Hungary, its partners in the Visegrad 4 (V4) club of Central European nations. Both Moody’s and market watchers said that Slovakia’s improved rating should be attributed to the country’s nearing adoption of the euro.
The Telecommunications Office kicked off a joint tender to select an operator of the first and second Digital Video Broadcasting – Terrestrial (DVB-T) multiplex in Slovakia, when it released an invitation to submit bids and applications on August 20, 2008.
August 24 was the last day to comply with the requirement that all prices for products and services be displayed in both currencies: the Slovak crown and the euro.
Primary frontloading of banks, which is the distribution of euro cash to commercial banks in cooperation with the NBS, started in autumn.
From mid-September to early October, politicians, bankers and analysts gradually abandoned their rosy scenarios that the country would be sheltered from the global financial crisis by its recent economic growth, careful banking and sufficient liquidity. By late October 2008, the question was no longer if the global crisis would affect Slovakia but by how much.
On October 12 to 13, Fico took part in the special eurozone member summit in Paris. This was the first time that Slovakia was invited to any of the group’s meetings. The end result of the summit was an agreement to provide ailing banks with a lifeline in order to prevent key financial institutions from failing.
The cabinet approved the state budget for 2009 on October 15. It estimated economic growth at 6.5 percent and projected a deficit of 1.7 percent of GDP. It was immediately criticised by the opposition and analysts for not reacting to the challenges of the global crisis and for unrealistic projections of GDP growth.
The government approved its Strategy on Energy Security on October 15, about a year after it was first made public. It is a long-term plan for how to obtain reliable supplies of all types of energy resources.
From the beginning of next year, the minimum monthly wage in Slovakia will increase from the current Sk8,100 (€268.9) to Sk8,902 (€295.5), the Cabinet decided on October 15. The lowest hourly wage will thus grow from the current Sk46.60 (€1.547) to Sk51.15 (€1.698).
In response to a decision by EU finance ministers to raise the minimum level of guaranteed bank deposits to €50,000 across the EU, Slovakia went one step further. On October 24, parliament approved a draft amendment to the law on protection of deposits. Based on the law, the state will guarantee an unlimited protection of personal deposits, as well as deposits of some small corporate clients. Until then, the state had guaranteed personal bank deposits up to 90 percent of inaccessible deposits of one depositor in one bank; however the maximum was €20,000 (Sk602,520).
On October 28, the National Bank of Slovakia (NBS) decided to change its key interest rate by 50
basis points starting October 29. The bank mirrored the rates offered by the European Central Bank (ECB) as Slovakia will join the eurozone in January 1, 2009 and by then the interest rates of Slovakia must be harmonised with those in the eurozone. The two-week sterilisation repo rate dropped to the level of the key interest rate in the eurozone, i.e. 3.75 percent p.a. The one-day refinancing rate decreased from 5.75 percent p.a. to 4.75 percent p.a. However, the one-day sterilisation repo rate increased from 2.25 percent p.a. to 2.75 percent p.a., the central bank told the SITA newswire.
Thousands of minimum wage and low-income workers will be eligible for an annual employment bonus under a proposal that made its way through parliament in late October.
Minimum wage earners are currently exempt from paying income taxes. The revision will make them eligible for a negative tax, which means the state would provide a monthly bonus of Sk200 with the first payment arriving in March 2010 (it will be paid annually in arrears on income earned from 2009 onwards).
The so-called secondary frontloading, which is distribution of euro cash to businesses and the public, started in November and should last till the end of the year.
As of November 1, 2008, a new law granted the government powers to regulate prices if it detects signs of unjustified increases. On November 6, parliament passed an amendment to the Penal Code that would allow courts to impose prison sentences of up to 12 years on businesses found to have raised prices without justification during the euro adoption period.
Slovenské Elektrárne (SE), Slovakia’s dominant power generator, officially launched the project to complete the third and fourth blocks of nuclear power plant in Mochovce on November 3. The construction is projected to cost Sk83.6 billion (€2.775 billion).
The boards of energy companies can no longer decide on price-change proposals submitted to the national network regulator ÚRSO: instead only a shareholders’ assembly can do so. The cabinet amended the law on November 4 in little more than a day in response to an SPP proposal to raise household gas prices by up to 24 percent.
On November 6, the government came up with a plan to weather the global financial crisis: a 26-item package of measures which assumes a more effective use of EU funds, loans for small and medium-sized businesses, support for applied research and innovation, public spending cuts, a committee to monitor the impact of the global crisis, a push to influence the pricing policies of energy companies and preferential treatment for domestic suppliers.
Also on November 6, the ECB cut its rates, and Slovakia followed suit on November 12, though the analysts had expected this step following the NBS Bank Board meeting on November 25. The NBS thus cut the two-week sterilisation repo rate by 50 basis points to the level of the key interest rate in the eurozone, i.e. 3.25 percent p.a. The one-day refinancing rate decreased from 4.75 percent p.a. to 4.25 percent p.a., while the one-day sterilisation repo rate decreased from 2.75 percent p.a. to 2.25 percent p.a.
The second pillar of the pension system was reopened on November 15 and will remain so until mid-2009. This time, the Labour Ministry expects between 30,000 and 150,000 savers to leave and 5,000 to 20,000 to join. The Fico government has opened the second pillar twice to allow clients to return freely to the state-run pay-as-you-go system (or first pillar).
After the Finance Ministry's Financial Policy Institute on November 4 revised its prognosis for economic growth from the original 6.5 percent to 4.6 percent, Slovak officials admitted that next year’s budget might be changed. Thus, on November 24, the parliamentary finance committee incorporated an increase in the Slovak general government deficit from 1.7 to 2.08 percent of GDP and lower GDP growth projection into the draft state budget.
By the deadline of November 20, four bidders had enrolled in the DVB-T tender: two Slovak companies, Telecom Corp. and Towercom, and foreign firms Valtech Communications Inc. from Canada and Osterreichische Rundfunksender GmbH & CoKG (ORS) from Austria. However, the tender process was put on hold pending an injunction issued by the Bratislava District Court at the request of Telecom Corp.
The ruling coalition on November 25 passed a proposal to freeze the salaries of some state officials.
After taking action last year to ban private health insurers from paying dividends to their shareholders and instead obliging them to return any profits to the health care system, the government amended the law on health insurers in a way that gives the state the authority to debate their budgets. The parliament passed the amendment on November 25.
On November 27, Standard & Poor's raised its long-term sovereign credit ratings for Slovakia to 'A+' from 'A'. According to the agency, the upgrade reflects the prospect of continued improvement in Slovakia's competitiveness and potential as the economy expands and diversifies in the wake of a series of business-friendly reforms. The upgrade was also supported by the country's upcoming accession to the eurozone in 2009.
After several failed attempts, the government in late November revised the country’s legislation affecting highway construction. Under the new law, the state does not need to have all the ownership rights to the land settled in order to receive a construction licence. It just needs to have these rights settled by the time the construction is finished and approved.
The OECD predicted economic growth in Slovakia in late November to be 4.0 percent at most next year, which is the most pessimistic of the recently published prognoses. According to the macroeconomic prognosis of the EC released on November 3, the Slovak economy will post real growth of 4.9 percent in 2009. The growth should be the fastest in the whole of the EU in next two years, said EC.
The growth rate of Slovakia’s GDP continues to decrease. In the July-September period, Slovakia reported real GDP growth of 7.1 percent year-on-year, compared with 7.6 percent in the second quarter and 8.7 percent in the first quarter of 2008, according to the Statistical Office of Slovakia.
Slovakia began selling starter packas of euro coins to the public and small businesses on December 1. The starter packs contain 38 coins worth an equivalent of Sk500.
On December 1, parliament approved the state budget for next year. For the first time in the history of the Slovak Republic the bill stipulated the budget in the common European currency.
On December 4, 2008, parliament dismissed Branislav Máčaj from his post as chairman of the Telecommunications Office. Fico’s team said he had delayed the tender to select an operator for DVB-T multiplexes. Máčaj insisted he had acted entirely in line with the law. He suggested that the cabinet had applied political pressure on him and that his resistance ended up costing him his job. On December 16, the Telecommunications Office cancelled the tender.
On December 9, the NBS cut its key interest rate after the ECB cut its rate a week before. The Slovak central bank reduced the rate for the two-week sterilisation repo tenders by 75 basis points. The overnight refinancing interest rate was cut from 4.25 percent p.a. to 3.5 percent p.a. and also the overnight sterilisation rate from 2.25 percent p.a. to 1.5 percent p.a.
On December 15, Fico and Finance Minister Ján Počiatek held talks with representatives of the Slovak Bank Association (SBA). The outcome of the meeting was that the state could guarantee riskier business loans from commercial banks.
The European Commission opened infringement proceedings against Slovakia on December 17 for failing to reopen competition in its hybrid postal sector. The EC had ordered Slovakia on October 7 to end Slovenská Pošta’s (SP) monopoly on delivering hybrid mail services. SP appealed the ruling the same day.
On December 31 Slovakia will switch off the second block of the V1 power station in Jaslovské Bohunice in line with the EU accession treaty. Slovakia lost its self-sufficiency in electricity in 2007. Turning off the block will increase the deficit.
Slovakia will switch to the euro at midnight between December 31 and January 1.
With press reports
22. Dec 2008 at 0:00 | Marta Ďurianová