Economic shocks permeated 2009; some encouraging signs are now emerging

In mid 2008, many had thought that the adoption of the euro and steady economic growth would be the keywords for Slovakia’s business environment in 2009. Things took quite a different turn: 2009 started with Russia turning off its gas tap to European markets over a commercial dispute with Ukraine, forcing Slovakia’s vital manufacturing sector to an almost complete halt. And it was only the beginning of a series of negative economic shocks which brought the government and many businesses face to face with the most challenging times they had ever experienced.

Prime Minister Robert Fico Prime Minister Robert Fico (Source: ČTK)

In mid 2008, many had thought that the adoption of the euro and steady economic growth would be the keywords for Slovakia’s business environment in 2009. Things took quite a different turn: 2009 started with Russia turning off its gas tap to European markets over a commercial dispute with Ukraine, forcing Slovakia’s vital manufacturing sector to an almost complete halt. And it was only the beginning of a series of negative economic shocks which brought the government and many businesses face to face with the most challenging times they had ever experienced.

The tsunami-like financial and then economic crisis that rolled across the Atlantic and began to saturate western Europe at the end of 2008 hit Slovakia in the first months of 2009 much harder than most market watchers and state officials had expected. Slovakia’s business giants shifted gears and mass layoffs became the most common term to describe the state of Slovakia’s labour market, making the early estimates by labour authorities of about 16,000 lost jobs from the crisis as far too sanguine. The ranks of jobless have swelled by more than 40,000 through late October.

The Slovak government responded with various crisis packages, including the much discussed car-scrapping bonus, changes in tax and labour legislation and also more controversial legislation such as the newly-adopted law on strategic companies.

“We are entering a crisis mode in which everything can be modified,” said Finance Minister Ján Poèiatek in early 2009, as quoted by the Sme daily.

At the beginning of 2009, the mood in Slovakia’s economy was the bleakest since 1997, as the Slovak Statistics Office’s economic sentiment indicator fell 3.1 percentage points from December 2008 to 79.1 points in January.

Economists agreed that the dramatic drop in foreign demand had given one of the hardest blows to the country’s open and export-oriented economy.

In the first three months of 2009, GDP fell by 5.6 percent. In contrast, the country’s economy had grown in the second quarter of 2008 at a blistering 7.9 percent. The second quarter of 2009 followed with a further shrinkage of 5.3 percent in Slovakia’s GDP year-on-year. On November 13, the Slovak Statistics Office reported that the slump in the country’s economy in the third quarter had slowed to 4.9 percent. But the 1.6 percent quarter-on-quarter GDP growth in the third quarter led some market watchers to see the first light at the end of the tunnel.

The National Bank of Slovakia, the European Commission and the Finance Ministry estimate the country’s economy will post an annual decline of 5.7 percent for the entire year. However, they all also predict that Slovakia’s economy should recover next year and climb into the group of the fastest-growing countries of the European Union.

EC predicts 1.9 percent growth in 2010

In its autumn outlook report the European Commission forecast a 5.8 percent contraction in Slovakia’s economy in 2009. However, it sees Slovakia’s GDP growing by 1.9 percent in 2010 and then rising to 2.6 percent in 2011, the SITA newswire reported. While positive, these figures are much lower than those recorded during the pre-crisis boom, the prognosis notes.

The commission does not rule out a further rise in Slovakia’s unemployment rate which is expected to reach 12.3 percent at the end of 2009 and then rise to 12.8 percent in 2010. A modest drop to 12.6 percent is expected in 2011, according to the EC report.

The anti-crisis packages

The government of Prime Minister Robert Fico has initiated several anti-crisis packages to help keep businesses afloat, to assist employers in maintaining jobs and to give a fiscal stimulus to the slowing economy.

Critics of the government said that some of the anti-crisis measures had come too late and that other measures which could have helped were not pursued at all. The government has also been criticised by the opposition for failing to rein-in public spending.

The government, for example, revised the estimate of the country’s economic performance only in mid June. The Finance Ministry’s February forecast was still predicting economic growth of 2.4 percent for 2009. In June it predicted a GDP decline of 6.2 percent and then later revised it to -5.7 percent.

The government adopted its first anti-crisis resolution in November 2008. It included calls for more effective use of EU funds, plans for loans to small and medium-sized businesses, support for applied research and innovation, public spending cuts, a push to influence the pricing policies of energy companies and preferential treatment for domestic suppliers. However, in early February 2009 observers said that implementation of many measures had been rather limited.

When passing the first legislated anti-crisis package in early February, the government said that its main objective was to preserve employment and authorised a total of €332 million for the package. Prime Minister Fico admitted that some of the first-aid measures might inflate the general government deficit.

Parliament passed a bill reducing the time period for refunding excess VAT payments from 60 to 30 days, along with an amendment to the income tax law which increased the non-taxable portion of personal incomes from €3,435 per annum to €4,026. The revision of the VAT legislation also allows companies to register as a group for VAT purposes beginning in 2010.

Self-employed people with annual incomes under €170,000 who do not have any employees were also exempted from some bookkeeping duties under the tax law revision, SITA reported.

The parliament also adopted a so-called employee bonus programme which makes minimum wage earners eligible for negative tax, starting with earnings in 2009, but paid in 2010.

Parliament also passed a revision to the law on budgetary rules for local governments as part of its anti-crisis efforts. This has made it possible for municipalities and local administrations to use additional resources to cover their expenses, specifically funds from capital budgets and surplus finances from previous years, SITA reported.

A revision to the law on investment assistance, passed by parliament on February 11, authorised the government to provide financial assistance to more businesses in the period between April 1, 2009 and December 31, 2010.

Car-scrapping bonus

The government launched the old-car scrapping scheme on March 9 to assist the ailing car industry in Slovakia, home to three large car assembly plants run by KIA, Volkswagen and PSA Peugeot-Citroën, which together produced about 576,000 vehicles last year. Another goal was to ‘rejuvenate’ Slovakia’s old or obsolete passenger-car fleet.

Slovaks managed in less than three weeks to burn through more than €30 million which had been allocated for scrapping old cars and getting government (and dealer) subsidies on the purchase of new cars. On April 1, another €22.1 million was appropriated for the bonus programme. Only cars which had been in use for at least 10 years and had been registered in Slovakia before December 31, 2008 were eligible to be scrapped in exchange for the €2,000 new car bonus.

While the measure was hugely popular among the general public, it garnered less enthusiastic responses from some economic experts who criticised it as an un-systemic measure which would do little to help the domestic car industry.

State takeover law stirs controversy

One of the most controversial laws that the government pushed through parliament toward the end of 2009 is the law on strategic companies which permits the state to buy bankrupt firms which have been declared to be strategic to the Slovak economy.

The new law, passed by parliament on November 5, states that any firm employing more than 500 employees which is important for the security of the state, protection of public health or operates in so-called network industries can be defined as strategic. If such an enterprise enters bankruptcy the state will have a pre-emptive right to take over the company and later pick a new owner.

The law evoked strong criticism from opposition parties, chambers of commerce, major investors and even the tri-partite social partners of the government – representatives of trade unions and employers. Slovakia’s union confederation requested President Ivan Gašparoviè to veto the law. At the time this Investment Guide went to print the president had not made a decision.

Critics said that the law introduces nationalisation of private property and also represents an indirect revision of the bankruptcy law and is likely to generate many problems and legal disputes in the future, SITA wrote.

State budget passes easily; deficit grows

The law authorising Slovakia’s state budget for 2010 easily slipped through parliament in early November. The opposition parties criticised the fact that next year’s budget deficit will reach nearly €3.75 billion, one of the highest deficits ever, even though the deficit as a percentage of GDP is expected to shrink from 6.3 percent this year to 5.5 percent next year. The 2010 budget assumes revenues of €12.53 billion and expenditures of €16.28 billion.

Prime Minister Fico said that passing the state budget was another step towards the economic stabilisation of Slovakia and that the budget not only fought against the economic crisis but also respected social standards. The opposition, however, complained that the ruling coalition had scrapped every single amendment proposed by its deputies.

The Ministry of Construction and Regional Development will see the biggest percentage increase in authorised spending, a 29.3 percent year-on-year boost with expenditure of both EU funds and national co-financing reaching €494.380 million. The Ministries of Agriculture and Economy will also see their budgets boosted, both by 18.7 percent year-on-year, with the Agriculture Ministry being authorised to spend €1.159 billion and the Economy Ministry having €319.167 million at its disposal, according to SITA.

The Health Ministry will see its budget increase by 10.3 percent year-on-year to reach €1.440 billion, while €2.348 billion will flow to the Education Ministry, an 8.2-percent year-on-year increase. The Labour Ministry will see a 4.1-percent increase, to €1.967 billion. The departments of defence, interior, culture and foreign affairs are expected to tighten their belts next year. The Ministry of Defence’s budget will shrink by 21.3 percent to €822.944 million while the Ministry of Foreign Affairs will get 18.1 percent less than last year, with €107.954 million. The Culture Ministry’s budget will shrink by 9.8 percent to €169.773 million and the Interior Ministry will see a 9.7 percent cut to €838.575 million.

Last year Slovakia was still expressing confidence about its ability to keep its budget deficit under control but by mid 2009 it became clear that the deficit would not only exceed the 3 percent of GDP limit – as set by the Maastricht criteria for eurozone membership – but might climb to 5 or even 6 percent. By the end of August the state budget deficit had already reached €1.206 billion, €200 million more than the annual deficit originally forecast for all of 2009.

In its autumn forecast, the European Commission predicted that Slovakia would register a budget deficit of 6.3 percent of GDP for 2009. In November, the EC called on nine EU countries, including Slovakia, to begin cutting their deficits and to bring them below the 3 percent limit set by Europe’s Growth and Stability Pact by the end of 2013.

Highways as medicine through PPPs?

The government had hoped that with the help of public-private partnership (PPP) projects the state could at least get close to its earlier promise to complete the cross-country highway by the end of 2010, excluding tunnels, and link Bratislava in the west with Košice, Slovakia’s second city in the east.

By mid October 2009, however, the government admitted that these ambitions would not be achieved even though the PPP projects and highway construction had been defined as one of the remedies to ease the impacts of the crisis and help employment. Transport Minister Ľubomír Vážny suggested in October that the east-west highway, with all its bridges and tunnels, might be completed in 2014.

The highway projects carry one of Slovakia’s heftiest price tags of all time: rough estimates are in the range of €21 billion over 30 years. The PPP projects are supposed to cover 150 kilometres of national highways and are managed in three packages: sections of the D1 highway make up the first and third packages and construction of parts of the R1 dual carriageway in central Slovakia is in the second package. The first package should be concluded in terms of its arrangements with the contractor by February 15, 2010.

The Construction Ministry hopes to wrap up the financing of the project by mid 2010. The second package already has a private partner and the project was financially closed on August 28, according to SITA.

Jobless rolls jump again

There has not been much optimistic news in 2009 for the country’s labour market in terms of the number of available jobs and the rapidly rising army of unemployed. In the third quarter 2.178 million people were employed in Slovakia and total employment had dropped by 3.7 percent compared to the same period in 2008, according to a flash estimate by the Slovak Statistics Office.

“It is the greatest fall in the history of independent Slovakia and the employment loss has not yet reached its bottom,” Miroslav Beblavý of the Slovak Governance Institute told the Sme daily in early November.

Slovakia had 368,021 residents without jobs at the end of September, putting one statistical measure of the unemployment rate at 13.89 percent, the highest level in nearly five years.

Job vacancies numbered 7,251, meaning there were almost 51 jobseekers for each available vacancy, the Labour, Social Affairs and Family Office (ÚPSVAR) announced on October 20.
Diagnosis for industrial production

In the first nine months of 2009, Slovak exports were down by 25.1 percent compared with the previous year, albeit with the monthly year-to-year declines gradually tapering off from -34.3 percent in January to -14.4 percent in September.

“Ensuing was an annual decline of export-driven manufacturing output by 18.4 percent compared with the same period a year ago, in a similar recovering pattern from -28.7 percent in January to -4 percent in September,” Vladimír Vaňo, chief analyst of Volksbank Slovensko told The Slovak Spectator.

Hence, the profitability of non-financial corporations in Slovakia declined in the first half of the year by 41.7 percent from the earlier year. The environment of weaker external demand, uncertainty over the outlook for future export orders and eroding profitability made corporations much more cautious with regards to their original expansion plans, Vaňo said. According to Vaňo, the volume of new gross fixed capital formation (corporate investments) in the first half of 2009 declined by 11.7 percent from the previous year and, coupled with massive liquidation of inventory stock, the annual decline in gross capital formation amounted to 20.8 percent.

In September industrial production was still falling – but only by 5.2 percent year-on-year, which was a marked improvement from the 21.4 percent decline recorded in July.

“Exchange rate stability as well as an extremely accommodating monetary policy by the ECB [European Central Bank] contributed to further stabilisation of Slovak manufacturing and narrowing of its annual decline to only -4 percent in September – the best annual comparison since October 2008,” Vaňo told The Slovak Spectator.

In addition to the 2.5 percent growth in oil refining, year-on-year, in the first 9 months and a 35.9 percent increase in production of computer, electronic and optical equipment in the same period, several other industries joined the trend of benefiting from the more competitive conditions resulting from eurozone membership: chemical production (+39.7 percent in August), pharmaceuticals (+14 percent in August and +12.6 percent in September), and production of base metals and metal products (+5.6 percent year-on-year in September), Vaňo said, referring to data from the Slovak Statistics Office. Production of transport vehicles began to improve in the third quarter with year-on-year declines of only -19 percent in September and -10.1 percent in August in comparison to the cumulative decline of -37 percent over the first nine months of 2009 in comparison with the same period in 2008.

“Slovak car manufacturers are beginning to benefit from their product portfolio, which is well-positioned for the ongoing shift of consumer preferences towards more efficient models,” Vaňo said.

Vaňo conceded that the lower base effect from weaker production already evident in September last year did play a role in mediation of the annual declines for the third quarter of 2009 but noted the encouraging signs of annual growth in an increasing number of Slovak industries as corroboration of the beneficial influence of eurozone membership for Slovak businesses. He also stressed that being part of the eurozone had strengthened Slovakia’s competitive position in attracting multinational corporations which desire and/or are forced to geographically optimise their production capacities by relocating here.

(Vladimír Vaňo contributed the graphs to the story)

More information about Slovak business environment you can find in our Investment Advisory Guide.

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