REGARDLESS of the composition of the government that emerges following the general election in March, Slovakia’s political leaders will have few other options but to continue fiscal consolidation if they want to preserve the country’s credibility, market watchers as well as politicians themselves seem to agree.
The slowing economies of the other countries in the EU and the eurozone portend a difficult 2012 for Slovakia, but predictions for its economy still see growth of around 1.7 percent.
Prospects for the labour market in 2012 remain gloomy, with an average unemployment rate estimated by the Ministry of Finance of 13.7 percent – mainly because slower-than-expected economic growth will fail to generate many new jobs. The central bank is slightly more optimistic than the ministry, suggesting that a moderate revival in the labour market in the second half of 2012 could lead to a fall in the jobless rate to 12.9 percent. But it adds that public sector layoffs and slower growth represent downside risks.
Nevertheless, economic analysts note that the skittish financial markets will have a strong say over developments in 2012.
The year started with some relatively good news, with the state announcing that its budget turned out somewhat better last year than had been foreseen. The state budget deficit in 2011 ended at €3.276 billion, a fall of 26 percent year-on-year.
“If there are no unexpected negative developments within other items of the public finances such as municipalities or a change in the state of obligations and receivables of public organisations, the public finance deficit for 2011 will be below the budgeted level of 4.9 percent,” the Finance Ministry said in a press release on January 2.
State expenditure reached €15.278 billion by the end of December, compared to the originally projected €16.958 billion. State revenue stood at €12.002 billion at the end of 2011, while the original plan had assumed €13.147 billion, according to the ministry.
“The state has received, but on the other hand has also spent, approximately 90 percent of what it planned, with revenue representing 91.3 percent of the amount stated in the plan and expenditure 90 percent,” Poštová Banka analyst Eva Sadovská told The Slovak Spectator.
Consolidation measures on the expenditure side contributed 86 percent to the fall in the deficit, with tax revenues contributing 14 percent to the better results, the ministry said.
“However, in reality, tax incomes were slightly worse than estimated in the planned budget due to the slowing of the economy,” Finance Ministry State Secretary Vladimír Tvaroška said, as quoted by the TASR newswire, adding that the consolidation involved job cuts in the public sector as well as salary reductions.
Tax revenue was broadly on target, falling only €87 million, or 1 percent, short of the target set in the budget.
Sadovská noted that it was not the minor shortfall in tax revenue that led to overall revenue reaching only 91.3 percent of the budgeted amount.
“This was instead due to the relatively higher unfulfilled expectations on the side of grants and transfers from the European Union budget,” said Sadovská, adding that non-tax revenue were actually one fifth higher than budgeted and these therefore had a positive impact on the overall state budget deficit.
Meeting the budget goals and the adoption of a constitutional law on budgetary discipline are significant steps towards confirming Slovakia’s fiscal credibility, which significantly suffered from the worsening condition of public finances between 2009 and 2010, the ministry said in a commentary on the state budget performance.
“Preliminary full-year results for the 2011 state budget are very important proof that under the current acting government, Slovakia was willing and able to maintain its fiscal consolidation plan despite worse-than-anticipated economic development in the second half of the year,” Volksbank Slovensko chief analyst Vladimír Vaňo told The Slovak Spectator.
Vaňo noted that the narrowing of the budget deficit by 26 percent year-on-year has put the full-year deficit target of 4.9 percent of GDP within reach.
The percentage share of the state budget deficit for 2011 in terms of estimated GDP for 2011, according to Sadovská’s calculations, stands at 4.7 percent. She therefore estimates that the overall public finance deficit – which includes local and regional governments and state-owned enterprises – for 2011 could reach approximately 5 percent, which is more or less in line with the plan of 4.9 percent. Nevertheless, Sadovská notes, that this calculation does not include the debts of public hospitals and state-owned railway companies. Based on the estimates of the Statistics Office these debts could add another 1 percent to the overall public finance deficit.
“We regard the prospect of meeting the planned deficit level positively and we believe that the markets will have a positive, not a negative, reaction as well,” Sadovská said, while noting that the situation in 2012 would be different, partly due to the parliamentary elections.
According to Vaňo, meeting the original target is an even more significant achievement because of the lower-than-anticipated economic growth, which would normally tend to make the relative deficit, expressed as a proportion of GDP, look even worse.
It also is significant, Vaňo added, because it demonstrated the ability of the acting government to countervail these two impacts by restraining both current as well as capital expenditures.
As for the factors that will have the most significant impact on public finances in 2012, Vaňo pointed to the composition of the new governing coalition. He said that this will be of key importance not only with regards to willingness to continue fiscal consolidation, but also in terms of Slovakia’s ability to carry out necessary but politically unpalatable fiscal measures and reforms.
“As 2012 will be the first time since 1998 when elections take place amid an unavoidable need for fiscal consolidation, coupled with weakening economic activity, there is a commensurately high need for the new governing coalition to be as stable as possible,” said Vaňo, adding that this is a necessary prerequisite for its ability to carry through fiscal reforms without fear of what he called “a replay of the early elections scenario”.
As for the challenges which the government that emerges from the early elections will face, Vaňo said it will have to find “a feasible and deliverable balance between cost-cutting and revenue-raising consolidation measures” since after the EU summit in December it is clear that medium-term consolidation will need to occur faster and deeper than the previous commitment to reducing the deficit to 3 percent of GDP by 2013.
“Achieving sufficient political consensus on the further-reaching fiscal reforms, such as in social welfare and taxation, will be also a major challenge,” Vaňo stated.
Edgy financial markets
Given the relatively mild planned reduction in the deficit to 4.6 percent of GDP pencilled into the 2012 budget – though noting that this might still be vulnerable to a potential downturn in economic growth – Vaňo said that there is no wonder that financial markets continue to price in higher sovereign risk, as measured by either credit default swaps or by the premium charged for Slovak government bonds.
According to Vaňo, the risk premium between Slovak and German treasury bonds maturing in 2019 has widened to almost 3 percent in the New Year, almost triple the level from as recently as February 2011.
“Obviously, the anxiety of investors about developments in the region may have contributed to this widening as well, but being the only regional eurozone member covered by the EFSF/ESM umbrella, the two sour results of government bond auctions in November might have been even more important domestic millstones,” Vaňo told The Slovak Spectator.