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Geopolitical tensions intensify challenges

Geopolitical tensions, fuelled by the Russian invasion of Ukraine and subsequent tit-for-tat sanctions the European Union and Russia have imposed on one another, brought political, economic and security challenges for all of central and eastern Europe, including Slovakia which is heavily energy dependent on Russia.

(Source: Sme)

Geopolitical tensions, fuelled by the Russian invasion of Ukraine and subsequent tit-for-tat sanctions the European Union and Russia have imposed on one another, brought political, economic and security challenges for all of central and eastern Europe, including Slovakia which is heavily energy dependent on Russia.

Prime Minister Robert Fico called the sanctions against Russia senseless, and in late August told Brussels that his country would reserve the right to disagree with any new EU-proposed sanctions against Vladimir Putin’s Russia that would harm Slovakia’s national interests, drawing criticism from the opposition parties as well as regional security analysts.

When assessing the damage Russia’s counter-measures to EU sanctions might cause to Slovakia, observers suggested that while only 5 percent of Slovakia’s exports go to Russia, the Slovak economy could feel the pinch if Moscow continues with its export ban, listing automotive companies and their subcontractors or the defense industry as prone to some freeze.

In early October, however, the Russian state-controlled company Gazprom put Slovakia on alert after it halved its regular gas supplies to the country. Gazprom cited technical issues behind the drop, while most saw a political message expressing Moscow’s dissatisfaction with gas being supplied through so-called reverse flow to Ukraine. Slovakia launched the reverse flow via the Vojany-Uzhgorod pipeline to Ukraine on September 2 as part of Europe’s help for the country’s eastern neighbour, involved in a gas dispute with Russians who cited unpaid bills as the reason for turning off the taps.

Nevertheless, an October 31 Russian-Ukrainian deal negotiated by the European Union encouraged some optimism, as Russia agreed to resume natural gas supplies for Ukraine during the winter. The European Union’s outgoing energy chief Guenther Oettinger called the agreement the “first glimmer” of hope in easing tensions between Russia and Ukraine, as quoted by the BBC.

Besides that of the regional security challenges, 2014 has brought Slovakia a number of political changes: a new president, changes in three ministerial posts and two new bosses for the country’s ailing judiciary, ending the reign of Supreme Court President Štefan Harabin.

Slovakia’s economic performance in the first half of 2014 opened doors for optimism, but its fate in the second half of the year and 2015 hinges in part on the region’s capacity to calm tensions in eastern Ukraine.

New president, new ministers

Ivan Gašparovič, the one-time right-hand man of controversial three-time prime minister Vladimír Mečiar, ended his decade-long tenure and was replaced by Andrej Kiska, the first-ever independent candidate with no political background whatsoever to win the presidency. Philanthropist Kiska defeated Fico in the second round run-off after he was backed by 1,307,065 people, more votes than Fico’s Smer harvested in the last parliamentary elections in 2012 when it took the country with 1,134,280 votes in a landslide victory.

On the heels of his unsuccessful presidential run and amid falling approval ratings, Fico changed two of his ministers and a number of state secretaries offering no specific explanation for why Dušan Čaplovič was asked to quit as education minister and why Tomáš Malatinský would no longer serve as economy minister. One-time Finance Ministry state secretary Peter Pellegrini, a rising star in Smer, took Čaplovič’s job, while Pavol Pavlis, the state secretary at the Economy Ministry, replaced Malatinský. Meanwhile, in early November, Fico requested Health Minister Zuzana Zvolenská resign over a suspicious tender in the Piešťany hospital. She met Fico’s request and she was replaced by the ministry’s state secretary Viliam Čislák.

The ruling Smer also experienced some shake-ups within the party; for example, Vladimír Maňka, who in 2013 lost the Banská Bystrica governor race to extremist Marian Kotleba, was replaced in the Smer’s deputy chairman post by Pellegrini.

While for some time in 2014 it seemed that Slovak diplomat Maroš Šefčovič would oversee the transport and space portfolio in the European Commission, satisfying Slovakia’s voiced ambitions to have a strong economic department, he was instead promoted to serve as EC vice president for the Energy Union, far surpassing expectations. Šefčovič will lead strategising that aims at more energy independence from Russia.

Judiciary gets new head

The single most significant change within the country’s judiciary over the past year is the failure of Štefan Harabin to get re-elected as the Supreme Court’s top chair. Supreme Court Judge Daniela Švecová replaced Harabin in the Supreme Court, while another Supreme Court judge, Jana Bajánková, who failed in the first-round bid for Supreme Court head, will lead the Judicial Council.

Both these posts were previously held by Harabin, but a constitutional amendment passed earlier in 2014 divided the post of Supreme Court president from the position of Judicial Council boss as of September. The changes are seen as better conditions for the eventual reform of the judiciary from how it was under Harabin.

Business environment

The judiciary is frequently cited as being among the main hindrances for the quality of the business environment in Slovakia. Observers, foreign investors and chambers of commerce also list corruption, excessive red tape and what they call a short-term approach to legislative changes as shortcomings. Even though the past year has brought some small improvement for Slovakia in some of the global rankings of the economic environment, with foreign businesses operating in the country having also expressed some optimism, complaints remain the same.

Foreign investors still view Slovakia as the most attractive location for investments in central and eastern Europe, suggests a survey organised by six chambers of commerce operating in Slovakia, published in March 2014.

Economic fundamentals

Due to intensified geopolitical tensions, economists find it more difficult to forecast the course of the economy for the upcoming months and years. The country’s central bank, the National Bank of Slovakia (NBS) moderately reduced its forecast in late September to 2.3 percent growth for this year. The NBS also cut its forecasts for economic growth for 2015 by 0.3 points to 2.9 percent, while the prediction for 2016 remained unchanged at 3.5 percent. The central bank also cut its forecast for inflation, suggesting that consumer prices should stagnate annually in 2014 while the bank had originally expected a 0.1 percent inflation rate. It forecasts that inflation will accelerate to 1.2 percent in 2015.

The total number of jobless in Slovakia was 14.01 percent in September, or 378,020 people, based on data from the Central Office of Labour, Social Affairs and Family, keeping Slovakia in the vanguard of countries struggling with double-digit unemployment rates. The percentage of unemployed ready to take a job immediately stood at 12.44 percent in September, the office reported.
Labour market and unions

A robust growth of the minimum wage, an extension of higher-level collective bargaining agreements and changes in temporary employment had the biggest impacts on the labour market in 2014 and beyond. While these are praised by the government and trade unions, employers expect that these will have a negative influence on the labour market and the competitiveness of companies.

The cabinet of Robert Fico hiked the minimum monthly wage in Slovakia from €352 in 2014 to €380 (€2.184 per hour) in 2015, which represents an increase of €28, or 7.95 percent. Though the tripartite group consisting of representatives of the government, employers and trade unions had failed to reach a consensus on the matter, the cabinet argued that it wanted to secure a higher monthly income than the poverty threshold, which is a level of income set at 60 percent of the median household income. The poverty threshold in 2013 was €337 per month, according to data from the Slovak Statistics Office.

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For more information about the Slovak business environment please see our Investment Advisory Guide.
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While the National Union of Employers (RÚZ) claims that the government has not been responding to the fact that Slovakia is one of the countries with the highest jobless rate in the EU with adequate measures, Labour Minister Ján Richter told the press in mid-September that the trend of pushing down unemployment rates continues.

One thorn in the employer’s side is the revision to the law on collective bargaining, valid as of the beginning of 2014, which re-introduced forced extension of collective higher-level collective agreements to all businesses in a given industrial sector, even those that have not signed on individually. On the other hand, the Confederation of Trade Unions (KOZ) praises the revision, pointing out that workers sheltered by collective agreements have 17-19 percent higher wages compared to those who work for employers where such agreements are not signed.

Another issue, which re-emerged in 2014 concerning the unions, was the question of their political independence, as the KOZ called upon its members to vote for Fico in the March presidential election, arguing that a social-democratic president would represent active protection for citizens. Political analyst Grigorij Mesežnikov said KOZ was not an independent organisation from political point of view, adding that the confederation has had for years an agreement on cooperation signed with the Smer party.

Budget, deficit and debt

In mid-October, the cabinet sent the 2015 budget with revenues planned at €14.193 billion and expenses at €16.635 billion to the parliament, where given the overwhelming majority of Fico’s Smer party, it is likely to easily pass. The budget deficit is planned at €2.442 billion.

The budget already assumes expenses of Fico’s pet project at about €13 million: free train rides for students aged up to 26, pensioners and seniors 62 or older on selected trains as of November 17. Slovakia’s biggest scientific institution, the Slovak Academy of Sciences (SAV) saw its budget trimmed considerably. Low-wage workers will see reduced health insurance contributions that will help boost net incomes, while teachers and doctors look set to get a pay bump as well. This assumes increased revenues from better tax collection, while keeping the value added tax at the current 20-percent level.

After application of the new accounting methodology, the European statistics authority Eurostat decreased the Slovak government’s debt for 2013 under the 55-percent threshold, to stand at 54.6 percent, which in practice means that the penalty ensuing from the third level of the constitutional debt brake, which states that expenditures in the state budget cannot be increased in annual terms, will not kick in.

Tax changes

Taxpayers will pay more in taxes as of next year even though basic rates of income and corporate taxes remain unchanged after Smer pushed through an extensive revision to the income tax laws October 30. While the government cites consolidation of public finances and closing legal loopholes for tax evasion as the motivation for the changes, the opposition calls them a covert tax hike and suggests they would challenge the moves with the Constitutional Court. The approved changes should bring the state additional revenues of nearly €860 million during the next three years, of which €265 million should come in 2015. The most important tax change is in depreciations, while this revision increases the number of depreciation groups from four to six, shortens depreciation of production technologies from 12 to eight years and prolongs the depreciation of non-productive real estate to 40 years.

The revision also caps the price of motor vehicles that business entities buy to do business, thus affecting depreciation. As another change, the revision obliges physicians, hoteliers or notaries to issue receipts by cash registers for services provided and paid, among others.

Energy

Companies in Slovakia keep insisting that high electricity prices make them uncompetitive when compared with those abroad. While waiting for a proposal by the Economy Ministry about how to alleviate such concerns in the business sector, the Regulatory Office for Network Industries (ÚRSO) increased the charge for operating the national grid, one of six components making up the end-electricity price. Fico plans to calm companies complaining about high electricity prices by abolishing the fees they have to pay to the National Nuclear Fund. Businesses, however, say it will not solve the problem.

Earlier this year Enel offered a 66 percent stake in Slovenské Elektrárne (SE), along with other assets for sale, as part of a plan to cut debt. The estimated value of the stake in SE ranges from billions of euros to negative value because of the outstanding issues surrounding the completion of the Mochovce nuclear power station. Local media listed the Czech energy giant ČEZ, another Czech investor Energetický a Průmyslový Holding (EPH) and some Russian companies, including Rosatom, as companies that might be interested in the stake.

Meanwhile, in October the SE announced that the third block of Mochovce is about 80 percent complete and should be put into commercial operation in the third quarter of 2016, and the fourth a year after that.

The postponed completion of Mochovce and the growing bill have caused headaches for the Fico cabinet with the prime minister believing that there are still some reserves in the existing €3.8 billion budget. Completion of the Mochovce blocks is financed also from SE dividends and the leaked information speaks about an additional €800 million to complete the project.

Education

Employers have for a long time complained about a lack of trained workers and called for the return of the dual education system, which previously existed in Slovakia.

While several companies in Slovakia have established cooperation with secondary vocational schools in order to train workers lacking in the market, the Education Ministry is also taking steps to adopt a dual education scheme with the prospect of launching the nation-wide project at specific schools in September 2015. The ministry is taking steps with three key priorities in education: the development of secondary vocational schools, the national system of qualifications (whose ambition is to describe 1,000 qualifications and define the basic skills and knowledge required for certain professions) and modernising primary schools.

Representatives of foreign chambers in Slovakia praised the general trend and the ministry initiative specifically, but warn that the system also needs to work in practice.

Media

In a trend largely unsettling journalists, big business has made some consequential shopping decisions in Slovakia over the course of 2014. On September 3, the financial group Penta announced it acquired the Trend Holding and Spoločnosť 7 Plus via cooperation with Dutch investment firm V-3 Media Holding, which officially bought both publishing houses. Shortly afterwards Penta made steps to acquire 50 percent of the shares in the major publishing house, Petit Press, which partially owns The Slovak Spectator. This resulted in the resignation of Sme Editor-in-Chief Matúš Kostolný and his deputy editors as well as a large part of the editorial office of Sme. Later, Penta agreed to withdraw to a 45-percent minority share, thus leaving the controlling 55-percent to Prvá Slovenská Investičná Skupina (PSIS), the original founder of Petit Press. Kostolný and others announced the launch of a new project called Projekt N.

Meanwhile, internet portal Stratégie of the Hospodárske Noviny daily, itself owned by a subsidiary of Agrofert, a group led by the Slovak-born Czech Finance Minister and billionaire Andrej Babiš, broke the news on October 20 that J&T or some of its partners were going to buy Ringier Axel Springer (RAS) Slovakia publishing house, Slovakia’s biggest publisher, and a division of the massive German and Swiss firm. Among their stable of properties is the country’s biggest tabloid daily, Nový Čas.

Press freedom advocates and political ethics watchdogs expressed serious concern over this trend in media ownership.

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