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The Slovak Republic continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. The country is well advanced in its transition process, with price and trade liberalisation, enterprise privatisation and financial sector reforms approaching the standards of more mature market economies. As another testament to its achievements it has joined the Eurozone from January 2009 (it is the second CEB country to do so after Slovenia).
Economic growth
Since the last country strategy was approved Slovakia’s macroeconomic performance has been solid. Growth in real GDP surged to an all-time high of 10.4 per cent in 2007 before moderating again to an estimated 6.4 per cent in 2008. Unemployment has also fallen to 9 percent in 2008 (although regional inequalities have not diminished and structural unemployment remains high). When the country was evaluated for Eurozone membership in May 2008, it comfortably met all the relevant criteria. The fiscal deficit was a mere 1.9 per cent of GDP in 2007 (down from its peak of 12.2 per cent in 2000), thanks to a significant reduction in expenditure and despite the introduction of the second-pillar pensions which reduced government revenues. Inflation was also well within the Maastricht limit.
Risks for stability
Given the rapidly worsening external environment the outlook for Slovakia has deteriorated significantly in the second half of 2008 and the economy is likely to contract in 2009. While the banking system has so far suffered limited impact from the global financial crisis, current indications are that the next strategy period will see a substantial contraction in the availability of finance, not only for households, SMEs and municipalities, but potentially also for large infrastructure projects that were planned to be financed under PPP schemes. In addition, Slovakia will suffer from a significantly weaker demand for its exports (a large share of which are cars and consumer electronics). As a result, unemployment and regional disparities may increase in the short term.
Outlook and key challenges
While Eurozone membership from January 2009 represents a commendable achievement, the external environment as well as economic conditions in Slovakia in the next strategy period will be difficult. This may require bold policy responses from the authorities (with the assistance of others) in support of financial institutions, municipalities and infrastructure sectors in order to ensure that the gains made in transition in these areas over recent years are not squandered. The Government’s package of crisis response measures is a welcome initiative. Clearly, past progress with structural reforms has made the Slovak economy less vulnerable to the global financial crisis than other countries in the region, and there is now an opportunity to build on this progress in areas such as infrastructure, governance, non-bank financial institutions and the social sector. The continuation of reforms will help to sustain the economy’s strength in the current environment, assist in the process of industrial diversification, reduce regional inequalities and enable convergence with EU average income over the medium term. The following institutional and structural policy priorities are paramount:
- Improvements to the business environment (in particular reforms to the public administration and judicial systems) and increased labour market flexibility to maintain competitiveness and help mitigate regional income disparities and structural unemployment.
- Promotion of alternative energy sources, greater energy efficiency and development of renewable energy, which lag behind regional standards. It is not clear that the government’s interventions in the energy sector have been helpful in this regard.
- Modernising municipal and environmental infrastructure with the assistance of EU structural and cohesion funds, private sector involvement and commercial co-financing from local sources where possible. This will require the strengthening of municipal administrative capacity.
- Mobilising private sector funding and expertise for development of efficient transport infrastructure network, such as the competitive award of PPP contracts for motorway construction, maintenance and operation.
- In case it becomes necessary, safeguarding the stability of the financial sector through selective support to financial institutions and fostering the continued provision of credit to households, SMEs and municipalities.
- Guaranteeing the operating stability of the well-functioning multi-pillar pension system in order to ensure the long-term sustainability of government finances.
- Promoting the development of equity finance for SMEs, using private equity funds, which lags behind regional peers.
Since the last country strategy was approved, the Bank activities in the Slovak Republic have remained limited as a result of significant progress in transition and, in particular, the emergence of a strong, competitive banking sector. The Bank has signed 13 projects for an amount of EUR 87 million in 2006 2008. The most significant achievement during the period was the extension of the successful SME financing model to provide loans for energy efficiency and renewable projects with the support of the Ministry of Economy and the BIDSF. The Bank’s policy dialogue efforts were instrumental in developing critical road infrastructure using PPP financing.
Crisis response
The Bank’s operational objectives in Slovakia are determined by the crisis response programme adopted by the Board of Directors. The Bank’s priority to assist Slovakia in dealing with the crisis is to expand SEFF in order to encourage local banks to continue lending to SME and housing associations and to work closely with commercial banks and other IFIs to mobilise financing for the initial PPP road projects. In light of the crisis and the external environment outlined above, the Bank’s activities in Slovakia will be based on the following operational objectives:
- Foster the continued availability of credit to SMEs and municipalities through local banks.
- Participate in the co ordinated IFI effort to contribute towards financing of viable public-private concession projects in transport infrastructure which are now coming to the market, following best international practice for tendering and contract award. This will complement the available commercial funding and allow for the successful implementation of the first round of public-private partnerships in the country.
- Promote investments in the diversification of energy supply, in energy efficiency and renewable energy to enhance energy security, reduce energy intensity and meet environmental targets through the expansion of the existing Sustainable Energy Financing Facility.
- In the context of restrained access to debt finance, provide higher-risk products such as equity for local corporations to support viable companies faced with worsening market conditions due to the crisis and, eventually, fund the growth of local companies emerging from the slow down.. Particular attention will be paid to local companies’ investments in the context of cross-border expansion. Such investments could also be supported indirectly by the EBRD through innovative products/financial institutions or venture funds that provide financing for SMEs.
- Proactive review and management of the Bank’s portfolio to maintain its high quality.
The Bank will continue to ensure that all EBRD operations in Slovakia meet sound banking principles, have transition impact, are additional and are subject to the Bank’s Environmental and Social Policy and incorporate, where appropriate, Environmental and Social Action Plans.
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