Slovak Republic

Private consumption and inventories drive growth

Country Rating A1

Strengths

  • Low systemic political risk 
  • Good regional and international relations; EU membership
  • Eurozone membership providing for low transfer and convertibility risk
  • Solid banking sector
  • Strong business environment overall; very attractive for foreign investors

Weaknesses

  • High dependence of the economy on the automobile sector and on exports
  • Large income inequality and high unemployment
  • Relatively high external debt level

 

Economic Overview

 

Growth slows slightly but remains robust

Real GDP growth moderated to +3.3% in 2016 from +3.8% in 2015, mainly because fixed investment dropped by -9.3% (after a very strong performance in 2015, at +16.9%) as a result of reduced EU fund absorption. However, investment bottomed out in H2 2016 and is expected to grow modestly in 2017.


In H1 2017, real GDP grew by +3.2% y/y, driven by robust private consumption (+3.5% y/y) thanks to employment gains over recent years, while public spending contracted by -0.4% y/y. Fixed investment fell by -2.9% y/y in H1 (after rebounding to +0.9% in Q1, it dropped -6.7% in Q2). Similarly, foreign trade activity gained strong momentum in Q1 but was flat in Q2. As a result, exports expanded by +4.4% y/y in H1, slightly faster than imports at +4.1% y/y, so that net exports contributed +0.5pp to growth. Inventories added +1.5pp to H1 growth. We expect the inventory build-up to gradually wane in the course of the year while the H1 growth pattern should broadly continue otherwise, resulting in full-year growth of +3% in 2017, followed by +3.4% in 2018.

 

Adequate economic policies

As expected, headline inflation turned positive again at the end of 2016 (after almost three years of deflation) and has averaged +0.9% y/y in H1 2017. Also over the past three years, monetary easing of the ECB – Slovakia is a member of the Eurozone since 2009 which provides for low transfer and convertibility risk and has substantially decreased external vulnerabilities related to exchange rate risk – has encouraged a rebound of private sector credit growth which reached +9% in 2016 and +11.4% y/y in May 2017, thus supporting the domestic demand driven economic recovery. We expect inflation to pick up slightly in H2 and to reach an annual average of +1.2% in 2017 and +1.8% in 2018, while continued accommodating monetary policy should help sustain reasonable credit growth.

 

Public finances have continued to improve. The annual fiscal deficit has been below -3% of GDP since 2013 and fell to -1.7% in 2016. We expect similar ratios in 2017-2018. Public debt rose to 55% of GDP in 2013 in the wake of the global financial crisis but has since gradually fallen to 52% in 2016 and is forecast to remain around that level in the near future.

 

Unproblematic external liquidity position

After four consecutive years of annual surpluses, the current account shifted to a moderate deficit of-0.7% of GDP in 2016. Positively, it was 83% covered by net foreign direct investment inflows. Further unproblematic shortfalls of less than -1% of GDP are forecast in 2017-2018.

 

Last review: 9/22/2017