Slovakia

Growth curtailed by lower global demand for cars

A1

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD106bn (World ranking 61, World Bank 2018)
Population 5.45mn (World ranking 116, World Bank 2018)
Form of state Parliamentary Democracy
Head of government Peter Pellegrini (PM)
Next elections 2020, legislative
  • 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
  • Small domestic market
  • High dependence of the economy on the automobile sector and on exports
  • Relatively high external debt level

Slowdown ahead

Real GDP growth in Slovakia accelerated from +3.2% in 2017 to +4.1% in 2018, mainly on the back of strong investment expansion. In the first half of 2019, growth slowed down to +3.7% y/y in Q1 and then markedly to +2% y/y in Q2. The sharp deceleration in Q2 2019 was mainly due to declines in fixed investment (-3.8% y/y) and real exports (-1.9% y/y), while private and public consumption remained robust. In fact, the performance of the economy reflects to a large extent the development of the automotive industry, on which Slovakia depends heavily (the country has the highest per capita car production in the world). With global demand for European cars faltering for some time, the industry contracted in mid-2019.

Looking ahead, the automotive industry may face U.S. tariffs by the end of 2019 and we expect the weakness to continue well into 2020. As a result, investment activity and export demand should remain muted, while domestic consumption will continue to support growth. Overall, we forecast full-year GDP growth of +2.5% in 2019 and +2.3% in 2020.

Overall adequate economic policies

Slovakia has been a member of the Eurozone since 2009 and thus its monetary policy is conducted by the European Central Bank (ECB), which provides for low transfer and convertibility risk and has substan­tially decreased external vulnerabilities related to exchange rate risk. The ultra-loose monetary policy of the ECB encouraged a rebound of private sector credit growth to an average +10% in 2016-2018 and supported the domestic demand-driven economic recovery in these years. Strong credit expansion combined with rapid wage growth (+6.8% in 2018, +8.5% y/y in H1 2019) has pushed consumer price inflation to an average 2.5% in 2018 and 2.8% y/y in Q3 2019, well above the ECB’s “just below 2.0%” inflation target. Hence, Slovakia in principle needs a somewhat tighter monetary policy. Yet we expect inflation to remain in check and fall back to around 2% in 2020 due to weakening domestic demand.

Public finances have continued to improve. The annual fiscal deficit has been below -3% of GDP since 2013 and fell to as low as -0.7% in 2018. We expect a slight uptick to a still favorable -1.5% of GDP in 2020. Public debt rose to 55% of GDP in 2013 in the wake of the global financial crisis but has since gradually fallen to 49% in 2018. It is forecast to remain around that level in the near future.

Rising current account deficit requires monitoring

After four consecutive years of annual surpluses, the current account shifted to a moderate deficit of -0.7% of GDP in 2016. The shortfall widened to -2.5% of GDP in 2018 and is on course towards -3% or more in 2019, based on data for the first eight months of the year. What’s worrisome is that net foreign direct investment inflows have covered only one third of the cumulative deficit since 2018, well below the adequate level of 75%. The rest of the deficit has to be financed through short-term inflows, posing a potential risk in the event of global financial turbulences. We expect the current account deficit to narrow gradually in 2020 as weaker domestic demand should also curtail imports.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Germany 20%
1
18% Germany
Czech Republic 13%
2
17% Czech Republic
Poland 9%
3
8% China
Hungary 7%
4
6% Poland
France 6%
5
6% Hungary

Trade structure by product

(% of total)

Exports Rank Imports
Road vehicles 28%
1
15% Road vehicles
Telecommunication and sound recording apparatus 14%
2
11% Telecommunication and sound recording apparatus
Electrical machinery, apparatus and appliances, n.e.s. 7%
3
8% Electrical machinery, apparatus and appliances, n.e.s.
Other industrial machinery and parts 6%
4
5% Other industrial machinery and parts
Iron and steel 4%
5
4% Manufactures of metal, n.e.s.

The payment behavior of domestic companies is quite good, however according to the data for 2016, companies or entrepreneurs in Slovakia pay after the due date in 27% of cases.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

The legal system suffers from a persisting lack of trust in the rule of law, while the legal process is overly slow. Domestic debtors often use the system to delay legal proceedings and enforcement attempts as much as possible.

Debt restructuring mechanisms may help collect debts, but overall recovery chances remain extremely low when legal proceedings have been delayed and the debtor has become insolvent.

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Contact Manfred Stamer

Senior Economist for Emerging Europe and the Middle East

manfred.stamer@eulerhermes.com 

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