Slovak Republic strategy overview

Full strategy  (0.4Mb) Approved 28  Jun 2006

Stratégia pre Slovenskú Republiku  (0.8Mb)

Invitation to comment

The Slovak Republic continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. The Slovak Republic has made significant progress in transition with 80 per cent of economic activity in private hands, a large degree of price liberalisation, an open foreign trade regime and a very conducive environment for attracting foreign investment. In May 2004, the country became a member of the European Union. The reform process is now oriented towards a business-friendly environment, which allows sustained growth and continued high levels of FDI.

Economic environment

The macroeconomic environment remains favourable. Real growth in GDP was 5.4 and 6.1 per cent in 2004 and 2005, respectively. Sound economic policies enabled the Slovak Republic’s successful entry into ERM2 on 28 November 2005, with Euro adoption planned for January 2009. The general government deficit is estimated to have amounted to 2.9 per cent in 2005 (excluding the costs of pension reform), down from 3.0 per cent in 2004 and against a plan of 3.4 per cent. The current account deficit is estimated to have increased to 8.6 per cent in 2005, from 3.6 per cent a year earlier, mainly as a result of higher capital goods imports, higher commodity import prices and reduced car exports (since the VW plant underwent refurbishment). The economy has benefited from substantial inflows of net FDI over the past years, particularly to the automotive sector, with per capita FDI between 1989 and 2005 amounting to USD 2,500. Rapid GDP growth and high inflows of net FDI have contributed to reducing the unemployment rate from about 19 per cent in 2001 to about 16 per cent by the end of 2005.

Reforms

Since coming to power in 2002, the reform-oriented multi-party government under Prime Minister Dzurinda has embarked on a series of major reforms, which have included bold changes to the tax regime, important labour market reforms as well as reforms to the pension system. Moreover, the privatisation of the remaining large state-owned companies resumed in 2004/2005. The sale of a 66 per cent stake in the dominant electricity generator Slovenske Elektrarne to ENEL (the Italian electricity company) was approved in 2005 and finalised in April 2006. The sale of additional stakes in the three regional power distributors is being offered to the existing minority shareholders, German RWE, E.ON and EdF. A tender for the 51 per cent stakes in 6 Slovak heating companies was launched in December 2005. The privatisation of Slovak Railway Cargo is underway, as well as the sale of a two-thirds stake in the country’s two international airports, Bratislava and Kosice.

Challenges

In spite of all these positive developments, this year will be shaped by the difficult political landscape of the looming elections. Following the recent departure of one of the coalition partners from government in February 2006, Prime Minister Dzurinda called early elections in June of this year (versus holding them as planned in September). This has put on hold the reform agenda, especially since the government announced a halt to ongoing privatizations. The Slovak Republic is still faced with a number of challenges. Key areas include bringing down inflation, fiscal consolidation, continuation of the health care and education reform and law enforcement as well as the increase of the absorption capacity of the country with respect to EU funding. Further sectoral challenges identified in the recent Assessment of Transition Challenges paper, which the EBRD can address and influence, are, among others:

• SMEs/Private equity: The creation of alternative employment opportunities is key to addressing the continued high unemployment rate, especially in the regions outside of the capital. Local SMEs should get more attention in terms of financial instruments available to them and improvement of the environment in which they operate. They continue to have limited access to equity capital and find it difficult to exit through the stock market. The development of private equity funds started later than in the neighbouring countries and the Slovak Republic is still trailing Poland, Hungary and the Czech Republic.
  
  
• Capital markets & financial sector: The size of capital markets is small compared to other EU members in CEB. Financial institutions also need to improve the management of their capital to deal with the Basel II requirements.
  
  
• Energy efficiency and MEI: Energy intensity (and dependence) remains high, even by regional standards. The market for energy conservation is in its infancy. Also, the market for renewable energy projects has not been developing at the pace required in order to meet EU directives for the promotion of renewable energy. Water sector reform is lagging behind, although the creation of regional water companies is intended to increase efficiency and enable access to capital and private sector participation, which is currently very limited.
  
  
• Privatisation: Several large-scale privatizations are still ongoing: the three regional electricity distributors, the six heating companies and the Railway Cargo Company.
  
  
• Transport: In railways, operating and policy setting functions have been separated and core railway businesses unbundled. The freight cargo company is in the process of being privatised. However, the quality of the road network varies according to region and type of roads. Secondary and smaller roads comprise around 75 per cent of all roads.

Since the last country strategy was approved, the Bank activities in the Slovak Republic have somewhat slowed as a result of significant progress in transition and, in particular, the emergence of a strong, competitive banking sector. The Bank has signed projects in an amount of EUR 106.9 million and EUR 54.8 million in years 2004 and 2005, respectively. The Bank has had a significant transition impact in supporting SMEs by providing credit lines to banks and leasing companies. The Bank’s contribution in the infrastructure sector has remained moderate due to the availability of other sources of financing, the limited size of municipal projects and the still ongoing restructuring of the water sector.

Operational objectives

Looking forward and taking into account the significant progress in transition and the principle of additionality, the Bank’s activities in the Slovak Republic will be very selective and based on the following operational objectives:

• Provide equity and structured debt for local companies to fund their growth, in particular in the context of cross border expansion. Support foreign direct investment by medium-sized companies with higher risk products not offered by the private sector, particulary in regions of higher unemployment facing specific transition challenges.
  
  
• Develop a finance facility for investments in energy efficiency and renewable energy in cooperation with local banks and the Slovak Ministry of Economy.
  
  
• Work on a limited number of public private partnership projects in infrastructure, if possible in conjunction with Cohesion/Structural Funds.
  
  
• Offer capital market products to companies and financial institutions such as bonds and asset backed securities.

Operational procedures

In accordance with this Strategy, the Bank will continue to ensure that all EBRD operations in the Slovak Republic meet sound banking principles, have transition impact, are additional, comply with the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans.