Comercial & Economic Section2-11-33, Motoazabu, Minato-ku, 106-0046 Tokyo Tel: 03-3451-1008 Fax: 03-3451-1015 commerce@slovak-embassy.jp |
JCR has affirmded the ratings and revised the rating outlooks on foreign currency and local currency long-term senior debts of
The Slovak Republic |
<Rationale>
The ratings are primarily supported by the steady progress Slovakia has been making in harmonizing itself with the euro-zone economy in pursuit of the adoption of the euro in 2009; the country's strong economic growth and reduced budget deficit expected to be brought about by the current coalition government's ambitious economic and fiscal reforms; and the expectation that exports centering on motor vehicles will expand amid the growing production capacity rendered by massive foreign direct investment (FDI) inflows mainly from EU15.
On the other hand, the ratings are constrained by the chronically high unemployment rate that could threaten the country's further economic growth. The unemployment rate continues to improve thanks to the labor market reforms implemented by the government but remains high.
The rating outlooks have been revised to positive from stable. It is highly likely that the minority coalition government will maintain the current reform momentum. Furthermore, Slovakia is highly likely to enter into the Exchange Rate Mechanism (ERM) II by June 2006, fulfill the Maastricht convergence criteria in 2007 and adopt the euro in January 2009, as planned by the government.
(1) |
Annual growth rate round 5% can be expected on expansion of domestic demand and exports |
| The Slovak economy grew a strong 4.9% annually between 2002 and 2004 despite an economic slowdown in EU15 and the appreciation of the koruna. The growth rate in the first half of 2005 accelerated to 5.1% % year-on-year, underpinned by the expansion of gross fixed capital formation related to massive FDI inflows in the past and consumer spending buoyed by an improved employment and wages increase. It is highly likely that the economy will continue to grow by more than 5% annually in 2005 and 2006, paced by the growth of exports and domestic demand. Motor vehicles will lead the expansion of exports following the start-up of two new car manufacturing plants. The current account deficit increased to 3.5% of GDP in 2004 from 0.8% the previous year on a wider trade deficit and increased repatriation of profits by foreign investors. However, with much of the current account deficit covered by FDI inflows, external debts rose only moderately. The financial system continued to improve as the bank lending kept growing amid progress on disposal of nonperforming loans and the recovery of sound management at banks through the privatization of large state-own banks. Consumer price inflation accelerated to 7.5% year-on-year in 2004 due primarily to increases in controlled prices and indirect tax rates, but slowed down to 2.6% year-on-year in the first eight months of 2005 with the departure of such temporary factors, and due to drops in food prices and the appreciation of the koruna. Inflation will remain stable in 2005 and 2006 amid a strong koruna and a moderate wage increase. The prospect of stable price trends has prompted the central bank to carry out a series of interest rate cuts, bringing its policy rate down to 3.0%. |
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(2) |
Budget deficit shrinking amid progress on fiscal reforms |
| Since its reelection in September 2005, the coalition government has implemented an ambitious reform program, promoted privatization and taken a series of steps to improve the business and investment environment. All these have proved effective in reducing the chronic fiscal deficit. On the expenditure side, the government has not only slashed current expenses but also carried out wide-ranging social security reforms involving pension and healthcare systems, which are necessary to cut fiscal deficits in the medium term. On the revenue side, the government has simplified the tax system by lowering the VAT, income and corporate tax rates to a unified 19%. The tax reforms have been contributing toward expanding tax revenues by way of preventing tax evasion and boosting tax collection. The general government deficit (ESA95) improved significantly from 5.7% of GDP in 2002 to 3.3% in 2004, which was even lower than the 4.0% as envisaged in the initial budget plan. With the central government's budget deficit in the first six months of 2005 registering a mere 0.1% of GDP, a general government deficit in 2005 as a whole is most likely to fall below the targeted 3.4% of GDP. The government debt at the end of 2004 stood at 43.5% of GDP. The ratio was slightly higher than the previous year's 42.6% but the debt amount remained at reasonably low levels. |
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(3) |
Stronger probability of euro being adopted in January 2009 |
| A favorable economic trend and progress on fiscal reforms have added to the possibility of Slovakia adopting the euro in January 2009. A National Euro Changeover Plan approved by the government in July this year calls for Slovakia to enter the ERMII by June 2006, clear the Maastricht convergence criteria in 2007 and adopt the euro in January 2009. JCR expects that the country will be able to fulfill all convergence criteria in 2007, if the government can hold fast to its current reform drive. |
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(4) |
Reform momentum will be kept as minority government's approval rate recovers |
| The current coalition government formed by four center-right parties took office in September 2002. It has suffered setbacks in the popularity rating as it vigorously pushed ahead with economic and fiscal reforms. It has become a minority government as MPs bolted from the coalition camp one after another. However, its support rating has begun to recover recently, helped by the improving economy and employment. In July, a no-confidence motion against Prime Minister Mikulas Dzurinda was voted down with the backing of independents. At this time, results of scheduled next election for September 2006 are difficult to predict. However, judging from the current popularity rating for each political party, the next administration will inevitably be a coalition. This might mean that there will be no fundamental changes in the country's ongoing reform drive. |
Kazuo Imai, Chief Analyst
Toshihiko Naito, Senior Analyst
