slovak republic
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A Capital Destination
May 2004
Slovak Republic
2
The Team
• Mr Vladimir Tvaroška State Secretary, Ministry of Finance
• Mr Martin BrunckoChief Economic Adviser
• Mr Daniel BytčánekDirector, Debt and Liquidity Management Agency
• Mr Tomáš KapustaHead of Debt Management Department, Debt and Liquidity Management Agency
3
A Political Sea-Change
Initiated by 1998 Parliamentary Elections
Beginning of a new political era and re-insertion into the global economy:
• EU membership (2004)
• NATO membership (2004)
• OECD membership (2000)
• WTO membership (1995)
4
An Economic Success Story
1999-2001: Successful macro-economic stablisation launched by 1999 Austerity Package & subsequent reforms:
• Radical improvement in all key fundamentals including fiscal deficit and current account
• Sustained growth rebound
2002 onward: Series of deep structural reforms, which distinguish it not only from Central European peers but also put it ahead of traditional EU members
• A successful privatisation program of the banking sector and utilities
• Deep reform of the pension system, introducing a funded pillar alongside the pay-as-you-go regime
• Innovative tax reform, introducing a single flat tax and radically simplifying the tax system
• Continued reform drive to address health care system, labour market, education and public administration
5
Robust Economic Growth
• Sustained solid growth despite weak
external demand
• Export driven growth in 2003
increasingly replaced by strenghening
domestic demand
• Declining unemployment since 2001
• Highest growth performance in Central
Europe
Real GDP
Real GDP (2003)
%
Source: Ministry of Finance, SUSR
Source: Ministry of Finance, SUSR
%
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
5 . 0 %
4 . 0 %
3 . 0 %
2 . 0 %
1 . 0 %
0 . 0 %
1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
5 . 0 %
4 . 0 %
3 . 0 %
2 . 0 %
1 . 0 %
0 . 0 %
Czech Republic Hungary Poland Slovakia
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
6
Sustained Fiscal Adjustment
• Share of public expenditures in GDP is
being reduced dramatically from 49.0%
of GDP in 2002 to 40.8% in 2006
• Deficit to be reduced to 3.0% of GDP
by 2006, complying with the fiscal
Maastricht criterion
• Continuous drive towards increased
transparency and fiscal consolidation
• Extra-budgetary funds incorporated
into budget in 2001
• Strongest position amongst Central
European peers
General Government Balance
% o
f GD
P
Source: Eurostat
General Government Balance (2003)
Source: Ministry of Finance
% o
f GD
P
Note: Data for 2003 is based on ESA95 methodology, previous years on national accounting standard
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1998 1999 2000 2001 2002 2003
Maastricht Criterion
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1998 1999 2000 2001 2002 2003
Maastricht Criterion
-14.0%
-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
Slovakia Poland Hungary Czech Republic
7
Prudent Debt Management
• Fiscal adjustment and prudent debt
management stabilised public
indebtedness
• Maastricht criterion (60% of GDP) easily
met
• Since 2003, specialised Debt and
Liquidity Management Agency in place
• Successive reduction of state
guarantees
• One of the lowest debt burdens in the
region
% o
f GD
P
Source: European Commission
Public Debt (2003)
Source: European Commission
% o
f GD
P
0 %
1 5 %
3 0 %
4 5 %
6 0 %
7 5 %
1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
M a a s t r i c h t C r i t e r i o n
Public Debt
0 %
1 0 %
2 0 %
3 0 %
4 0 %
5 0 %
6 0 %
C z e c h R e p u b l i c S l o v a k i a P o l a n d H u n g a r y
8
Monetary Policy on Course
• Inflation on track with central bank
targets
• CPI to fall-off sharply as effect of
regulated price adjustments fades and
to converge to Core CPI
• Free float of the Koruna introduced in
1998
• Successive liberalisation of financial
transactions since 2000
• Continued real and nominal exchange
rate appreciation
CPI and Targets
% y
oy
Source: SUSR, NBS
CPI (2003)
Source: SUSR, NBS
% y
oy
0
2
4
6
8
1 0
J a n - 0 1 D e c - 0 1 N o v - 0 2 O c t - 0 3 S e p - 0 4
C P I C o r e C P I
%
%
%
%
%
%
0 %
3 %
5 %
8 %
1 0 %
S l o v a k i a H u n g a r y P o l a n d C z e c h R e p u b l i c
9
Balance of Payments Improvement
• 1999 Austerity Package reined in the
current account deficit
• Sharp current account adjustment to
virtual balance in 2003 on the back of
25% export growth
• 61% of total exports go to the EU15 and
85% to the EU25
• Imports largely driven by export growth
due to high import component
• Financing needs more than covered by
FDI
• Lowest foreign financing need in the
region
Balance of Payments Components
US
D m
n
Source: NBS
Current Account (2003)
Source: NBS
% o
f GD
P
0
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
C u r r e n t a c c o u n t d e f i c i t F D I
- 1 0 . 0 %
- 8 . 0 %
- 6 . 0 %
- 4 . 0 %
- 2 . 0 %
0 . 0 %
H u n g a r y C z e c h R e p u b l i c P o la n d S l o v a k i a
10
EMU in Sight
• EMU participation provides incentive for
final reform push
• Price liberalisation and adjustment is
mostly complete
• Inflation falling off sharply, en route
towards meeting the Maastricht criterion
• Fiscal criterion to be met by 2006/07
• Public debt level already below
Maastricht threshold
Expectation to enter EMU by
2008/2009
Fulfillment of Maastricht Criteria
Source: Ministry of Finance, European Commission, NBS, SUSR
Note: FX volatility is defined as the monthly deviation from a 2-yr moving average of the SKK/€ rate as a proxy
%
%
Inflation Fiscal deficit Interest rate FX volatility Public debt
Maastricht Slovakia
16%
14%
12%
10%
8%
6%
4%
2%
0%
65%
60%
55%
50%
45%
40%
35%
30%
70%
11
Well Positioned Ahead of EMU
General Government Deficit Public Debt
CPI Long Term Interest Rate
% o
f GD
P%
yoy
% o
f GD
P%
Source: Eurostat, Ministry of Finance
Source: Eurostat, European Commission
Source: Eurostat, SUSR
Source: Eurostat, Ministry of Finance
Note: Figures indicate a country‘s position 5 years ahead of actual or expected EMU entry
0 %
2 %
4 %
6 %
8 %
1 0 %
S l o v a k i a( 2 0 0 3 )
P o r t u g a l( 1 9 9 4 )
S p a i n( 1 9 9 4 )
G r e e c e( 1 9 9 6 )
I t a l y( 1 9 9 4 )
0 %
2 5 %
5 0 %
7 5 %
1 0 0 %
1 2 5 %
S l o v a k i a( 2 0 0 3 )
P o r t u g a l( 1 9 9 4 )
S p a i n( 1 9 9 4 )
G r e e c e( 1 9 9 6 )
I t a l y( 1 9 9 4 )
0 %
4 %
8 %
1 2 %
S l o v a k i a( 2 0 0 3 )
P o r t u g a l( 1 9 9 4 )
S p a i n( 1 9 9 4 )
G r e e c e( 1 9 9 6 )
I t a l y( 1 9 9 4 )
0 %
4 %
8 %
1 2 %
1 6 %
S l o v a k i a( 2 0 0 3 )
P o r t u g a l( 1 9 9 4 )
S p a i n( 1 9 9 4 )
G r e e c e( 1 9 9 6 )
I t a l y( 1 9 9 4 )
Since 2001: Forging Ahead with Structural Reforms
13
Successful Privatisation
• Privatisation proceeded in two stages:
• 2000-2001: Banking sector privatisation
• 2002: Sale of minority (but with management control) stakes in utilities (energy, gas)
• Proceeds used to finance costs of pension reform and repayment of state debt
• Left to privatise:
• Book value of SKK79bn for sale
• 60% of book value in SE (electricity) and SPP (gas)
Privatisation Receipts (Cumulative)
% o
f GD
P
Source: NBS
0 %
5 %
1 0 %
1 5 %
2 0 %
2 5 %
1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3
14
Pension Reform: Well-fundedKey reforms recommended by European Commission to relieve pressures on public financing:
• Provide economic incentives to prolong working lives
• Limit access to early retirement schemes
• Strengthen the link between contributions and entitlements
• Curtail future public spending requirements by instituting more appropriate pension indexation mechanism
• Spread future pensions-related risks across several pension pillars
SLOVAK REFORM IMPLEMENTS ALL THESE RECOMMENDATIONS
• Through radical reform of 1st pillar (pay-as-you-go pillar)
• Through introduction of the 2nd pillar (private pension accounts invested in capital markets)
• Through improving the regulatory environment for efficient functioning of the 3rd pillar
15
Tax Reform: Simple and Flat
Created a transparent, efficient and non-distortionary tax system:
• Introduced 19% flat tax on all direct income:
• Unified five personal income tax rates (previously 10, 20, 28, 35 and 38%)
• Lowered the corporate tax rate from 25%
• Unified VAT rates into a single 19% rate
• Eliminated virtually all exceptions, exemptions and special regimes
• Eliminated double taxation of income: inheritance, dividend, gift and real estate transfer tax abolished
16
Tax Rates Faced by Investors
Source: Ministry of Finance, NBS, SUSR
0% 10% 20% 30% 40% 50% 60%
USA (New York)
France
Ireland
UK
Japan
Germany
Czech Republic
Poland
Hungary
Finland
Estonia
Slovakia
Corporate tax rate
Effective tax rate on investment income faced by a private investor (combined corporate tax and dividend tax)
17
Further Key Structural ReformsLabour Market and Social Security:
• Dramatically increased labour market flexibility
• Increased employment through incentives that reward activity
• Reduced space for abuse of social benefits schemes
Health-Care
• Made the system financially self-sustainable
• Improving the quality of services provided
Education
• Increased responsiveness of school supply to local demand for schooling and labour market situation
• Increased financial flows into system to expand capacity and improve quality
Public Administration
• Improved the quality of public services
• Continued the de-centralisation of public administration
18
Competitive Industrial Location
• Favorable geographical position
• Highly open and deregulated economy
• Well-educated and highly skilled labour
force
• High level of productivity
• Strongly competitive labour costs
• Low degree of labour unrest
Labour Cost-adjusted Productivity
Source: Market Sources
% o
f EU
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
EU15 CzechRepublic
Slovakia Hungary Poland
19
Steadily Growing FDI
Slovakia the location of choice for
productive investment:
• One of the highest direct investment
ratios in the region
• A well-diversified investor base
• Peugeot Citroen and Hyundai/Kia are
to triple car production in years to
come, investing in excess of a
combined €1.5 bn
FDI per capita (2000-2003 avg)
Source: Ministry of Finance
US
D
0
1 0 0
2 0 0
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
C z e c h R e p u b l i c S l o v a k i a H u n g a r y P o l a n d
20
Upward Rating Trajectory
• Slovakia‘s reform efforts have been
recognised by the rating agencies
through a series of upgrades
• Slovakia first regained its investment
grade rating in 2001
• Further upgrades have followed, with
Moody‘s rating Slovakia A3 and S&P
BBB+
Credit Rating Dynamics
Cre
dit
Rat
ing
s
Source: Standard & Poor’s, Moody’s
M a y - 9 5 S e p - 9 6 F e b - 9 8 J u n - 9 9 N o v - 0 0 M a r - 0 2 A u g - 0 3
M o o d y s S & P
A
A -
B B B +
B B B
B B B -
B B +
B B
M a y - 9 5 S e p - 9 6 F e b - 9 8 J u n - 9 9 N o v - 0 0 M a r - 0 2 A u g - 0 3
M o o d y s S & P
A
A -
B B B +
B B B
B B B -
B B +
B B
21
Debt Performance – Market Ratification
10-year Local Market Spread to Bunds
bp
s
Source: Bloomberg Note: Local Currency Market
0
1 0 0
2 0 0
3 0 0
4 0 0
5 0 0
6 0 0
7 0 0
4 3 2 1 0
P o r t u g a l , 1 0 y r
I r e l a n d , 1 0 y r
I t a l y , 1 0 y r
S p a i n , 1 0 y r
Y e a r s t o E M U m e m b e r s h i p
S l o v a k R e p u b l i c C u r r e n t 1 0 y e a r
22
Debt and Liquidity Management Agency
• Established as part of the reforms aimed at creating a state-of-the-art platform for debt and liquidity management, based on the best international practices
• The role of the Debt and Liquidity Management Agency:
• Provide professional debt and liquidity management for cost optimisation
• Separate operational debt and liquidity management from policy formulation and regulatory controls
• Maintain permanent dialogue with financial intermediaries and investors
• Develop a flexible approach to debt management
• Support the integration of Slovak financial markets and the management of Slovak public finance within the European Union
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