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