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Slovak Republic
A Capital Destination
May 2004
The Team
• Mr Vladimir Tvaroška
State Secretary, Ministry of Finance
• Mr Martin Bruncko
Chief Economic Adviser
• Mr Daniel Bytčánek
Director, Debt and Liquidity Management Agency
• Mr Tomáš Kapusta
Head of Debt Management Department, Debt and Liquidity Management Agency
2
A Political Sea-Change
Initiated by 1998 Parliamentary Elections
Beginning of a new political era and reinsertion into the global economy:
•
EU membership (2004)
•
NATO membership (2004)
•
OECD membership (2000)
•
WTO membership (1995)
3
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 payas-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
4
Robust Economic Growth
•
Sustained solid growth despite weak
external demand
Real GDP
5.0%
Export driven growth in 2003
increasingly replaced by strenghening
domestic demand
4.0%
%
•
3.0%
2.0%
1.0%
Declining unemployment since 2001
•
Highest growth performance in Central
Europe
0.0%
1999
2000
2001
2002
2003
Source: Ministry of Finance, SUSR
Real GDP (2003)
5.0%
4.0%
3.0%
%
•
2.0%
1.0%
0.0%
Czech Republic
Hungary
Poland
Slovakia
Source: Ministry of Finance, SUSR
5
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
General Government Balance
0.0%
-1.0%
% of GDP
•
-2.0%
-3.0%
Maastricht Criterion
-4.0%
-5.0%
1998
•
1999
2000
2001
2002
2003
Note: Data for 2003 is based on ESA95 methodology,
previous years on national accounting standard
Continuous drive towards increased
transparency and fiscal consolidation
Source: Ministry of Finance
General Government Balance (2003)
•
Extra-budgetary funds incorporated into
budget in 2001
Strongest position amongst Central
European peers
0.0%
-2.0%
% of GDP
•
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
Slovakia
Poland
Hungary
Czech Republic
Source: Eurostat
6
Prudent Debt Management
•
Fiscal adjustment and prudent debt
management stabilised public
indebtedness
Maastricht criterion (60% of GDP) easily
met
Public Debt
75%
Maastricht Criterion
60%
% of GDP
•
45%
30%
15%
•
Since 2003, specialised Debt and
Liquidity Management Agency in place
0%
1998
1999
2000
2001
2002
2003
Source: European Commission
•
Public Debt (2003)
Successive reduction of state
guarantees
60%
•
One of the lowest debt burdens in the
region
% of GDP
50%
40%
30%
20%
10%
0%
Czech Republic
Slovakia
Poland
Hungary
Source: European Commission
7
Monetary Policy on Course
10 %
% yoy
CPI to fall-off sharply as effect of
regulated price adjustments fades and
to converge to Core CPI
CPI and Targets
8
6
%
•
Inflation on track with central bank
targets
%
•
4%
2%
•
0
Jan-01
Continued real and nominal exchange
rate appreciation
Dec-01
Nov-02
Oct-03
CPI
Core CPI
Sep-04
Source: SUSR, NBS
CPI (2003)
Successive liberalisation of financial
transactions since 2000
10%
8%
% yoy
•
Free float of the Koruna introduced in
1998
%
•
5%
3%
0%
Slovakia
Hungary
Poland
Czech Republic
Source: SUSR, NBS
8
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
Balance of Payments Components
5000
4000
USD mn
•
3000
2000
1000
•
0
61% of total exports go to the EU15 and
85% to the EU25
1998
1999
2000
2001
Current account deficit
2002
2003
FDI
Source: NBS
•
Current Account (2003)
Imports largely driven by export growth
due to high import component
Financing needs more than covered by
FDI
0.0%
% of GDP
•
-2.0%
-4.0%
-6.0%
-8.0%
•
Lowest foreign financing need in the
region
-10.0%
Hungary
Czech Republic
Poland
Slovakia
Source: NBS
9
EMU in Sight
•
•
•
•
EMU participation provides incentive for
final reform push
Fulfillment of Maastricht Criteria
16%
70%
Price liberalisation and adjustment is
mostly complete
14%
65%
12%
60%
Inflation falling off sharply, en route
towards meeting the Maastricht criterion
10%
55%
8%
50%
6%
45%
4%
40%
2%
35%
0%
30%
Fiscal criterion to be met by 2006/07
Public debt level already below
Maastricht threshold
 Expectation to enter EMU by
2008/2009
%
•
Inflation
Fiscal deficit Interest rate FX volatility Public debt
Maastricht
Slovakia
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
10
Well Positioned Ahead of EMU
Public Debt
10%
125%
8%
100%
6%
75%
% of GDP
% of GDP
General Government Deficit
4%
2%
0%
50%
25%
0%
Slovakia
(2003)
Portugal
(1994)
Spain
(1994)
Greece
(1996)
Italy
(1994)
Slovakia
(2003)
Portugal
(1994)
Source: Eurostat, Ministry of Finance
Greece
(1996)
Italy
(1994)
Source: Eurostat, European Commission
CPI
Long Term Interest Rate
12%
16%
12%
%
8%
% yoy
Spain
(1994)
8%
4%
4%
0%
0%
Slovakia
(2003)
Portugal
(1994)
Spain
(1994)
Greece
(1996)
Italy
(1994)
Source: Eurostat, SUSR
Note: Figures indicate a country‘s position 5 years ahead of actual or expected EMU entry
Slovakia
(2003)
Portugal
(1994)
Spain
(1994)
Greece
(1996)
Italy
(1994)
Source: Eurostat, Ministry of Finance
11
Since 2001: Forging Ahead with
Structural Reforms
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)
Privatisation Receipts (Cumulative)
25%
•
Proceeds used to finance costs of
pension reform and repayment of state
debt
% of GDP
20%
15%
10%
5%
•
Left to privatise:
0%
•
Book value of SKK79bn for sale
1998
1999
2000
2001
2002
2003
Source: NBS
•
60% of book value in SE
(electricity) and SPP (gas)
13
Pension Reform: Well-funded
Key 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
14
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
15
Tax Rates Faced by Investors
Slovakia
Estonia
Finland
Hungary
Poland
Czech Republic
Germany
Japan
UK
Ireland
France
USA (New York)
0%
10%
20%
30%
40%
50%
60%
Corporate tax rate
Effective tax rate on investment income faced by a private investor (combined corporate tax and dividend tax)
Source: Ministry of Finance, NBS, SUSR
16
Further Key Structural Reforms
Labour 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
17
Competitive Industrial Location
•
Favorable geographical position
•
Highly open and deregulated economy
Labour Cost-adjusted Productivity
180%
160%
•
Well-educated and highly skilled labour
force
140%
•
High level of productivity
•
Strongly competitive labour costs
•
Low degree of labour unrest
% of EU
120%
100%
80%
60%
40%
20%
0%
EU15
Czech
Republic
Slovakia
Hungary
Poland
Source: Market Sources
18
Steadily Growing FDI
Slovakia the location of choice for
productive investment:
FDI per capita (2000-2003 avg)
700
•
One of the highest direct investment
ratios in the region
600
500
•
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
USD
•
400
300
200
100
0
Czech Republic
Slovakia
Hungary
Poland
Source: Ministry of Finance
19
Upward Rating Trajectory
•
Slovakia‘s reform efforts have been
recognised by the rating agencies
through a series of upgrades
Credit Rating Dynamics
A
•
•
Slovakia first regained its investment
grade rating in 2001
Further upgrades have followed, with
Moody‘s rating Slovakia A3 and S&P
BBB+
Credit Ratings
ABBB+
BBB
BBBBB+
BB
May-95
Sep-96
Feb-98
Jun-99
Nov-00
Moodys
S&P
Mar-02
Aug-03
Source: Standard & Poor’s, Moody’s
20
Debt Performance – Market Ratification
10-year Local Market Spread to Bunds
700
Portugal, 10 yr
600
Ireland, 10 yr
Italy, 10 yr
500
bps
Spain, 10 yr
400
300
200
100
Slovak Republic
Current 10 year
0
4
3
2
1
0
Years to EMU membership
Note: Local Currency Market
Source: Bloomberg
21
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
22