IMF Executive Board Concludes 2012 Article IV Consultation with the Slovak RepublicPublic Information Notice (PIN) No. 12/78
July 17, 2012
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with the Slovak republic is also available.
On July 11, 2012 the Executive Board of the IMF concluded the Article IV consultation with the Slovak Republic, and considered and endorsed the staff appraisal.1
Strong exports supported a healthy economic expansion with real GDP growing 3.3 percent in 2011. The robust performance of net exports offset the contraction in domestic demand amid fiscal consolidation and volatile consumer confidence. The strong economic performance continued into the first quarter of 2012 on the back of expanding auto production. All in all, Slovakia’s post-crisis economic performance has been among the strongest in the euro area, with real GDP surpassing its pre-crisis peak in the last quarter of 2011.
However, the strong growth has yet to put a dent in unemployment. The unemployment rate—which surged during the crisis by 5 percentage points to over 14 percent—declined only slightly to 13¾ percent in April 2012. Unemployment is particularly high in less developed regions, contributing to an already large regional income disparity.
Despite the still-negative output gap, inflation surged to 4.7 percent in 2011 on the back of an increase in tax and administered price and a global rise in energy prices. As these one-off factors ebbed, inflation eased to 3.4 percent in May 2012, but remains among the highest in the EU.
Financial sector conditions continued to strengthen. Banks’ profitability increased, and capital adequacy ratios rose to 15 percent of risk-weighted assets throughout 2011. Banks’ reliance on domestic deposits as a source of funding shielded them from the developments in the euro area, including a region-wide deleveraging, and supported a modest expansion in credit.
A frontloaded fiscal consolidation reduced the 2011 headline deficit by 3 percentage points to 4¾ percent of GDP. The underlying fiscal deficit, excluding one-off payments, declined to 4.4 percent of GDP. Despite the sizable deficit reduction, public sector debt climbed up another 3 percentage points, reaching 44 percent of GDP at the end of 2011. A fiscal responsibility law, which sets limits on public debt—60 percent of GDP until 2017 and gradually declining to 50 percent of GDP by 2027—was adopted in December 2011 with broad political support.
The growth outlook is for a modest slowdown in 2012 and a moderate expansion over the medium term. Reflecting a worsened external environment, Slovakia’s real GDP growth is expected to slow to 2.6 percent in 2012, before picking up to 3¼ percent next year as external environment strengthens. As the base effects fade and in the absence of further supply shocks, inflation would ease to below 3 percent by the end of the year. However, the euro zone stress remains a key external risk. Renewed severe strains in Europe could precipitate a global downturn and reduce demand for Slovak exports with significant adverse implications for growth.
Executive Board Assessment
Executive Directors commended the prudent macroeconomic policies and sound fundamentals that have underpinned a strong recovery for the Slovak economy. However, Directors considered that external risks, high fiscal deficits, and the double-digit unemployment rate pose significant policy challenges for the period ahead. They concurred that further fiscal adjustment, heightened oversight of the financial sector, and stepped up structural reforms remain essential to mitigate downside risks and bolster growth prospects.
Directors supported the authorities’ consolidation strategy to achieve fiscal sustainability. They considered that the planned measures appear to strike the appropriate balance between safeguarding fiscal solvency and supporting economic activity. More broadly, Directors encouraged the authorities to develop a robust medium-term fiscal framework, building on the recently adopted Fiscal Responsibility Law. In this regard, Directors welcomed the government’s plans to reform the public administration, strengthen tax administration, and increase the efficiency of public spending, including on healthcare. They also stressed the importance of safeguarding the solvency of the pension system by grounding prospective changes on actuarial analysis.
Directors noted that the banking system appears sound, but emphasized the need for continued supervisory vigilance. They welcomed recent steps to strengthen banks’ capital and liquidity buffers, but stressed that enhanced cooperation with home supervisors is essential to curb cross-border risks. Directors also recommended subjecting all types of housing loans to the same prudential norms to help prevent excessive risk-taking, while removing tax obstacles that could delay the resolution of non-performing loans.
Directors underscored the importance of deeper structural reforms, in particular to boost employment and address regional disparities. They noted that an effective implementation of the reformed labor code could help reduce unemployment, and welcomed plans to foster the development of disadvantaged regions. Improving vocational education and the incentives to work would help address labor markets rigidities. Directors also welcomed the authorities’ intention to further strengthen the business climate to attract investment.