## cr1771

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### Mission and report team
- Staff team: Ms. Rahman (head), Ms. Yackovlev, Mr. Ralyea and Ms. Caselli.
- Ms. Erbenova (OED) and Mr. Hagara (OED) attended policy meetings.
- Ms. Calixto and Mr. Smith assisted in the preparation of the staff report.
- The mission met with Finance Minister Kažimír, NBS Governor Makúch, the Fiscal Council, other senior officials, private sector representatives, trade unions, and local government officials in Eastern Slovakia.

### Context: convergence, regional disparities, and aging
- Convergence and productivity
  - Real GDP per capita increased from around 45 percent of the European Union (EU) average in 1997 to over 70 percent in 2015.
  - Productivity growth in manufacturing, linked to global supply chains, was a key driver of convergence.
  - Labor productivity growth is estimated to have nearly halved during 2009–2015 due to lower total factor productivity (TFP) growth and capital deepening.
- Regional disparities
  - Slovakia shows the highest regional disparities among EU countries as measured by Gini coefficients.
  - Unemployment rates in Eastern and Central Slovakia are about three times as high as in the Bratislava region.
  - An estimated 1.1 million people, roughly a fifth of the population, are considered at risk of poverty or social exclusion and are mostly concentrated in lagging regions.
  - Lower educational attainment and underdeveloped infrastructure are cited as key explanations for regional divergence.
- Aging risks
  - Slovakia’s old age dependency ratio is projected to be the largest in the EU.
  - Aging likely to further slow productivity growth, posing challenges to sustaining convergence.

### Recent developments: macro, labor, fiscal, credit, external
- Growth and inflation
  - Real GDP growth is projected to moderate in 2016 but remain robust at 3.3 percent.
  - Headline inflation has been negative since 2014; core inflation has hovered around zero.
  - The output gap is now closed.
- Labor market
  - Steady employment growth reduced the unemployment rate below its pre-crisis level.
  - Real wage growth recently surpassed productivity growth.
  - Labor shortages are particularly acute for skilled manufacturing workers; firms indicating labor shortages back to pre-crisis level.
- Fiscal outcomes (2016)
  - Headline fiscal deficit improved to 2 percent of GDP in 2016.
  - Consolidation of 0.7 percent of GDP was largely driven by a sharp drop in capital spending, lower interest payments, and lower goods and services spending.
  - Revenues: improving labor market, efficiency gains, and legislative changes boosted tax revenues and social contributions, but a sharp drop in EU funds resulted in a decline in overall revenues.
  - Cyclically-adjusted structural fiscal balance improved in 2016 after remaining broadly neutral in recent years.
- Credit and financial sector
  - Private sector credit growth among the highest in the EU.
  - Household credit growth double-digit; household credit accounts for about two-thirds of outstanding private sector credit.
  - Credit to nonfinancial corporations grew at 6 percent.
  - House prices increased in some regions but remain below pre-crisis levels.
- External sector
  - Export volume has nearly doubled since the post-crisis dip; rising market shares in the EU.
  - Trade surpluses since 2012, current account in 2016 estimated surplus of 0.9 percent of GDP.
  - External debt declined to slightly below 85 percent of GDP in 2016; denominated in euros and mostly composed of long-term general government bonds.
  - External position assessed as broadly in line with fundamentals.

### Outlook and risks
- Medium-term projections
  - Real GDP growth projected to peak at 3.9 percent in 2019 and settle at around 3½ percent thereafter.
  - New automotive investments expected to increase car production by 40 percent in the medium term.
  - External debt projected to decline to 74 percent of GDP by 2022.
  - Inflation projected to reach 2 percent at the end of the medium term.
- Main external risks
  - Developments in Europe and key export markets; export structure highly concentrated with transport and machinery products accounting for more than half of exports.
  - Brexit and Europe’s 2017 political calendar add uncertainty.
- Domestic risks
  - Rapid household credit growth a potential domestic risk, particularly if labor market falters after an external shock.
- Authorities’ views
  - Authorities broadly concurred with staff’s outlook and risks; foreseeing more robust medium-term growth with acceleration in 2018 and 2019.
  - Authorities agreed main risks arise from developments in key trading partners and noted increasing protectionism and uncertainties related to the new US administration.
  - Authorities viewed spillovers from Brexit as likely contained and agreed the real exchange rate is in line with fundamentals.
- Risk Assessment Matrix (selected points)
  - Global: Weaker-than-expected global growth — Likelihood: Medium /High; Time Horizon: Short to Medium Term; Impact: Medium /High.
    - Policy responses: diversify export destinations, increase high value-added exports; near-term: create fiscal space through efficiency-based consolidation, broadening of the tax base, and keeping debt limits at current levels; improve labor market and business environment; draw on banks’ capital buffers.
  - Global: Retreat from cross-border integration, policy and geopolitical uncertainties — Likelihood: Medium /High; Time Horizon: Short to Medium Term; Impact: Medium/High.
    - Policy responses: diversify export products and destination, increase value added in exports; near-term: create fiscal space through efficiency-based consolidation, broadening the tax base, and keeping the debt ceiling at current levels; improve labor market and business environment to attract diversified FDI.
  - Local: Property market downturn in the event of a worsening economic situation — Likelihood: Low; Time Horizon: Medium Term; Impact: Medium.
    - Policy responses: use macro-prudential toolkit and closely supervise lending practices.

### Policy discussion — Fiscal policy objectives (opening)
- 2017–19 medium-term budget sets an ambitious fiscal consolidation path.
  - Government targets an overall deficit of 1.3 percent of GDP in 2017 and a balanced budget by 2019 (staff projects more moderate path; see below).

### Fiscal consolidation and near-term projections (2017–2019)
- Consolidation entirely on the expenditure side; overall revenues projected to decline in percent of GDP due to lower grants and other revenues despite measures yielding small gains.
- Authorities' planned fiscal consolidation and sources (Percent of GDP) — values provided by authorities (data in millions of euros) and calculated in percent of GDP as projected by IMF Staff:
  - Target fiscal consolidation: 2017: 0.7; 2018: 0.9; 2019: 0.6
  - Revenue measures: 2017: 0.2; 2018: 0.1; 2019: -0.9
    - Tax revenues: 2017: 0.1; 2018: -0.1; 2019: -0.1
    - Grants and other revenues: 2017: 0.0; 2018: 0.2; 2019: -0.7
    - Social contributions: 2017: 0.1; 2018: -0.1; 2019: -0.1
  - Expenditure measures: 2017: 0.4; 2018: 0.8; 2019: 1.5
    - Wages and compensation: 2017: 0.2; 2018: 0.0; 2019: 0.1
    - Use of goods and services: 2017: -0.1; 2018: 0.4; 2019: 0.2
    - Social benefits: 2017: 0.4; 2018: 0.4; 2019: 0.4
    - Other expenses: 2017: -0.3; 2018: -0.1; 2019: 0.0
    - Net acquisition of non-financial assets: 2017: 0.2; 2018: 0.1; 2019: 0.8
  - Sources: National Authorities; and IMF staff estimates.
- Staff’s baseline fiscal balance projections (Percent of GDP):
  - Baseline overall fiscal balance: 2017: -1.8; 2018: -1.1; 2019: -0.7
  - Recommended overall fiscal balance: 2017: -1.3; 2018: -0.6; 2019: 0.0
    - Of which: Revenue efficiency measures (+ increased revenue): 2017: 0.3; 2018: 0.3; 2019: 0.3
    - Expenditure efficiency measures (+ expenditure savings): 2017: 0.3; 2018: 0.3; 2019: 0.4

### Revenue efficiency and tax policy
- VAT and compliance
  - VAT efficiency gap remains high at 48 percent (mostly in construction, trade and transportation) relative to EU peers.
  - Further efforts to increase VAT efficiency to the EU average (54 percent) could produce an additional 0.9 percent of GDP in revenues.
- Corporate income tax and excises
  - Low efficiency for the CIT and possibly for the mineral oils excise tax; effective tax rate for mineral oils remains low compared to pre-crisis level.
  - Recommendations: establish a well-defined corporate income tax base; target compliance in sectors with highest evasion.
- Scope for additional revenues (up to 2 percent of GDP) from reforms to:
  - Residential property tax (currently levied on surface area rather than market valuation).
  - Capital gains tax (set to zero for any transaction made after five years of ownership, including sale of bequeathed properties).
  - Environmental taxes (Slovakia has the third-lowest tax collection in the EU).

### Expenditure efficiency and "Value for Money" program
- Authorities initiated a “Value for Money” program in 2015: rolling thematic expenditure reviews over four years covering one-quarter of central government spending each year.
- First reviews (health, transport, IT) identified cost savings around 9–10 percent in health and IT (about 0.2 percent of GDP annually each).
- Next reviews launched in education, social benefits and the environment.
- Staff recommendations:
  - Support the initiative as an initial step toward comprehensive spending review.
  - Savings identified should, at least in part, support consolidation rather than be fully reallocated within the same sector.
  - Need clear procedures for oversight, integration into the budget, and effective inter-ministerial cooperation.

### Infrastructure, EU funds absorption, and public investment needs
- Current EU funds for transportation investment: 3.6 billion euro (4 percent of GDP) for the 2014–2020 programming period.
- Authorities estimate additional infrastructure investment needs around 6–8 percent of GDP.
- Slovakia received cumulative EU funds of 15 percent of GDP between 2007 and 2015, but allocation does not materially address regional differences.
  - About one third of EU funds allocated to transport infrastructure; share going to Eastern and Central Slovakia remains similar to Bratislava and the West.
- Staff cautions:
  - Limited capacity to spend sizable EU funds already allocated; be cautious in increasing domestically-financed infrastructure spending before improving public investment management.
  - To achieve better outcomes under 2014–2020 programming: improve expertise and capacity, lower corruption, prevent frequent legislative changes, and increase transparency and competition in public procurement.
- Staff recommends preserving public investment and financing it by raising new revenues through broadening the tax base (e.g., property tax reform), conditional on improvements in project preparation and public procurement.

### Aging, pensions, and long-term fiscal pressures
- Pension reforms (2012)
  - Linking retirement age to life expectancy, unifying male/female retirement age by 2022, and indexing benefits to price increases only.
- Projections and scenarios
  - Pension spending projected to decline until 2035 but rise thereafter.
  - Taking into account pension, health and long-term care spending, a cumulative increase in aging-related public expenditure of 21.5 percent by 2060 (about 4 percent of GDP) is projected under the baseline scenario.
  - Higher increases possible if TFP grows at historical average or slows further, and if authorities reopen Pillar II (authorities have done so four times in the past).
- Illustrative potential savings in public pension expenditure (Percentage points of GDP, 2016-60):
  - Link retirement age more closely to life expectancy: 1.8 - 2.8
  - Change in valorization formula (weight CPI at 25 percent): 0.6 - 0.8
  - Change in calculation of contribution base (annual assessment): 1.0 - 1.5
  - (Alternate table entry): Change in calculation of contribution base (annual assessment): 0.2 - 0.3
- Staff recommendations and cautions
  - Potential savings from parametric reforms (retirement age linkage, valorization formula change, annual contribution base).
  - Authorities agreed changing valorization formula could yield significant savings but emphasized balancing with pension adequacy.
  - Authorities saw scope for increasing equity and amount of social contributions by changing to an annual assessment base rather than monthly.
  - Staff urged avoiding reopening Pillar II due to risks of increasing Pillar I obligations.

### Macroeconomic context and staff policy view
- Staff supports authorities’ objective to achieve a balanced budget by 2019 but projects a more moderate consolidation given:
  - Wage pressures from a tight labor market, recent trends in social spending, closed output gap, capacity utilization at pre-crisis high, strong credit growth, and anticipated large FDI inflows.
- Staff assesses proposed efficiency-driven consolidation would not significantly affect growth and would create room for aging-related and future infrastructure spending.
- Staff recommendations to reach balanced budget in 2019:
  - Increased tax efficiency (VAT and CIT measures, compliance strategy).
  - Savings from expenditure efficiency (use Value for Money reviews).
  - Preserve public investment by raising new revenues through tax base broadening and improving project preparation and procurement.
  - Keep debt limits and brakes at current levels; support netting out cash balances from the headline debt indicator but advise against modifying limits to accommodate specific investment types.

### Financial sector vulnerabilities and banking system risks
- Banking sector metrics and vulnerabilities
  - Share of non-performing loans: 4.6 percent (source summary).
  - Capital adequacy ratio broadly stable and well above regulatory minimum; capital mostly Tier 1.
  - Special levy on financial institutions set at 0.2 percent until 2020 (authorities prolonged it) despite prior plan to reduce to 0.1 percent once cumulative receipts reach €750 million (receipts exceeded €600 million in mid-2016).
- Real estate and household exposure
  - Real estate sector accounts for over half of total private sector loans.
  - Household indebtedness is now one of the highest among central and eastern European peers.
  - Elevated concentration of new loans with loan-to-value (LTV) ratio around 90 percent.
  - NPLs for consumer loans increased from 7.1 percent in December 2015 to 8.6 percent in December 2016.
  - Over 80 percent of new mortgage loans have interest rates fixed for less than five years; significant share have 2–3 years until interest rate reset.
  - These factors increase bank vulnerability to interest rate increases and to a slowdown in economic activity.

### Banking system: asset-liability mismatch and liquidity risks
- Slovakia’s banking system has the most pronounced asset liability mismatch in the EA.
  - High reliance on short-term deposits for funding (more than 50 percent of liabilities) coupled with rapid mortgage lending growth.
  - Propensity to hold sight deposits exacerbated by low term deposit rates following ECB quantitative easing and limited capital markets.
- Micro-prudential and liquidity measures
  - Minimum liquidity coverage ratio in place.
  - Further measures being phased in such as a net stable funding ratio.

### Macro‑prudential measures, timing, and buffers
- Housing Loan Act (HLA) implemented in March 2016; NBS mandate to issue binding decrees imposing limits on debt service to income (DSTI) and LTV ratios set to tighten in 2017.
- Amendment to the Consumer Credit Act (entered January 1, 2017):
  - Obligatory verification of debt servicing capacity and income for consumer loan applicants.
  - Introduces maturity limit for consumer loans as for housing loans.
- Buffers as of January 1:
  - O‑SII buffer increased to 2 percent; systemic risk buffer to 1 percent for selected banks.
  - Countercyclical buffer (CCB) raised from zero to 0.5 percent beginning August 1, 2017.
- Banking sector legislation fully harmonized; supervision coordinated with the Single Supervisory Mechanism.

### Non-bank lending and supervisory changes
- Non-bank loans remained stable, roughly one-fifth of consumer loan volume.
- NBS took on responsibility for supervising non-banks in 2015 with increased powers on consumer financial protection.
- Regulatory cap on interest rates led to:
  - Sharp drop in annual percentage rates charged by non-banks.
  - Lengthening of average terms and maturities of non-bank loans.
  - Adverse effects on non-bank profitability and slowed new lending.

### Policy recommendations and supervisory options
- Increase credit risk weights for real-estate loans (currently standardized at 35 percent) for riskier subcomponents; option to impose higher risk weights on mortgage loans with LTV over 80 percent or on investment property mortgages.
- Further lower the LTV ratio limit (currently among highest in EA).
- Remove preferential treatment of capital gains from housing investment and link real-estate taxation to market value.
- Lower the bank tax to 0.1 percent as originally planned to relieve pressures on banks’ profitability.

### Structural issues: skills, regional disparities, and reforms
- Productivity
  - Value added of exports and workers remain low; productivity growth has nearly halved since 2008.
- Skills and labor market
  - Shortage of skilled labor; population aging worsens shortages.
  - Roma population: about 8 percent of total population; 80 percent of unemployed Roma lack formal workforce skills; unemployment rate for unemployed Roma stands at 70 percent.
  - Outmigration of skilled Slovaks to other EU countries contributes to labor shortages.
- Business climate
  - Perceptions of corruption and lack of judicial impartiality negatively affect business climate.
- Structural reform priorities and recommendations
  - Active labor market policies (ALMPs): Slovakia’s spending on ALMP is among the lowest in the EU; recommend reorienting ALMPs to skills and on-the-job training.
  - Authorities plan expenditure review of labor market policies in April 2017.
  - Address regional disparities: Law on Support of Lagging Regions (Act No. 336/2015 Coll.) targets initial support to 12 out of 79 districts with highest unemployment; financed from EU funds, government budget (€10 million a year) and private funds.
  - Address skilled labor shortage: revise work permitting rules; authorities acknowledged foreign worker permits generally take more than six months.
  - Judicial and business regulation reforms: streamline local government, ease business registration via one-stop shops, harmonize public procurement with EU law, increase transparency and independence of judiciary, extend mandatory disclosure rules to local government.

### Staff appraisal: performance, outlook, and risks
- Slovakia continues to enjoy strong economic growth; real incomes more than 70 percent of EU average.
- Estimated GDP growth of 3.3 percent in 2016; similar growth forecast for 2017 due in part to rebound in EU funds absorption.
- Planned automotive investment projected to drive medium-term growth.
- Risks: Brexit, European elections, and rapid household credit growth.
- Long-term challenges: aging population, sharp regional disparities, nearly halved productivity growth since 2008; Bratislava captured disproportionate share of success; underdeveloped infrastructure and lower educational attainment held back Eastern and Central regions.

### Annex I — Labor productivity: developments and outlook (key statistics)
- Average annual labor productivity growth declined from 4.3 percent during 2000–08 to around 1.8 percent during 2008–15.
- Estimated loss of annual TFP growth due to aging: about 0.3 percent (1996–2007).
- Additional potential TFP growth reduction from changing labor-force composition (prime-age share decline): 0.3 percent per year (projection based on EC and OECD inputs).
- Share of older workers (55+): more than tripled to over 15 percent; projected about a fifth of the workforce by 2034.

### Annex III — Public Debt Sustainability Analysis (selected baseline figures and scenarios)
- Baseline nominal gross public debt (percent of GDP):
  - 2014: 38.85; 2015: 53.65; 2016: 52.55; 2017: 52.55; 2018: 52.25; 2019: 51.14; 2020: 49.44; 2021: 48.04; 2021 (alternate): 46.6
- Public gross financing needs (percent of GDP):
  - 2014: 10.6; 2015: 9.9; 2016: 7.3; 2017: 7.8; 2018: 9.7; 2019: 6.8; 2020: 1.8; 2021: 2.0; 2021 (alternate): 0.9
- Real GDP growth (percent): 2014: 4.1; 2015: 2.6; 2016: 3.8; 2017: 3.3; 2018: 3.3; 2019: 3.7; 2020: 3.9; 2021: 3.5; 2021 (alternate): 3.4
- Inflation (GDP deflator, percent): 2014: 1.3; 2015: -0.2; 2016: -0.2; 2017: -0.8; 2018: 0.3; 2019: 1.5; 2020: 1.8; 2021: 1.8; 2021 (alternate): 1.9
- Effective interest rate (percent): 2014: 4.3; 2015: 3.5; 2016: 3.4; 2017: 2.9; 2018: 2.5; 2019: 2.2; 2020: 2.2; 2021: 2.1; 2021 (alternate): 1.9
- Debt dynamics (change in gross public sector debt, percent of GDP):
  - 2014: 1.6; 2015: -1.1; 2016: -1.1; 2017: 0.0; 2018: -0.2; 2019: -1.1; 2020: -1.7; 2021: -1.4; Cumulative (2014–2021): -5.9
- Stress test scenarios (selected outcomes)
  - Primary balance shock: primary balance under shock 2017: -1.5; 2018: -0.9.
  - Real GDP growth shock: real GDP growth under shock 2017: -1.1; 2018: -0.7; corresponding primary balance 2017: -2.7; 2018: -4.4.
  - Combined shock: primary balance 2017: -2.7; 2018: -4.4; effective interest rate rises to 4.1 in 2021 under combined shock.
- Forecast track record (2005–2013)
  - Real GDP Growth forecast error median: -1.27; Slovak Republic percentile rank: 16%
  - Primary Balance forecast error median: -0.78; Slovak Republic percentile rank: 34%
  - Inflation (Deflator) forecast error median: -0.69; Slovak Republic percentile rank: 10%

### Data adequacy and statistical practices
- Slovakia subscribed to SDDS since 1996 and observes or exceeds related standards.
- Subject to Eurostat and ECB statistical requirements.
- National accounts follow ESA 2010.
- General government statistics compiled in line with ESA 2010; monthly reconciliation above/below the line restricted to state budget on cash basis; reconciliation available only with long lag.
- External sector statistics generally good and timely; large errors and omissions in balance of payments acknowledged; data submitted to Fund following BPM6 standard since September 2014, back to 2004.
- Monetary and financial statistics are of good quality and timely.
- Table of Common Indicators (as of February 9, 2017) provides frequencies and dates for key series (Exchange Rates: Current; International Reserve Assets: January 2017; Reserve/Base Money: December 2016; Broad Money: December 2016; Central Bank Balance Sheet: December 2016; Consolidated Banking Balance Sheet: December 2016; Interest Rates: Current; CPI: December 2016; Revenue/Expenditure (General Government): 2015; Central Government operations: January 2017; Stocks of central government debt: 2016Q3; External Current Account Balance: November 2016; Exports/Imports: December 2016; GDP/GNP: 2016Q3; Gross External Debt: 2016Q3; International Investment Position: 2016Q3).

*Source: IMF staff report (cr1771 - 2017).*

### 2017. The mission met with Finance Minister Kažimír, NBS Governor

### 2017. The mission met with Finance Minister Kažimír, NBS Governor Makúch, the Fiscal Council, other senior officials, private sector representatives, trade unions, and local government officials in Eastern Slovakia.

### Mission and report team
- The staff team comprised Ms. Rahman (head), Ms. Yackovlev, Mr. Ralyea and Ms. Caselli.
- Ms. Erbenova (OED) and Mr. Hagara (OED) attended policy meetings.
- Ms. Calixto and Mr. Smith assisted in the preparation of the staff report.

### CONTEXT
- Convergence and productivity
  - Real GDP per capita increased from around 45 percent of the European Union (EU) average in 1997 to over 70 percent in 2015.
  - Productivity growth in the manufacturing sector, linked to global supply chains, was a key driver of convergence.
  - Labor productivity growth is estimated to have nearly halved during 2009–2015 due to lower total factor productivity (TFP) growth and capital deepening (Annex I).
- Regional disparities
  - Slovakia shows the highest regional disparities among EU countries as measured by Gini coefficients (Box 1).
  - Unemployment rates in Eastern and Central Slovakia are about three times as high as in the Bratislava region.
  - An estimated 1.1 million people, roughly a fifth of the population and mostly concentrated in lagging regions, are considered at risk of poverty or social exclusion.
  - Lower educational attainment and underdeveloped infrastructure are cited as key explanations for regional divergence.
- Aging risks
  - Slovakia’s old age dependency ratio is projected to be the largest in the EU.
  - Given aging, a further slowdown in productivity growth is likely, posing challenges to sustaining convergence.

### RECENT DEVELOPMENTS
- Growth and inflation
  - Real GDP growth is projected to moderate in 2016 but remain robust at 3.3 percent.
  - Headline inflation has been negative since 2014, while core inflation has hovered around zero.
  - The output gap is now closed.
- Labor market
  - Steady employment growth has reduced the unemployment rate below its pre-crisis level.
  - Real wage growth recently surpassed productivity growth.
  - The number of firms indicating labor shortages limiting production is back to its pre-crisis level; shortages are particularly acute for skilled manufacturing workers.
- Fiscal outcomes
  - The headline fiscal deficit improved to 2 percent of GDP in 2016.
  - Consolidation of 0.7 percent of GDP was largely driven by a sharp drop in capital spending, lower interest payments, and lower goods and services spending.
  - On the revenue side, an improving labor market, some efficiency gains, and legislative changes boosted tax revenues and social contributions, but a sharp drop in EU funds resulted in a decline in overall revenues.
  - The cyclically-adjusted structural fiscal balance also improved in 2016 after remaining broadly neutral in recent years.
  - Sovereign risk spreads remain historically low and were largely unaffected by Brexit and the emerging market sell-off following the US elections.
- Credit and financial sector
  - Private sector credit growth has been among the highest in the EU.
  - Household credit growth has been double-digit, with household credit now accounting for about two-thirds of the outstanding private sector credit stock (Figure 4).
  - Growth of credit to nonfinancial corporations (NFC) at 6 percent is one of the highest in EU countries.
  - House prices have increased in some regions but remain below pre-crisis levels; residential property prices by region are shown for Bratislava, Trnava, Nitra, Trenčín, Košice.
- External sector
  - Export volume has nearly doubled since the post-crisis dip, reflecting rising market shares in the EU.
  - Trade surpluses have been generated since 2012, with some recent weakening.
  - The current account in 2016 is estimated to have recorded a surplus of 0.9 percent of GDP.
  - External debt declined to slightly below 85 percent of GDP in 2016; it is denominated in euros and mostly composed of long-term general government bonds.
  - External position assessed as broadly in line with fundamentals (Annex II).

### OUTLOOK AND RISKS
- Medium-term projections
  - Real GDP growth is projected to peak at 3.9 percent in 2019 and settle at around 3½ percent thereafter.
  - New automotive investments are expected to increase Slovakia’s car production by 40 percent in the medium term.
  - External debt is projected to decline to 74 percent of GDP by 2022.
  - Inflation is projected to reach 2 percent at the end of the medium term.
- Main external risks
  - Developments in Europe and key export markets constitute the main external risks (Box 2).
  - Slovakia has strong real and financial links with a small number of central and western European countries; export structure is highly concentrated with transport and machinery products accounting for more than half of exports (Annex II).
  - The United Kingdom’s exit from the EU poses uncertainties and risks of negative spillovers from lower growth in key trading partners.
  - Europe’s political calendar (elections in the Netherlands, France, and Germany in 2017) adds uncertainty.
- Domestic risks
  - Rapid household credit growth is a potential domestic risk, particularly if the labor market falters after an external shock.
- Authorities’ views
  - Authorities broadly concurred with staff’s outlook and risks, foreseeing more robust medium-term growth with an acceleration in 2018 and 2019.
  - Authorities agreed main risks arise from developments in key trading partners in Europe and also noted increasing protectionism and uncertainties related to the new US administration.
  - Authorities viewed spillovers from Brexit as likely to be contained and agreed the real exchange rate is in line with economic fundamentals.
- Risk Assessment Matrix (selected points)
  - Global: Weaker-than-expected global growth — Likelihood: Medium /High; Time Horizon: Short to Medium Term; Impact: Medium /High.
    - Policy responses: diversify export destinations, increase high value-added exports; near-term: create fiscal space through efficiency-based consolidation, broadening of the tax base, and keeping debt limits at current levels; improve labor market and business environment; draw on banks’ capital buffers.
  - Global: Retreat from cross-border integration, policy and geopolitical uncertainties — Likelihood: Medium /High; Time Horizon: Short to Medium Term; Impact: Medium/High.
    - Policy responses: diversify export products and destination, increase value added in exports; near-term: create fiscal space through efficiency-based consolidation, broadening the tax base, and keeping the debt ceiling at current levels; improve labor market and business environment to attract diversified FDI.
  - Local: Property market downturn in the event of a worsening economic situation — Likelihood: Low; Time Horizon: Medium Term; Impact: Medium.
    - Policy responses: use macro-prudential toolkit and closely supervise lending practices.

### POLICY DISCUSSION — A. Fiscal Policy: Creating Space to Address Regional Disparities and Aging Pressures (opening)
- The 2017–19 medium-term budget sets an ambitious fiscal consolidation path.
  - The government targets an overall deficit of 1.3 percent of GDP in 2017, and a balanced budget by

*Source: IMF staff report (cr1771 - 2017).*

### 2019. The consolidation is entirely

### cr1771 - 2019. The consolidation is entirely

### Fiscal consolidation and near-term projections
- The consolidation is entirely on the expenditure side as overall revenues are projected to decline in percent of GDP due to lower grants and others revenues despite a set of measures yielding small gains.
- Authorities' planned fiscal consolidation and sources (Percent of GDP) — values provided by authorities (data in millions of euros) and calculated in percent of GDP as projected by IMF Staff:
  - Target fiscal consolidation: 2017: 0.7; 2018: 0.9; 2019: 0.6
  - Revenue measures: 2017: 0.2; 2018: 0.1; 2019: -0.9
    - Tax revenues: 2017: 0.1; 2018: -0.1; 2019: -0.1
    - Grants and other revenues: 2017: 0.0; 2018: 0.2; 2019: -0.7
    - Social contributions: 2017: 0.1; 2018: -0.1; 2019: -0.1
  - Expenditure measures: 2017: 0.4; 2018: 0.8; 2019: 1.5
    - Wages and compensation: 2017: 0.2; 2018: 0.0; 2019: 0.1
    - Use of goods and services: 2017: -0.1; 2018: 0.4; 2019: 0.2
    - Social benefits: 2017: 0.4; 2018: 0.4; 2019: 0.4
    - Other expenses: 2017: -0.3; 2018: -0.1; 2019: 0.0
    - Net acquisition of non-financial assets: 2017: 0.2; 2018: 0.1; 2019: 0.8
  - Sources: National Authorities; and IMF staff estimates.

- Staff’s baseline fiscal balance projections (Percent of GDP):
  - Baseline overall fiscal balance: 2017: -1.8; 2018: -1.1; 2019: -0.7
  - Recommended overall fiscal balance: 2017: -1.3; 2018: -0.6; 2019: 0.0
    - Of which: Revenue efficiency measures (+ increased revenue): 2017: 0.3; 2018: 0.3; 2019: 0.3
    - Expenditure efficiency measures (+ expenditure savings): 2017: 0.3; 2018: 0.3; 2019: 0.4

### Revenue efficiency and tax policy
- Recent measures targeting tax fraud and non-compliance have reduced the VAT gap, but:
  - VAT efficiency gap remains high at 48 percent (mostly concentrated in construction, trade and transportation sectors) relative to EU peers.
  - VAT and CIT C-efficiency ratios and effective tax rates show low efficiency for the CIT and possibly for the mineral oils excise tax, where the effective tax rate remains low compared to its pre-crisis level.
- Staff recommendation and potential revenue gains:
  - Further efforts to increase Slovakia’s VAT efficiency to the EU average (54 percent) could produce an additional 0.9 percent of GDP in revenues.
  - Establish a well-defined corporate income tax base and target compliance efforts on sectors with highest evasion rates to support revenue gains.
  - Scope for additional revenues (up to 2 percent of GDP) from reforms to:
    - Residential property tax (currently levied on surface area rather than market valuation).
    - Capital gains tax (set to zero for any transaction made after five years of ownership, including sale of bequeathed properties).
    - Environmental taxes (Slovakia has the third-lowest tax collection in the EU).

### Expenditure efficiency and "Value for Money" program
- The authorities initiated in 2015 a rolling series of thematic expenditure reviews called the “Value for Money” program, planned over a four-year period covering one-quarter of central government spending each year.
- First set of reviews (health, transport, IT) identified measures for cost savings of around 9–10 percent in the areas of health and IT spending (about 0.2 percent of GDP annually each).
- Authorities have launched the next set of reviews in education, social benefits and the environment.
- Staff views and recommendations:
  - Support for the “value for money” initiative as an initial step toward a comprehensive spending review.
  - Savings identified should, at least in part, be used to support consolidation rather than be fully reallocated within the same sector.
  - Need for clear procedures to support the oversight mandate of the implementation unit, integration of measures into the budget, and effective cooperation between ministries to ensure delivery of identified fiscal savings.

### Infrastructure, EU funds absorption, and public investment needs
- Current EU funds for transportation investment: 3.6 billion euro (4 percent of GDP) for the 2014–2020 programming period.
- Authorities estimate additional infrastructure investment needs around 6–8 percent of GDP.
- Slovakia receives sizable EU funds (a cumulative 15 percent of GDP between 2007 and 2015) but allocation does not materially address regional differences:
  - About one third of EU funds allocated to transport infrastructure, yet share going to Eastern and Central Slovakia remains similar to Bratislava and the West.
- Staff cautions:
  - Limited capacity to spend sizable EU funds already allocated calls for caution in increasing domestically-financed infrastructure spending before improving public investment management framework.
  - Achieving better outcomes under the 2014–2020 programming period requires improving expertise and capacity, lowering corruption, preventing frequent changes in legislation, and increasing transparency and competition in public procurement.
- Staff recommends preserving public investment and financing it by raising new revenues through broadening the tax base (e.g., property tax reform), conditional on improvements in project preparation and public procurement.

### Aging, pension spending, and long-term fiscal pressures
- Pension reforms undertaken in 2012 include:
  - Linking the retirement age to life expectancy, unifying male/female retirement age by 2022, and indexing benefits to price increases only.
- Projections and scenarios:
  - Pension spending is projected to decline until 2035 but rise thereafter.
  - Taking into account pension, health and long-term care spending, a cumulative increase in aging-related public expenditure of 21.5 percent by 2060 (about 4 percent of GDP) is projected under the baseline scenario.
  - Higher increases possible if TFP grows at historical average or slows further, and if authorities reopen Pillar II (authorities have done so four times in the past).
- Illustrative potential savings in public pension expenditure (Percentage points of GDP, 2016-60):
  - Link retirement age more closely to life expectancy: 1.8 - 2.8
  - Change in valorization formula (weight CPI at 25 percent): 0.6 - 0.8
  - Change in calculation of contribution base (annual assessment): 1.0 - 1.5
  - (Alternate listing in text: Change in calculation of contribution base (annual assessment): 0.2 - 0.3) — note both sets appear in the source tables.
- Staff recommendations and cautions:
  - Highlighted potential savings from parametric reforms: closer linkage of retirement age to life expectancy, change valorization formula, move contribution base to an annual level.
  - Authorities agreed changing valorization formula could yield significant savings but emphasized balancing with pension adequacy.
  - Authorities saw scope for increasing equity and amount of social contributions by changing to an annual assessment base rather than monthly.
  - Staff urged authorities to avoid reopening Pillar II due to risks of increasing Pillar I obligations.

### Macroeconomic context and staff policy view
- Staff supports the authorities’ objective to achieve a balanced budget by 2019 but projects a more moderate consolidation given:
  - Wage pressures due to a tight labor market, recent trends in social spending, closed output gap, capacity utilization at pre-crisis high, strong credit growth, and anticipated large FDI inflows in the medium-term.
- Staff assesses that the proposed efficiency-driven consolidation would not significantly affect growth negatively and would create room for aging-related and future infrastructure spending.
- Staff recommendations to reach a balanced budget in 2019:
  - Increased tax efficiency (VAT and CIT measures, compliance strategy).
  - Savings from expenditure efficiency (use Value for Money reviews to generate savings that support consolidation).
  - Preserve public investment by raising new revenues through tax base broadening and improving project preparation and procurement.
  - Keep debt limits and brakes at current levels; support netting out cash balances from the headline debt indicator but advise against modifying limits to accommodate specific types of investment.

### Financial sector vulnerabilities
- Banking sector: stable but profitability declined.
  - Share of non-performing loans: 4.6 percent.
  - Capital adequacy ratio broadly stable and well above regulatory minimum; capital mostly Tier 1.
- Special levy on financial institutions set at 0.2 percent until 2020 (authorities decided to prolong it), despite previous plan to reduce to 0.1 percent once cumulative total receipts reach €750 million (receipts exceeded €600 million in mid-2016).
- Vulnerabilities from high exposure to real estate sector:
  - Real estate sector accounts for over half of total private sector loans.
  - Household indebtedness is now one of the highest among central and eastern European peers.
  - Elevated concentration of new loans with loan-to-value (LTV) ratio around 90 percent.
  - NPLs for consumer loans increased from 7.1 percent in December 2015 to 8.6 percent in December 2016.
  - Over 80 percent of new mortgage loans have interest rates fixed for less than five years, with a significant share having 2–3 years until interest rate reset.
  - These factors increase bank vulnerability to interest rate increases and to a slowdown in economic activity.

*Source: IMF staff summaries and estimates drawn from the provided content.*

### 23.      Slovakia’s banking system also has the most pronounced asset liability mismatch in

### 23.      Slovakia’s banking system also has the most pronounced asset liability mismatch in

### Banking system: asset-liability mismatch and liquidity risks
- Slovakia’s banking system has the most pronounced asset liability mismatch in the EA.
- This reflects a high reliance on short-term deposits for funding (more than 50 percent of liabilities) coupled with rapid growth in mortgage lending.
- The propensity to hold sight deposits has been exacerbated in recent years by low interest rates on term deposits in the wake of ECB quantitative easing and by the limited size of capital markets.
- Micro-prudential measures already undertaken include a minimum liquidity coverage ratio.
- Further measures are being phased in to address liquidity risks, such as a net stable funding ratio.

### Macro‑prudential measures, timing, and buffers
- Housing Loan Act (HLA) implemented in March 2016; NBS mandate to issue binding decrees imposing limits on debt service to income (DSTI) and LTV ratios which are set to further tighten in 2017.
- Amendment to the Consumer Credit Act entered into force on January 1, 2017:
  - introduces an obligation to verify the debt servicing capacity and income of consumer loan applicants,
  - introduces a maturity limit for consumer loans as is the case for housing loans.
- As of January 1, the O‑SII buffer was increased to 2 percent and the systemic risk buffer to 1 percent for selected banks.
- In light of a strong positive credit‑to‑GDP gap relative to its long‑term steady state and developments in the property market, the NBS decided to raise countercyclical buffer (CCB) from zero to 0.5 percent beginning August 1, 2017.
- Banking sector legislation in Slovakia is fully harmonized, and supervision closely coordinated with the Single Supervisory Mechanism.

### Non-bank lending and supervisory changes
- Non-bank loans have remained stable accounting for roughly one-fifth of the volume of consumer loans.
- The NBS acquired responsibility for supervising non-banks in 2015, along with increased supervisory powers in the area of consumer financial protection.
- Introduction of a regulatory cap on interest rates led to:
  - a sharp drop in annual percentage rates charged by non-banks,
  - partial responsibility for lengthening of average terms and maturities of non-bank loans,
  - adverse effects on non-bank profitability,
  - slowed pace of new lending by non-banks and enhanced stability of the sector.

### Key observations on lending, risk, and profitability
- Measures implemented so far have had a limited impact on credit growth as banks rely on loan volume growth for profitability in a low‑interest rate environment.
- With current capital levels well above the minimum regulatory requirement, the increase in the CCB rate is likely to have limited impact on banks’ lending behavior.
- Transposition of new EU directives to equalize the operating environment for bank and non-bank lenders may not materially slow rapid credit growth.
- Authorities note default rates in housing portfolios remained very low despite rapid growth; they favor focusing on the countercyclical buffer and tighter lending standards rather than risk weights.
- Authorities note obligatory amortization for all loans in Slovakia causes LTVs to drop rapidly over the lifespan of the loan.

### Policy recommendations and supervisory options (staff advice)
- Increase credit risk weights for real‑estate loans (currently standardized at 35 percent) for riskier subcomponents.
  - One option in line with latest Basel proposals: impose higher risk weights on mortgage loans with LTV ratios over 80 percent or on mortgage loans for investment properties.
- Further lowering of the LTV ratio limit, which is among the highest in the EA, to curtail the sharp increase in recent quarters in new loans with excessively high LTVs.
- Remove preferential treatment of capital gains from housing investment and link real‑estate taxation to the market value of the property to curb demand for real estate and add to fiscal revenues.
- Lower the bank tax to 0.1 percent as originally planned to help relieve pressures on banks’ profitability.

### Structural issues: skills, regional disparities, and reforms
- Slowing productivity growth poses risks to long‑term convergence; value added of exports and workers remain low.
- Shortage of skilled labor is denting productivity and is worsened by population aging.
- Education enrollment and completion rates, as well as PISA scores, are much lower in Eastern and Central Slovakia partly reflecting concentration of the Roma population.
  - Roma population constitutes about 8 percent of total Slovak population.
  - 80 percent of unemployed Roma population lacking any type of formal workforce skills.
  - Unemployment rate for unemployed Roma population stands at 70 percent.
- Domestic and foreign investors cite shortages of skilled labor and rate Slovakia in the bottom half in areas of the labor market (qualification of staff, adequacy of higher education and vocational training, legal flexibility of employment, availability of skilled workers).
- Outmigration of Slovaks, primarily skilled workers, to other EU countries contributes to labor shortages.
- Perceptions of corruption and lack of impartiality in the judiciary negatively affect Slovakia’s business climate.

### Structural reform priorities and recommendations
- Active labor market policies (ALMPs):
  - Slovakia’s spending on ALMP is among the lowest in the EU.
  - Staff recommend reorienting ALMPs to skills and on‑the‑job training to support lasting graduation to the job market.
  - Authorities plan to complete an expenditure review of labor market policies in April 2017 and expect recommendations to improve efficiency of ALMP spending.
- Addressing regional disparities:
  - Law on Support of Lagging Regions (Act No. 336/2015 Coll.) targets initial support to 12 out of 79 districts with highest unemployment rates.
  - Program focuses on sectors with regional comparative advantage (family farming, viticulture with processing, agro‑tourism, traditional crafts) and covers significant part of Roma community.
  - Program financed from European structural investment funds, the government budget (€10 million a year) and private funds.
- Addressing skilled labor shortage:
  - Revise work permitting rules and enhance vocational education.
  - Authorities acknowledged that issuing foreign worker permits generally takes more than six months, which is an obstacle.
  - Continued efforts to improve vocational and on‑the‑job training, which are somewhat limited, could play a greater role.
- Judicial and business regulation reforms:
  - Steps to streamline local government, ease business registration via one‑stop shops, harmonize public procurement with EU law are welcomed.
  - Staff stress importance of ensuring transparency and competitiveness in public procurement.
  - Improve efficiency, transparency, and independence of the judicial system and enforce ban on offering and accepting unethical advantages by government officials in management of public property.
  - Extend mandatory disclosure rules for public companies, government contracts, and government officials to cover local government.

### Staff appraisal: recent performance, outlook, and risks
- Slovakia continues to enjoy strong economic growth.
  - Real incomes are now more than 70 percent of the EU average.
  - Rising employment and real wages supported estimated GDP growth of 3.3 percent in 2016.
  - Similar growth is forecast for 2017 due, in part, to a rebound in EU funds absorption.
  - Planned investment in the automotive sector is projected to drive growth in the medium term.
- Risks to the optimistic outlook are primarily external:
  - The United Kingdom’s planned exit from the European Union and elections in Europe’s larger economies create uncertainty about growth prospects in Slovakia’s key trading partners.
  - Continued rapid growth in credit to households, following several years of double‑digit increases, is a potential domestic risk.
- Long‑term challenges:
  - An aging population and sharp regional disparities.
  - Productivity growth has nearly halved since 2008.
  - With population aging the fastest in Europe, a further slowdown in productivity is likely unless countered by structural reforms.
  - The Bratislava region has captured the lion’s share of Slovakia’s past economic success; underdeveloped infrastructure, lower educational attainment, and limited labor mobility have held back the Eastern and Central regions.

*Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1771.pdf*

### 41.      The authorities’ planned fiscal consolidation is appropriate and can create space for

### cr1771 - 41.      The authorities’ planned fiscal consolidation is appropriate and can create space for

### Fiscal consolidation: objectives and recommended measures
- The authorities’ planned fiscal consolidation is appropriate and can create space for addressing regional inequities and future aging-related spending.
- On current policies, the fiscal deficit is likely to be 0.7 percent of GDP in 2019.
- To meet the balanced budget objective by 2019, the authorities should:
  - Save in whole or in part expenditure reductions identified in current spending reviews.
  - Increase VAT and corporate tax efficiency by implementing a compliance strategy that targets tax evaders.
  - Raise property and environmental tax collections to preserve public investment.

### Fiscal rules, debt management, and cash management
- To safeguard stability generated by the FRA, Slovakia’s fiscal anchor, debt rules and brakes should not be modified to provide more favorable treatment of any specific type of investment.
- To strengthen cash management:
  - Consider modifications to allow for government cash balances to be netted out from gross debt when assessing performance relative to the debt ceiling, because the current ceiling on gross debt discourages pre-financing efforts during periods of low interest rates even when these have no impact on net debt.
- Avoid introducing any escape clause for investment spending so the budget process remains a forum for assessing relative merits of competing spending demands.
- Staff recommends keeping the debt limits and brakes at their current levels.

### Pensions and health sector measures to contain age-related spending
- Unwavering implementation of approved pension reforms is imperative to help contain age-related spending.
- The politically-costly and significant pension reforms undertaken in 2012, including indexing benefits to inflation, will pay off only if implemented in full.
- Re-opening Pillar II should be avoided.
- Additional measures that would yield further savings include:
  - Indexing accrued pension benefits to inflation.
  - Broadening the social contribution base.
- In the health sector, advance current efforts to centralize procurement and restructure the hospital network.

### Banking sector stability and prudential recommendations
- Slovakia’s banks are profitable, well-capitalized, and possess healthy balance sheets.
- Profit pressures stem from tight interest margins and the burden of the special levy on bank profits.
- Bank exposure to Slovakia’s households, which are among the most indebted in central and eastern Europe, has grown rapidly.
- The authorities have introduced pre-emptive micro- and macro-prudential measures, including:
  - Introduction of tighter loan-to-value (LTV) ratios.
  - Introduction of a systemic risk buffer in 2017.
- Further steps to maintain credit quality in the environment of high credit growth may be necessary, including consideration of:
  - Imposing higher risk weights on riskier mortgage loans.
  - Lowering the maximum LTV ratio.
  - Reducing the bank tax as originally planned.

### Labor market, productivity, and business environment reforms
- Measures to improve labor market efficiency and the business environment are needed to support productivity growth and sustain convergence.
- Positive developments:
  - Shift in active labor market policies (ALMP) toward activities that move the long-term unemployed into the labor market.
  - Ongoing expenditure review of ALMP with recommendations whose successful implementation will be important to maximize benefits.
- Near-term measures:
  - Review and possible relaxation of the process for granting work permits to foreign workers to help ease the growing skills mismatch.
- Long-term measures:
  - Revamp education policies to strengthen vocational training to ensure a better match of labor supply and demand.
- To tackle the widespread perception of corruption:
  - Improve judicial transparency and independence.
  - Assiduously implement recent measures to curb unethical behavior in government.

### Regional development and EU funds absorption
- Implement a comprehensive strategy to improve economic outcomes in underdeveloped regions to boost growth and equity.
- Effective and timely absorption of EU funds can help address shortcomings.
- Focus areas:
  - Identify priority infrastructure projects that facilitate further investment and labor mobility in under-developed regions.
  - Establish clear selection criteria and follow a competitive procurement process.
- The authorities’ recent initiatives to create jobs in lagging regions through an integrated approach of working with local businesses, communities and government is welcome.

*SLOVAK REPUBLIC INTERNATIONAL MONETARY FUND 23*

### 47.      It is proposed that the next Article IV consultation with the Slovak Republic take place on the

### It is proposed that the next Article IV consultation with the Slovak Republic take place on the standard 12-month cycle.

### Real Sector Developments (2010–16)
- "Slovakia has seen a strong recovery... ...compared to most peers."
- "Solid wage growth, ...a buoyant labor market, and low inflation has supported domestic demand. Capacity utilization is now at pre-crisis high."
- Real GDP and Output Gap (visual indicators across 2006–2016 shown).
- Capacity Utilization (Percent) compared to Avg. 2004-08 and Trend (2010–2016).
- Real GDP: Slovak Republic and Peers (Index, 2008Q1=100) — comparisons with Hungary, Czech Republic, Poland.
- Nominal Wages (Year-on-year percent change) by sectors: Total economy, Industry, Public admin, def., and Soc. Sec., Services (2010–2016).
- Inflation (Year-on-year percent change): Headline inflation and Core Inflation (2010–2016).

### Labor Market Developments (2010–16)
- "Employment grew steadily since mid-2013... ...and unemployment rate is converging to the EU average."
- Employment composition and change:
  - Employment types: Self-employed, Temporary, Permanent (2010–2016).
  - Overall employment (Y/y % change, RHS).
  - Employment (Absolute change, thousands of persons) (2010–2016).
- Unemployment:
  - SVK unemployment vs EU (avg.) and CE3 (avg.) 1/ (Percent) (2010–2016).
  - Youth Unemployment: SVK, EU (avg.), CE3 (avg.) (Percent) (2010–2016).
- Wages and productivity:
  - "Youth unemployment has fallen from its high level... ...real wage growth has recently surpassed productivity growth."
  - Real Wage and Productivity Growth (Percent) 2001–2016: Real wages growth vs Real productivity growth.
  - Real Unit Labor Cost (Index: 2010=100) series for SVK, CZE, HUN, POL (2005–2015).
- Minimum wage (2015) as Percent of mean value of average monthly earnings: country comparisons (ESP, CZE, EST 2/, SVK, ROM 2/, HRV, GBR, DEU, IRL, NLD 2/, PRT, LVA 2/, BEL 2/, POL, HUN 2/, MLT, SRB, LTU, BGR, FRA 2/, LUX 2/, SVN, TUR 2/, etc.).
- Notes:
  - 1/ CE3 comprises Czech Republic, Hungary, and Poland.
  - 2/ Reflects 2014 as data for 2015 are not available.

### Fiscal Developments (2010–16)
- "Revenues, excluding grants, continue to grow... ...and expenditures have begun to moderate."
- "The fiscal stance has been improving... ...and public debt declining."
- Yields and sovereign spreads:
  - Government 10-Year Bond Yields series (Jan-13 to Jan-17): SVK, POL, CZE, DEU (Percent).
  - 5-year Sovereign CDS Spreads (Basis points) series (Jan-13 to Jan-17): SVK, POL, CZE, DEU.
- General Government Revenue (Percent of GDP) components (2011–2016): Other revenues, Social contributions, Indirect taxes, Direct taxes.
- General Government Expenditure (Percent of GDP) components (2011–2016): Transfers, Interest, Investment, Goods & services, Wages.
- Fiscal balances (Percent) 2011–2016:
  - Cyclically-adjusted fiscal balance (percent of potential GDP)
  - Cyclically-adjusted structural balance (percent of potential GDP)
  - Overall fiscal balance (percent of GDP)
- General Government Balance and Gross Debt (Percent of GDP) (2011–2016): EFSF & ESM contribution, Gross debt, Overall balance (RHS).
- Sources: Bloomberg, Eurostat, National Authorities and IMF staff calculations.

### Financial Sector Developments (2010–16)
- "Credit growth continues at a strong pace... ...driven by lending to households."
- "Deposits rates fell sharply... ...as did ECB borrowing."
- "Banks are adequately capitalized... ...NPLs are stable and adequately capitalized."
- Housing Loans (Percent of GDP; Percent of household income) 2007–2016.
- Deposit Rates 1/ (Percent) and ECB Policy Rate / Overnight Interbank Rate comparisons (2010–2016).
- ECB Borrowing 3/ (Percent of total assets) series (2010–2016Q3).
- Capitalization metrics (2010–2016): Capital to asset ratio; Tier 1 Capital Adequacy Ratio (Percent of risk-weighted and average assets).
- Private Sector Credit and Deposits (Year-on-year percentage change) and Loan-to-deposit ratio (RHS) (2010–2016).
- Non-performing Loans and Provisions (Percent) (2010–2016).
- Notes:
  - 1/ Values are weighted by total assets of banks within each country.
  - 2/ Net income after taxes on average assets.
  - 3/ ECB Borrowing defined as stock of central bank loans to residents.
- Sources: Haver; National Bank of Slovakia; and IMF staff calculations.

### External Sector Developments (2010–16)
- "The current account is expected to be in surplus... ...reflecting improving trade balances."
- "Real exports have almost doubled since 2009... ... resulting in increasing market shares in the EU."
- "Net IIP is in line with peers... ...and dominated by FDI."
- Current Account Balance (Percent of GDP) components (2010–2016): Secondary income, Primary income, Services, Goods, Current account.
- Trade Balance (Percent of GDP) series (2000–2016): Non-oil, Oil, Total.
- Real Exports (Billions of euros, 2010 constant prices) 2006–2016.
- Net International Investment Position (Percent of GDP) components (2009–2016): Direct inv., Portfolio inv., Financial deriv., Other inv., Reserve assets, Total.
- Export Shares (Percent of destination's total imports) 2005–2015: World, Euro area, European Union.
- Net International Investment Positions, 2016 (Percent of GDP) by country list (BEL, DEU, DNK, LUX, SWE, AUT, FIN, FRA, ITA, CZE, etc., SVK included).
- Sources: Eurostat; OECD; and IMF staff calculations.

### Key Projections and Summary Indicators (Table 1: 2014–2022)
- Output/Demand (Annual percentage change, constant prices, unless noted otherwise):
  - Real GDP: 2.6 3.8 3.3 3.3 3.7 3.9 3.5 3.4 3.4 (2014–2022)
  - Domestic demand: 3.2 4.7 0.6 3.1 3.6 3.2 2.9 2.9 2.9
  - Public consumption: 5.3 5.4 3.0 1.9 3.0 3.8 2.7 1.8 1.8
  - Private consumption: 1.4 2.2 3.1 2.9 3.1 3.4 2.9 2.9 3.1
  - Gross fixed capital formation: 1.2 16.9 -7.3 4.4 5.3 2.3 3.0 3.6 3.3
  - Exports of goods and services: 3.7 7.0 4.7 5.1 5.7 6.5 5.8 5.7 5.7
  - Imports of goods and services: 4.4 8.1 2.2 5.1 5.7 6.0 5.4 5.4 5.4
  - Output Gap: 0.9 0.0 -0.2 0.0 -0.1 -0.3 -0.2 -0.1 -0.2
- Contribution to growth (components listed for Domestic demand, Public consumption, Private consumption, Gross fixed capital formation, Inventories, Net exports).
- Prices:
  - Inflation (HICP): -0.1 -0.3 -0.5 1.2 1.5 1.8 1.8 1.9 2.0
  - Inflation (HICP, end of period): -0.1 -0.5 0.2 1.5 1.6 1.8 2.0 2.0 2.0
  - GDP deflator: -0.2 -0.2 -0.8 0.3 1.5 1.8 1.8 1.9 2.0
- Employment and wages:
  - Employment: 1.4 2.0 2.5 3.0 1.1 1.1 1.1 1.1 1.1
  - Unemployment rate (Percent): 13.2 11.5 8.7 7.8 7.3 7.1 6.3 5.4 5.4
  - Nominal wages: 4.1 2.9 3.2 3.5 4.1 4.3 4.0 3.9 3.2
- Public Finance (Percent of GDP):
  - Revenue: 39.0 42.6 39.8 39.9 40.1 39.2 39.2 39.1 39.0
  - Expenditure: 41.7 45.3 41.8 41.7 41.2 39.8 39.8 39.7 39.5
  - Overall balance: -2.7 -2.7 -2.0 -1.8 -1.1 -0.7 -0.6 -0.6 -0.5
  - Primary balance: -0.8 -1.2 -0.5 -0.4 0.2 0.7 0.8 0.9 1.0
  - Structural balance (Percent of potential GDP): -3.3 -2.7 -1.9 -1.8 -1.1 -0.5 -0.5 -0.5 -0.4
  - General government debt: 53.6 52.5 52.5 52.2 51.1 49.4 48.0 46.6 45.2
- Monetary and financial indicators:
  - Credit to private sector (Growth rate): 6.1 12.3 9.1 7.5 6.5 6.2 5.5 5.3 5.2
  - Lending rates 1/: 4.0 3.1 2.6 ..................
  - Deposit rates 2/: 1.0 1.0 0.6 ..................
  - Government 10-year bond yield: 2.1 0.9 0.5 0.8 1.2 1.6 2.1 2.5 3.6
- Balance of payments (Percent of GDP):
  - Trade balance (goods): 3.8 2.7 4.3 3.6 3.6 4.1 4.5 4.8 5.1
  - Current account balance: 1.2 0.2 0.9 0.7 0.6 1.0 1.3 1.6 1.9
  - Gross external debt: 89.2 85.4 84.9 84.8 82.7 80.8 78.8 76.7 74.4
- Saving and investment balance:
  - Gross national savings: 22.9 23.4 22.6 23.0 23.7 24.2 24.9 25.6 26.2
  - Gross capital formation: 21.7 23.2 21.8 22.4 23.1 23.3 23.5 24.0 24.4
- Memo item:
  - Nominal GDP (Millions of euros): 75,946 78,686 80,658 83,524 87,896 92,983 97,923 103,126 108,723

Notes:
- 1. Average of interest rates on new housing loans to households and loans of less than EUR 1 million to nonfinancial corporations (all maturities).
- 2. Average of interest rates on new deposits with agreed maturity (up to 1 year) from households and nonfinancial corporations.

### General Government: Statement of Operations (Tables 2A and 2B, 2014–2022)
- Table 2A (Millions of euros) — Revenue and Expenditure levels and projections:
  - Revenue (2014–2022): 29,647; 33,491; 32,122; 33,322; 35,221; 36,439; 38,347; 40,288; 42,424
  - Taxes (2014–2022): 13,252; 14,331; 14,995; 15,466; 16,318; 17,152; 18,063; 18,961; 19,990
    - Personal income tax (2014–2022): 2,275; 2,464; 2,665; 2,803; 2,988; 3,204; 3,374; 3,554; 3,747
    - Corporate income tax: 2,504; 2,945; 3,011; 2,984; 3,191; 3,376; 3,555; 3,744; 3,948
    - VAT: 5,021; 5,416; 5,446; 5,640; 5,935; 6,279; 6,612; 6,964; 7,341
    - Excises: 2,196; 2,310; 2,171; 2,260; 2,320; 2,418; 2,546; 2,620; 2,762
    - Other taxes: 1,255; 1,195; 1,701; 1,779; 1,883; 1,875; 1,975; 2,080; 2,193
  - Social contributions (2014–2022): 10,291; 10,955; 11,521; 12,034; 12,578; 13,232; 13,907; 14,612; 15,354
  - Grants (2014–2022): 2,400; 4,246; 1,853; 1,887; 2,347; 2,016; 2,123; 2,236; 2,357
  - Other revenue (2014–2022): 3,703; 3,958; 3,754; 3,935; 3,978; 4,039; 4,253; 4,479; 4,722
  - Expenditure (2014–2022): 31,683; 35,622; 33,709; 34,804; 36,203; 37,047; 38,948; 40,899; 42,957
  - Net lending(+)/borrowing(-) (2014–2022): -2,036; -2,132; -1,587; -1,482; -982; -608; -601; -610; -533
  - Gross public debt (2014–2022): 40,725; 41,306; 42,313; 43,583; 44,916; 45,924; 46,975; 48,085; 49,098
  - Primary balance (2014–2022, memorandum): -595; -739; -364; -355; 153; 646; 783; 884; 1,098
- Table 2B (Percent of GDP) — Key ratios (2014–2022):
  - Revenue: 39.0; 42.6; 39.8; 39.9; 40.1; 39.2; 39.2; 39.1; 39.0
  - Expenditure: 41.7; 45.3; 41.8; 41.7; 41.2; 39.8; 39.8; 39.7; 39.5
  - Net lending(+)/borrowing(-): -2.7; -2.7; -2.0; -1.8; -1.1; -0.7; -0.6; -0.6; -0.5
  - Gross public debt: 53.6; 52.5; 52.5; 52.2; 51.1; 49.4; 48.0; 46.6; 45.2
  - GDP at current market prices (2014–2022): 75,946; 78,686; 80,658; 83,524; 87,896; 92,983; 97,923; 103,126; 108,723

### General Government Balance Sheet (Table 3, 2009–2015)
- Net financial worth (Billions of euros) 2009–2015: -11,600; -18,327; -21,935; -23,211; -25,357; -27,110; -28,629
- Financial assets (Billions of euros) 2009–2015: 15,562; 13,662; 13,312; 19,146; 19,967; 18,835; 18,007
  - Currency and deposits: 5,307; 2,939; 2,729; 3,988; 3,817; 2,623; 2,386
  - Debt securities: 366; 209; 209; 206; 215; 0; 20
  - Loans: 1,168; 1,281; 1,478; 2,860; 3,297; 3,578; 3,581
  - Equity and other investment fund shares: 6,054; 6,103; 5,079; 8,428; 8,546; 8,392; 8,007
  - Other accounts receivable: 2,668; 3,129; 3,818; 3,664; 4,286; 4,192; 4,014
- Financial liabilities (Billions of euros) 2009–2015: 27,162; 31,989; 35,248; 42,357; 45,323; 45,945; 46,636
  - Debt securities: 20,857; 25,479; 27,672; 33,486; 34,997; 36,161; 35,953
  - Loans: 2,759; 2,835; 3,713; 5,041; 6,155; 5,452; 5,706
  - Other liabilities: 3,463; 3,603; 3,763; 3,737; 4,061; 4,227; 4,556
- Memorandum items:
  - Public debt (Millions of euros) 2009–2015: 22,980; 27,504; 30,480; 37,926; 40,600; 40,725; 41,306
  - Net lending/borrowing (Millions of euros) 2009–2015: -4,909; -4,888; -2,727; -2,991; -1,876; -2,036; -2,132
  - GDP (Millions of euros) 2009–2015: 64,023; 67,577; 70,627; 72,704; 74,170; 75,946; 78,686
- Source: Eurostat.

### Balance of Payments (Table 4, 2014–2022)
- Current account (Millions of euros, 2014–2022): 904; 168; 716; 546; 533; 888; 1,319; 1,692; 2,020
- Trade balance (goods) (Millions of euros): 2,859; 2,115; 3,506; 3,004; 3,193; 3,798; 4,380; 4,951; 5,511
- Exports, f.o.b. (Millions of euros): 62,581; 66,089; 68,220; 75,350; 80,713; 86,313; 91,599; 97,963; 104,735
- Imports, f.o.b. (Millions of euros): 59,722; 63,974; 64,715; 72,345; 77,520; 82,515; 87,219; 93,011; 99,224
- Services balance (Millions of euros): 109; 952; 411; 691; 842; 402; 933; 433; 392
  - Receipts (Millions of euros): 6,821; 7,239; 7,467; 8,248; 8,840; 9,454; 10,033; 10,730; 11,472
  - Payments (Millions of euros): 6,713; 7,144; 7,226; 8,078; 8,656; 9,214; 9,740; 10,386; 11,080
- Primary income balance (Millions of euros): -869; -927; -1,739; -1,472; -1,624; -1,859; -1,985; -2,151; -2,344
  - Credit / Debit (Millions of euros) series provided.
- Secondary income balance (Millions of euros): -1,194; -1,115; -1,292; -1,156; -1,220; -1,291; -1,369; -1,451; -1,539
  - Credit / Debit (Millions of euros) series provided.
- Capital account (Millions of euros): 730; 2,790; 1,295; 1,402; 1,422; 1,476; 1,647; 1,415; 1,436
- Financial Account (Millions of euros): -361; 849; 2,011; 1,948; 1,955; 2,364; 2,966; 3,107; 3,456
  - Direct investment, net (Millions of euros): 418; 11; -483; -2,196; -2,681; -1,802; -1,815; -1,773; -1,728
  - Portfolio investment, net (Millions of euros): -1,794; 1,856; 2,000; 2,071; 1,973; 2,124; 1,982; 1,844; 1,817
  - Other investment, net (Millions of euros): 241; -1,492; 111; 1,972; 2,640; 2,018; 2,773; 3,011; 3,341
  - Reserve assets (Millions of euros): 454; 242; 0; 0; 0; 0; 0; 0; 0
  - Errors and omissions (Millions of euros): -1,995; -2,109; 0; 0; 0; 0; 0; 0; 0
- Net International Investment Position (Millions of euros): -52,174; -54,316; -52,305; -50,357; -48,402; -46,038; -43,073; -39,966; -36,510
- External Debt (Millions of euros): 67,776; 67,225; 68,494; 70,834; 72,711; 75,156; 77,105; 79,065; 80,840
- Current account (Percent of GDP): 1.2; 0.2; 0.9; 0.7; 0.6; 1.0; 1.3; 1.6; 1.9
- Trade balance (goods) (Percent of GDP): 3.8; 2.7; 4.3; 3.6; 3.6; 4.1; 4.5; 4.8; 5.1
- Exports, f.o.b. (Percent of GDP): 82.4; 84.0; 84.6; 90.2; 91.8; 92.8; 93.5; 95.0; 96.3
- Imports, f.o.b. (Percent of GDP): 78.6; 81.3; 80.2; 86.6; 88.2; 88.7; 89.1; 90.2; 91.3
- Net International Investment Position (Percent of GDP): -68.7; -69.0; -64.8; -60.3; -55.1; -49.5; -44.0; -38.8; -33.6
- External Debt (Percent of GDP): 89.2; 85.4; 84.9; 84.8; 82.7; 80.8; 78.8; 76.7; 74.4
- Note: 1/ Does not include the transfer of reserve assets from the NBS to the ECB which took place in 2009.
- Sources: National Bank of Slovakia; and IMF staff estimates.

### Financial Soundness Indicators (Table 5, 2010–2016Q3)
- Capital adequacy:
  - Regulatory capital to risk-weighted assets: 12.7; 13.4; 15.7; 16.5; 17.3; 17.8; 17.7 (2010–2016Q3)
  - Regulatory Tier 1 capital to risk-weighted assets: 11.6; 12.4; 14.7; 14.4; 16.0; 16.5; 16.5
  - Capital to assets: 9.7; 10.8; 11.7; 12.1; 11.9; 11.1; 10.7
- Asset quality:
  - Nonperforming loans to gross loans: 5.8; 5.6; 5.2; 5.1; 5.3; 4.9; 4.7
  - Nonperforming loans net of provisions to capital: 16.7; 15.5; 13.3; 13.1; 15.8; 13.9; 13.4
- Earnings and profitability:
  - Return on assets (after tax): 1.2; 0.7; 1.0; 1.3; 1.2; 1.3; 1.4
  - Return on equity (after tax): 12.6; 6.9; 9.1; 10.7; 10.4; 11.2; 13.4
  - Interest margin to gross income: 75.9; 73.9; 84.1; 78.1; 80.4; 76.9; 74.5
  - Noninterest expenses to gross income: 57.5; 52.5; 64.3; 59.1; 60.0; 58.5; 59.5
- Liquidity:
  - Customer deposits to total (noninterbank) loans: 116.6; 109.4; 114.2; 113.0; 110.3; 111.0; 107.4
  - Liquid assets to total assets: 40.9; 37.4; 38.3; 36.2; 34.1; 34.2; 32.2
  - Liquid assets to short-term liabilities: 56.5; 52.9; 55.9; 49.1; 46.0; 45.9; 42.6
- Sectoral distribution of loans to total loans (Residents vs Nonresidents) and other indicators:
  - Residents: 93.6; 93.6; 92.4; 91.6; 91.0; 93.6; 93.5
  - Nonresidents: 6.4; 6.4; 7.6; 8.4; 9.0; 6.4; 6.5
  - Nonfinancial corporation debt (in percent of GDP): 81.7; 83.9; 81.4; 85.6; 85.5; 87.3; 86.9
  - Households debt (in percent of GDP): 27.8; 29.2; 32.0; 34.4; 36.8; 39.0; 40.8
  - Households debt (in percent of disposable income): 44.2; 47.4; 52.8; 56.3; 60.4; 63.9; 68.8
  - Spread between reference lending and deposit rates (basis points): 395.0; 376.5; 359.0; 379.3; 369.4; 343.4; 306.0
  - Foreign currency-denominated loans to total loans: 1.5; 1.6; 1.5; 1.1; 1.9; 1.8; 2.0
  - Foreign currency-denominated liabilities to total liabilities: 3.2; 4.1; 3.6; 3.9; 4.2; 3.8; 3.6
- Sources: Haver; National Bank of Slovakia; IMF FSI Database; and IMF staff estimates.

*International Monetary Fund.*

### Annex I. Labor Productivity: Developments and Outlook

### Annex I. Labor Productivity: Developments and Outlook

### Evolution of productivity and its drivers
- Average annual labor productivity growth declined from 4.3 percent during 2000–08 to around 1.8 percent during 2008–15, largely due to lower TFP growth.
- Slowing productivity growth across the region reflects both lower TFP growth and, in most cases, reduced capital deepening.
- Lower growth in capital stock and poor investment performance since the crisis also contributed to the productivity slowdown.
- TFP growth declined relatively less in Slovakia than in central European peers.

### Demographic trends and labor-force aging
- Slovakia experienced population and workforce aging in the last decade driven by a declining fertility rate and longer life expectancy; with little offset from immigration, natural population change has been stagnant or dipping into negative territory in recent years.
- The old age dependency ratio is high and increasing.
- The share of older workers (55+) more than tripled to over 15 percent.
- Workers aged 55+ are projected to constitute about a fifth of the workforce by 2034.
- Population aging may alter industry structure, shifting from manufacturing to the less productive services sector.

### Estimated impact of aging on productivity
- The aging of workers is estimated to have caused a loss of annual TFP growth of about 0.3 percent during 1996–2007.
- Using point estimates from Aiyar et al (2016), workforce aging decreased TFP growth by 0.3 percentage points each year between 1996–2007.
- The EC's 2015 Aging Report predicts a decline in the labor force participation rate over the next two decades which, combined with OECD forecasts of population change by age group, could reduce the prime-age (25–54) workers’ share in the workforce, shaving off another 0.3 percent off TFP growth every year.

### Mechanisms and additional considerations
- Aging reduces incentives to invest in human capital because proximity to retirement reduces returns to such investments.
- Older workers are disproportionately affected by the depreciation of knowledge and are typically less able to accommodate innovative ideas.
- A further productivity slowdown can be expected if current demographic trends continue, with fewer available workers increasing the burden on each worker.

### Key statistics and projections (preserved verbatim)
- Average annual labor productivity growth: 4.3 percent (2000–08) → around 1.8 percent (2008–15).
- Estimated loss of annual TFP growth due to aging: about 0.3 percent (1996–2007).
- Additional potential TFP growth reduction from changing labor-force composition (prime-age share decline): 0.3 percent per year (projection based on EC and OECD inputs).
- Share of older workers (55+): more than tripled to over 15 percent; projected about a fifth of the workforce by 2034.

*Prepared by Xiaobo Shao and Dustin Smith based on Economic Growth in Slovakia: Past Successes and Future Challenges, European Commission Economic Brief 008 (March 2015) and IMF Euro Area Policy Selected Issues (2016).*

### Annex III. Public Debt Sustainability Analysis (DSA)

### Annex III. Public Debt Sustainability Analysis (DSA)

### Baseline Scenario (percent of GDP, unless otherwise indicated)
- As of February 02, 2017.
- Nominal gross public debt:
  - 2014: 38.85
  - 2015: 53.65
  - 2016: 52.55
  - 2017: 52.55
  - 2018: 52.25
  - 2019: 51.14
  - 2020: 49.44
  - 2021: 48.04
  - 2021 (alternate line): 46.6
- Public gross financing needs (in percent of GDP):
  - 2014: 10.6
  - 2015: 9.9
  - 2016: 7.3
  - 2017: 7.8
  - 2018: 9.7
  - 2019: 6.8
  - 2020: 1.8
  - 2021: 2.0
  - 2021 (alternate): 0.9
- Public debt (in percent of potential GDP) mirrors nominal gross public debt values: 38.85, 54.1, 52.55, 52.45, 52.25, 51.14, 49.24, 47.94, 46.6 (years as above).
- Real GDP growth (in percent):
  - 2014: 4.1
  - 2015: 2.6
  - 2016: 3.8
  - 2017: 3.3
  - 2018: 3.3
  - 2019: 3.7
  - 2020: 3.9
  - 2021: 3.5
  - 2021 (alternate): 3.4
- Inflation (GDP deflator, in percent):
  - 2014: 1.3
  - 2015: -0.2
  - 2016: -0.2
  - 2017: -0.8
  - 2018: 0.3
  - 2019: 1.5
  - 2020: 1.8
  - 2021: 1.8
  - 2021 (alternate): 1.9
- Nominal GDP growth (in percent):
  - 2014: 5.6
  - 2015: 2.4
  - 2016: 3.6
  - 2017: 2.5
  - 2018: 3.6
  - 2019: 5.2
  - 2020: 5.8
  - 2021: 5.3
  - 2021 (alternate): 5.3
- Effective interest rate (in percent; defined as interest payments divided by debt stock at end of previous year):
  - 2014: 4.3
  - 2015: 3.5
  - 2016: 3.4
  - 2017: 2.9
  - 2018: 2.5
  - 2019: 2.2
  - 2020: 2.2
  - 2021: 2.1
  - 2021 (alternate): 1.9
- Sovereign spreads and market measures:
  - EMBIG (bp) 3/: 76
  - 5Y CDS (bp): 42
  - Ratings (Foreign / Local): Moody's A2 / A2; S&P's A- / A+; Fitch A+ / A+

### Debt Dynamics, Flows, and Cumulative Changes
- Change in gross public sector debt (annual, percent of GDP):
  - 2014: 1.6
  - 2015: -1.1
  - 2016: -1.1
  - 2017: 0.0
  - 2018: -0.2
  - 2019: -1.1
  - 2020: -1.7
  - 2021: -1.4
  - 2021 (cumulative): -1.4
  - Cumulative (2014–2021): -5.9
- Identified debt-creating flows (annual, percent of GDP):
  - 2014: 2.2
  - 2015: 2.3
  - 2016: 2.2
  - 2017: 0.0
  - 2018: -0.4
  - 2019: -1.6
  - 2020: -2.4
  - 2021: -2.3
  - 2021 (cum. last): -2.4
  - Cumulative (2014–2021): -9.0
- Primary deficit (annual, percent of GDP):
  - 2014: 2.8
  - 2015: 1.0
  - 2016: 1.2
  - 2017: 0.5
  - 2018: 0.5
  - 2019: -0.1
  - 2020: -0.6
  - 2021: -0.8
  - 2021 (cum. last): -0.8
  - Cumulative (2014–2021): -1.4
- Primary (noninterest) revenue and grants (percent of potential GDP):
  - 2014: 35.5
  - 2015: 38.8
  - 2016: 42.3
  - 2017: 39.8
  - 2018: 39.8
  - 2019: 40.0
  - 2020: 39.1
  - 2021: 39.1
  - 2021 (cumulative): 39.0
  - Cumulative (2014–2021): 236.9
- Primary (noninterest) expenditure (percent of potential GDP):
  - 2014: 38.3
  - 2015: 39.8
  - 2016: 43.5
  - 2017: 40.3
  - 2018: 40.3
  - 2019: 39.9
  - 2020: 38.5
  - 2021: 38.4
  - 2021 (cumulative): 38.2
  - Cumulative (2014–2021): 235.6
- Automatic debt dynamics (percent of GDP, annual):
  - 2014: -0.6
  - 2015: 0.9
  - 2016: 0.3
  - 2017: 0.2
  - 2018: -0.5
  - 2019: -1.5
  - 2020: -1.7
  - 2021: -1.5
  - 2021 (last): -1.5
  - Cumulative (2014–2021): -6.6
- Interest rate / growth differential (annual, percent):
  - 2014: -0.3
  - 2015: 0.5
  - 2016: -0.3
  - 2017: 0.2
  - 2018: -0.5
  - 2019: -1.5
  - 2020: -1.7
  - 2021: -1.5
  - 2021 (last): -1.5
  - Cumulative (2014–2021): -6.6
- Components of interest rate/growth differential:
  - Real interest rate:
    - 2014: 1.0
    - 2015: 1.8
    - 2016: 1.7
    - 2017: 1.9
    - 2018: 1.1
    - 2019: 0.3
    - 2020: 0.2
    - 2021: 0.1
    - 2021 (alt): 0.0
    - Cumulative (2014–2021): 3.6
  - Real GDP growth (contribution, negative sign in table):
    - 2014: -1.4
    - 2015: -1.4
    - 2016: -2.0
    - 2017: -1.7
    - 2018: -1.7
    - 2019: -1.8
    - 2020: -1.9
    - 2021: -1.6
    - 2021 (alt): -1.5
    - Cumulative (2014–2021): -10.3
- Exchange rate depreciation contribution:
  - 2014: -0.3
  - 2015: 0.4
  - 2016: 0.6
  - Subsequent years: not shown (dots).
- Other identified debt-creating flows (annual, percent of GDP):
  - 2014: 0.0
  - 2015: 0.3
  - 2016: 0.7
  - 2017: -0.7
  - 2018: -0.4
  - 2019: 0.0
  - 2020: 0.0
  - 2021: 0.0
  - 2021 (cum.): -0.0
  - Cumulative (2014–2021): -1.1
- Residual, including asset changes (annual, percent of GDP):
  - 2014: -0.6
  - 2015: -3.4
  - 2016: -3.3
  - 2017: 0.0
  - 2018: 0.2
  - 2019: 0.5
  - 2020: 0.7
  - 2021: 0.9
  - 2021 (cum.): 1.0
  - Cumulative (2014–2021): 3.2

### Composition of Public Debt and Alternative Scenarios
- Underlying assumptions (percent):
  - Baseline real GDP growth: 2016: 3.3; 2017: 3.3; 2018: 3.7; 2019: 3.9; 2020: 3.5; 2021: 3.4
  - Baseline inflation: 2016: -0.8; 2017: 0.3; 2018: 1.5; 2019: 1.8; 2020: 1.8; 2021: 1.9
  - Baseline primary balance: 2016: -0.5; 2017: -0.5; 2018: 0.1; 2019: 0.6; 2020: 0.8; 2021: 0.8
  - Baseline effective interest rate: 2016: 2.9; 2017: 2.5; 2018: 2.2; 2019: 2.2; 2020: 2.1; 2021: 1.9
- Alternative scenarios presented:
  - Historical Scenario assumptions:
    - Real GDP growth: 2016: 3.3; 2017: 3.7; 2018: 3.7; 2019: 3.7; 2020: 3.7; 2021: 3.7
    - Inflation: same as baseline
    - Primary Balance: 2016: -0.5; 2017: -2.6; 2018: -2.6; 2019: -2.6; 2020: -2.6; 2021: -2.6
    - Effective interest rate: 2016: 2.9; 2017: 2.5; 2018: 2.6; 2019: 2.7; 2020: 2.8; 2021: 2.8
  - Constant Primary Balance Scenario assumptions:
    - Real GDP growth and inflation: same as baseline
    - Primary Balance fixed at -0.5 for 2016–2021
    - Effective interest rate: same as baseline

- Composition charts (labels preserved as in source):
  - Gross Nominal Public Debt (in percent of GDP) projected 2014–2021.
  - Public Gross Financing Needs (in percent of GDP) projected 2014–2021.
  - By Maturity: Medium and long-term vs Short-term (in percent of GDP) historical and projection.
  - By Currency: Local currency-denominated vs Foreign currency-denominated (in percent of GDP) historical and projection.

### Realism of Baseline Assumptions and Forecast Track Record
- Forecast track record highlights (versus surveillance countries, 2005–2013 actuals):
  - Real GDP Growth: distribution of forecast errors median -1.27 (in percent, actual-projection); Slovak Republic percentile rank: 16%
  - Primary Balance: distribution median -0.78 (in percent of GDP); Slovak Republic percentile rank: 34%
  - Inflation (Deflator): distribution median -0.69 (in percent); Slovak Republic percentile rank: 10%
- Notes:
  - Plotted distributions include surveillance countries; percentile rank refers to all countries.
  - Projections made in the spring WEO vintage of the preceding year.
  - Slovak Republic has had a positive output gap for 3 consecutive years, 2013–2015; for Slovak Republic, t corresponds to 2016 in the boom-bust analysis.

- Cyclically-Adjusted Primary Balance (CAPB) measures:
  - 3-Year Adjustment in CAPB: Slovak Republic has a percentile rank of 37% (3-year CAPB adjustment greater than 3 percent of GDP in approx. top quartile).
  - 3-Year Average Level of CAPB: Slovak Republic has a percentile rank of 62% (3-year average CAPB level greater than 3.5 percent of GDP in approx. top quartile).

### Macro-Fiscal Stress Tests (selected scenario assumptions and outcomes)
- Underlying baseline assumptions (selected years and variables):
  - Baseline real GDP growth: 2016: 3.3; 2017: 3.3; 2018: 3.7; 2019: 3.9; 2020: 3.5; 2021: 3.4
  - Baseline inflation: 2016: -0.8; 2017: 0.3; 2018: 1.5; 2019: 1.8; 2020: 1.8; 2021: 1.9
  - Baseline primary balance: 2016: -0.5; 2017: -0.5; 2018: 0.1; 2019: 0.6; 2020: 0.8; 2021: 0.8
  - Baseline effective interest rate: 2016: 2.9; 2017: 2.5; 2018: 2.3; 2019: 2.3; 2020: 2.2; 2021: 2.0
- Primary Balance Shock:
  - Primary balance under shock:
    - 2016: -0.5
    - 2017: -1.5
    - 2018: -0.9
    - 2019: 0.6
    - 2020: 0.8
    - 2021: 0.8
- Real GDP Growth Shock:
  - Real GDP growth under shock:
    - 2016: 3.3
    - 2017: -1.1
    - 2018: -0.7
    - 2019: 3.9
    - 2020: 3.5
    - 2021: 3.4
  - Corresponding primary balance: 2017: -2.7; 2018: -4.4; 2019–2021: unchanged vs baseline in table.
  - Effective interest rate path under this shock: 2016: 2.9; 2017: 2.5; 2018: 2.4; 2019: 2.7; 2020: 2.6; 2021: 2.4
- Real Interest Rate Shock:
  - Effective interest rate path under shock: 2016: 2.9; 2017: 2.5; 2018: 3.1; 2019: 3.5; 2020: 3.6; 2021: 3.9
- Real Exchange Rate Shock:
  - Inflation path under shock: 2017: 0.8 (vs baseline 0.3); other years largely aligned with baseline.
  - Effective interest rate under shock: remains similar to baseline (e.g., 2016: 2.9; 2017: 2.5; 2018: 2.2; 2019: 2.2; 2020: 2.1; 2021: 1.9)
- Combined Shock:
  - Real GDP growth under combined shock: 2016: 3.3; 2017: -1.1; 2018: -0.7; 2019: 3.9; 2020: 3.5; 2021: 3.4
  - Inflation under combined shock: 2016: -0.8; 2017: -0.8; 2018: 0.4; 2019: 1.8; 2020: 1.8; 2021: 1.9
  - Primary balance under combined shock: 2016: -0.5; 2017: -2.7; 2018: -4.4; 2019: 0.6; 2020: 0.8; 2021: 0.8
  - Effective interest rate under combined shock: 2016: 2.9; 2017: 2.5; 2018: 3.2; 2019: 3.7; 2020: 3.9; 2021: 4.1
- Stress test outcomes (chart labels preserved):
  - Gross Nominal Public Debt (in percent of GDP) under baseline and stress scenarios for 2016–2021.
  - Gross Nominal Public Debt (in percent of Revenue) under baseline and stress scenarios for 2016–2021.
  - Public Gross Financing Needs (in percent of GDP) under baseline and stress scenarios for 2016–2021.

### Risk Assessment (heat map and vulnerability indicators)
- Key risk indicators and benchmark context (2015 reference values and benchmarks shown in source):
  - Bond spread (long-term spread over German bonds, average 04-Nov-16 through 02-Feb-17): 51 bp
  - External Financing Requirement benchmarks: lower/upper of 17 and 25 percent of GDP.
  - Public Debt Held by Non-Residents: 32 percent (in percent of total)
  - Annual change in short-term public debt: benchmark change values include 1 and 1.5 percent.
  - Heat map legend:
    - Green if country value is less than lower benchmark
    - Yellow if between lower and upper benchmark
    - Red if exceeds upper benchmark
    - White if data unavailable or not relevant
- Debt-profile vulnerabilities highlighted in source:
  - Gross financing needs benchmarks and their relevance to stress-test coloring (20% benchmark for gross financing needs).
  - The evolution of predictive densities of gross nominal public debt (percentiles and restricted/asymmetric distributions) for 2014–2021.

*Source: IMF staff (Annex III. Public Debt Sustainability Analysis, as presented in the Slovak Republic staff report).*

### 1.      Coverage, periodicity, and timeliness of data provided to the Fund are adequate for

### 1.      Coverage, periodicity, and timeliness of data provided to the Fund are adequate for

### Overall assessment
- The Slovak Republic has subscribed to the Special Data Dissemination Standard (SDDS) since 1996 and observes or exceeds all related standards.
- The Slovak Republic is subject to the statistical requirements and timeliness and reporting standards of Eurostat and the European Central Bank (ECB).
- Coverage, periodicity, and timeliness of data provided to the Fund are adequate for surveillance purposes.

### Real sector
- All data on national accounts follow the ESA 2010.

### Fiscal sector
- The compilation of general government statistics is in line with the ESA 2010.
- Monthly reconciliation of government operations above and below the line is restricted to state budget transactions on a cash basis.
- Reconciliation of general government operations above and below the line are available only with a long lag.

### External sector
- External sector statistics are generally of good quality, and are reported on a timely basis to the Fund.
- Errors and omissions in the balance of payments statistics are large and reported financial account flows are subject to large volatility.
- The statistical authorities are aware of these issues and are working to address them.
- The statistical authorities started to submit data to the Fund following the standard of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) in September 2014 and have provided data back to 2004.

### Monetary and financial sector
- Monetary and financial statistics are of good quality and are reported on a timely basis to the Fund, or made publicly available.

### Table of Common Indicators Required for Surveillance (As of February 9, 2017) — Key data points and frequencies
- Exchange Rates
  - Date of Latest Observation: Current
  - Date Received: Current
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1
  - Date of Latest Observation: January 2017
  - Date Received: February 2016
  - Frequency of Data: D
  - Frequency of Reporting: W
  - Frequency of Publication: W
- Reserve/Base Money
  - Date of Latest Observation: December 2016
  - Date Received: January 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Broad Money
  - Date of Latest Observation: December 2016
  - Date Received: January 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Central Bank Balance Sheet
  - Date of Latest Observation: December 2016
  - Date Received: January 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consolidated Balance Sheet of the Banking System
  - Date of Latest Observation: December 2016
  - Date Received: January 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Interest Rates2
  - Date of Latest Observation: Current
  - Date Received: Current
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- Consumer Price Index
  - Date of Latest Observation: December 2016
  - Date Received: January 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Revenue, Expenditure, Balance and Composition of Financing3 — General Government4
  - Date of Latest Observation: 2015
  - Date Received: July 2016
  - Frequency of Data: A
  - Frequency of Reporting: A
  - Frequency of Publication: A
- Revenue, Expenditure, Balance and Composition of Financing3 — Central Government
  - Date of Latest Observation: January 2017
  - Date Received: February 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Stocks of Central Government and Central Government-Guaranteed Debt5
  - Date of Latest Observation: 2016Q3
  - Date Received: December 2016
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- External Current Account Balance
  - Date of Latest Observation: November 2016
  - Date Received: February 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Exports and Imports of Goods and Services
  - Date of Latest Observation: December 2016
  - Date Received: February 2017
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- GDP/GNP
  - Date of Latest Observation: 2016Q3
  - Date Received: December 2016
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- Gross External Debt
  - Date of Latest Observation: 2016Q3
  - Date Received: December 2016
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q
- International Investment Position7
  - Date of Latest Observation: 2016Q3
  - Date Received: December 2016
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
3 Foreign, domestic bank, and domestic nonbank financing.
4 The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
5 Including currency and maturity composition.
6 Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I), Not Available (NA).
7 Includes external gross financial asset and liability positions vis-à-vis nonresidents.

*IMF staff report excerpt (cr1771).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1771.pdf_