## 1. Slovakia and the Recovery and Resilience Facility

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### Context
- Pre-pandemic indicators:
  - Per capita income reached 72 percent of the EU average.
  - Growth decelerated in 2019; unemployment at record lows and participation at record highs.
  - Slovakia had accumulated fiscal space; banking system had strong capital and liquidity buffers.
- Political context:
  - Center-right opposition party OĽaNO won February 2020 elections and formed a coalition government.
  - Government experienced mounting tensions, resignation and formation of a new government in April 2021 with a largely unchanged policy agenda.
- Pandemic status as of late May 2021:
  - About one-third of adults had received at least one dose by late May.
  - Infections surged in late 2020 and early 2021, triggering tight containment and deep reductions in mobility.

### Pandemic impact and policy response
- Macro outcomes:
  - GDP declined by 4.8 percent in 2020, with a much larger investment collapse.
  - Manufacturing and contact-intensive sectors contracted sharply in Q2 2020; industrial production reached pre-pandemic levels by end-2020.
  - 2020 contraction milder than the Euro Area average.
- Fiscal response and outcomes:
  - Direct aid in 2020 amounted to 2.1 percent of GDP.
  - Fiscal deficit rose to 6.1 percent of GDP and public debt reached 60.3 percent of GDP.
  - Discretionary package smaller than EU and advanced European peers.
- Liquidity and credit support:
  - Authorities estimate utilized liquidity support of 2.2 percent of GDP in 2020.
  - More than 11 percent of loans to households and corporates used legislated debt moratoria by June 2020.
- Banking-sector and regulatory measures:
  - NBS reduced CCyB to 1 percent; recommended banks not pay dividends; cancellation of the bank levy boosted bank capital.
  - Staff estimate dividend restriction, CCyB cut, and bank levy cancellation could have added roughly 0.9 percent of GDP to banks’ capital.
- Labor market and households:
  - Registered unemployment increased by about 3 percentage points; most adjustment through lower hours worked.
  - 2020 decline in private consumption among the smallest in Europe.
- Corporate sector and insolvency:
  - Corporate bankruptcies remained subdued in 2020.
  - Crisis potentially widened corporate equity gaps by 2–5 percent of GDP.
- Financial sector resilience and risks:
  - Bank solvency and liquidity increased; NPL ratios declined through 2020.
  - House prices continued to rise, with an estimated overvaluation of about 20 percent.
- External sector:
  - Current account deficit narrowed significantly in 2020; cyclically adjusted current account balance coincides with EBA-lite model norm, implying no REER misalignment.

### Outlook and risks
- Near-term projection assumptions:
  - Baseline assumes 60 percent of the population is vaccinated by end 2021:Q3 and that semiconductor supply disruptions do not lead to prolonged closures of car factories.
- Growth and inflation outlook:
  - Activity expected to rebound in 2021:H2 and reach pre-crisis level by 2021:Q3.
  - Projected annual GDP growth for 2021 is 4.7 percent.
  - Some scarring: 2025 output about 1.5 percent below pre-pandemic forecasts.
  - Inflation expected to dip in 2021 due to lower regulated energy prices and a sizable output gap.
- Medium-term drivers and risks:
  - Slovakia to receive 6.9 percent of 2020 GDP in grants over 2021–26 from the RRF.
  - Downside risks include resurgent infections, new variants, vaccination delays, phasing out support measures raising bankruptcies and unemployment, housing price correction, supply-chain disruptions and production re-shoring.
  - Upside risks include successful virus containment and stronger external demand from stimulus packages.

### Authorities’ views
- Authorities broadly agreed with staff’s near-term outlook and risks.
- Expect a rebound as containment eases and vaccination proceeds; industrial and export sectors key drivers.
- NBS downside risk scenario assumes virus not successfully suppressed; authorities note faster containment and large support packages present upside risks.

### Box 1 — RRF overview and macroeconomic impact
- RRF grant envelope: €6.3 billion (6.9 percent of 2020 GDP), distributed over 2021-26, no co-financing requirements.
- RRP main investment/reform areas: green economy, health, education, public administration, research and innovation; digitalization embedded across projects.
- Staff estimate of RRF impact on GDP:
  - Under standard multiplier/persistence assumptions, GDP level effect peaks in 2025 with GDP 1.6 percent higher than without grants.
  - Assumptions: multiplier of 0.5, persistence factor of 0.5; 80 percent of funds finance public investment raising potential output.

### Fiscal policy — near-term stance and medium-term challenges
- Near-term priority: keep the pandemic at bay, accelerate vaccines, mitigate economic costs with continued policy support.
- Fiscal stance in 2021: projected to remain appropriately expansionary.
- Staff projection for 2021 fiscal deficit: 8.8 percent of GDP (below budgeted 9.9 percent of GDP).
- No-consolidation baseline:
  - Fiscal deficit declines to 2.8 percent of GDP by 2026.
  - Debt reaches 62½ percent of GDP by 2026, above national fiscal rules’ upper ceiling.
- Additional EU funds to absorb:
  - €7.9 billion under 2014−20 MFF.
  - €12.8 billion under 2021−27 MFF.
- Policy recommendations:
  - Shift from broad emergency support to targeted measures: increase ALMPs (hiring subsidies, training, reskilling), support worker reallocation, and strengthen viable firms’ balance sheets (especially SMEs).
  - Use well-targeted solvency support including equity-like instruments; base viability assessments on business forecasts where practical.
  - Improve EU fund absorption and public investment efficiency (central public investment authority, pipeline by ministries, specialized SOE financial oversight, stronger procurement auditing).
  - Rebuild fiscal buffers once recovery robust; plan consolidation contingent on economic situation, mitigate adverse growth impacts via faster drawdown and absorption of MFF/NGEU funds.
  - Specific reforms: raise property and environmental taxes, reduce labor taxation; adopt eInvoice to strengthen VAT and CIT collection; integrate VfM into budget processes; amend Constitutional Act on Budgetary Responsibility (multiannual ceilings, debt brake revisions, shift to net debt targeting, modified sanctions and escape clauses); pension reform to re-link retirement age to life expectancy and minimize parental bonus cost.
- Quantified fiscal-yield estimates (percent of GDP):
  - Raising property tax to the EA average controlling for income: 0.9
  - Closing half of VAT gap with the EU median level: 0.4
  - Realizing half of additional VfM saving potential: 0.4
  - Total estimated yield: 1.7
- Authorities’ stated intentions:
  - Medium-term budgetary objective tightened to a structural surplus of 0.5 percent of GDP in the 2021 Stability Program.
  - Authorities noted consolidation of 1 percent of GDP annually will begin in 2023 under their baseline.
  - Committed to pension reforms improving S2 indicator by at least 1.8 percent of GDP and to amend the Constitutional Act on Budgetary Responsibility.
  - Note on fiscal rules: if debt exceeds 54 percent of GDP in 2023 a vote of confidence is needed; appointment of new government in April 2021 triggered a 24-month escape clause.

### Financial sector policies and risks
- Banking sector resilience:
  - Aggregate CET1 ratio (2020 Q4): 17.0 percent.
  - “COVID-19 policy unwinding” scenario: CET1 falls to 15.7 percent (130 bps decline); NPLs could rise to 5.1 percent.
  - “Mortgage stress” scenario: CET1 falls to 14.2 percent (additional 150 bps decline), still above MDA.
- Mortgage vulnerabilities and sensitivity tests:
  - Probability of default of mortgage book could reach 1.8 percent in an adverse scenario; new vintages up to 4.7 percent.
  - Tightening LTV from current 80 percent with exemptions to 70 percent would reduce expected losses by 35 percent and yield an annual reduction of capital depletion under stress of 20 basis points.
  - Corporate credit downgrade reduces capital by 180 basis points.
  - Default of guaranteed loans reduces capital by 15 basis points.
  - 50 percent default of loans under moratoria would erode capital by 240 basis points.
  - 30 percent migration of stage 2 loans to default status would breach the MDA trigger.
  - Reverse stress-test: banking sector could afford increase in NPLs to 7.5 percent given its 550-basis points capital management buffer.
- Corporate sector distress and policy effectiveness:
  - Simulations of roughly 200,000 firms indicate policies reduced the pandemic-induced rise in illiquid firms and liquidity gap by almost half; debt moratoria contributed most.
  - Full uptake of guaranteed loans would have allowed an additional 5 percent of firms to fill liquidity needs.
  - Policies less effective on equity gaps: even with support, share of insolvent firms could increase by 6.5 percentage points, accounting for 8.7 percent of corporate turnover and 5.7 percent debt-at-risk.
  - Pandemic could turn 9.1 percent of firms that were solvent before the pandemic insolvent.
  - Support needed to close equity gaps:
    - Amount to close equity gap of viable firms: 1.9 percent of GDP.
    - Additional amount to reach minimum equity threshold: 2.9 percent of GDP.
- Policy recommendations to support credit provision and financial stability:
  - Maintain liquidity support through guaranteed loans; redesign programs to lower administrative costs and strict conditionality that hinder uptake.
  - If downside risks materialize, release CCyB or relax regulatory retail lending requirements to create balance-sheet capacity.
  - Carefully withdraw prudential flexibility for loan loss provisions once pandemic under control; ensure sound IFRS staging and provisioning while avoiding excessive pro-cyclicality.
  - Maintain conservative dividend payout distributions conditional on adequate buffers.
  - Continue upgrading AML/CFT framework: develop risk-based supervisory model, improve beneficial ownership information availability, mitigate risks from politically exposed persons.
- Macroprudential stance:
  - Broadly adequate but scope to augment if housing imbalances persist.
  - NBS could complement borrower-based tools with targeted capital-based measures on mortgage exposures (minimum risk weights, differentiated risk buckets) and explore sectoral SyRB under CRD V flexibility.
- Restructuring and insolvency:
  - Strengthen restructuring mechanisms and insolvency frameworks to release capital trapped in unviable businesses and minimize inefficient liquidations.
  - RRP measures to improve insolvency efficiency: digitalization, early warning systems, professionalization of insolvency administrators, specialization of courts, and implementation of the 2019 EU Directive on preventive restructuring.

### Real sector and labor market (selected projections)
- Real GDP annual percent change (table):
  - 2018: 3.7
  - 2019: 2.5
  - 2020: -4.8
  - 2021: 4.7
  - 2022: 4.9
  - 2023: 4.0
  - 2024: 3.2
  - 2025: 2.9
  - 2026: 2.6
- Output gap (percent):
  - 2018: 1.5; 2019: 1.0; 2020: -4.6; 2021: -3.1; 2022: -1.5; 2023: -0.5; 2024: -0.2; 2025: -0.2; 2026: 0.0
- Labor market:
  - Unemployment rate (Percent): 2018: 6.5; 2019: 5.8; 2020: 6.7; 2021: 7.3; 2022: 6.6; 2023: 6.2; 2024: 6.0; 2025: 5.9; 2026: 5.8
  - Employment (annual percent change): 2018: 2.0; 2019: 1.0; 2020: -1.9; 2021: -0.3; 2022: 0.8; 2023: 0.3; 2024: 0.1; 2025: 0.0; 2026: 0.0
  - Nominal wages (annual percent change): 2018: 6.2; 2019: 7.8; 2020: 3.7; 2021: 4.8; 2022: 4.6; 2023: 4.5; 2024: 4.4; 2025: 4.3; 2026: 4.3
- Policy support:
  - Wage subsidies supported almost a third of total jobs; Wage Support Program disbursements and worker support figures provided in source.

### External sector
- Current account balance (Percent of GDP): 2018: -2.2; 2019: -2.7; 2020: -0.4; 2021: -0.6; 2022: -1.6; 2023: -2.2; 2024: -1.8; 2025: -1.4; 2026: -0.7
- Trade balance (goods) (Percent of GDP): 2018: -0.3; 2019: -1.0; 2020: 0.6; 2021: 1.5; 2022: 0.2; 2023: -0.3; 2024: 0.2; 2025: 0.5; 2026: 1.0
- NIIP and external liabilities (Millions of euros):
  - NIIP: 2018: -62,228; 2019: -62,227; 2020: -60,437; 2021: -59,117; 2022: -58,880; 2023: -59,232; 2024: -59,153; 2025: -58,951; 2026: -58,347
  - External Debt (Millions of euros): 2018: 102,701; 2019: 105,517; 2020: 110,925; 2021: 114,572; 2022: 119,739; 2023: 125,795; 2024: 131,505; 2025: 137,362; 2026: 144,379
- Staff assesses external position in 2020 as broadly in line with fundamentals.

### Fiscal sector developments and debt dynamics
- Gross public debt (Percent of GDP): 2018: 49.7; 2019: 48.2; 2020: 60.3; 2021: 63.0; 2022: 65.0; 2023: 63.7; 2024: 62.8; 2025: 62.5; 2026: 62.4
- Overall balance (Percent of GDP): 2018: -1.0; 2019: -1.3; 2020: -6.1; 2021: -8.8; 2022: -4.9; 2023: -4.1; 2024: -3.3; 2025: -2.8; 2026: -2.8
- Primary balance (Percent of GDP): 2018: 0.2; 2019: -0.3; 2020: -5.1; 2021: -7.9; 2022: -4.0; 2023: -3.2; 2024: -2.5; 2025: -1.9; 2026: -1.9
- Statement of operations (Millions of euros) — selected:
  - Revenue: 2018: 36,389; 2019: 38,818; 2020: 38,110; 2021: 40,547; 2022: 43,328; 2023: 47,004; 2024: 47,193; 2025: 49,604; 2026: 51,759
  - Expenditure: 2018: 37,290; 2019: 40,066; 2020: 43,719; 2021: 49,116; 2022: 48,445; 2023: 51,546; 2024: 51,082; 2025: 53,033; 2026: 55,310
  - Net lending(+)/borrowing(-): 2018: -902; 2019: -1,249; 2020: -5,609; 2021: -8,569; 2022: -5,117; 2023: -4,543; 2024: -3,889; 2025: -3,428; 2026: -3,552
  - EU Grants (o/w): 2018: 931; 2019: 910; 2020: 1,455; 2021: 2,597; 2022: 3,937; 2023: 2,631; 2024: 2,486; 2025: 2,128
- Debt dynamics summary (public DSA baseline highlights):
  - Public gross financing needs remain below 11½ percent of GDP under baseline.
  - Effective interest rate declined from 4.7 percent in 2008 to 2.5 percent in 2020; projected to decline to 1.5−1.6 percent during 2022−26.
  - Average maturity of public debt at end-2020: 8.2 years.
  - Stress scenarios: combined negative shocks could raise debt to 74.9 percent of GDP by 2026 versus 62.4 percent under baseline.

### Banking sector and credit developments
- Soundness indicators:
  - Capital adequacy (Regulatory capital to RWA): 2019: 18.2; 2020: 19.6
  - Nonperforming loans to gross loans (Percent): 2019: 2.9; 2020: 2.7
  - Return on equity (after tax): 2019: 9.5; 2020: 5.9
  - Households debt (percent of GDP): 2020: 48.3; Households debt (percent of disposable income): 2020: 76.5
  - Nonfinancial corporation debt (percent of GDP): 2020: 91.2
- Credit developments:
  - Credit to private sector growth (percent): 2018: 9.2; 2019: 6.6; 2020: 4.8; 2021: 6.5; 2022: 7.8; 2023: 6.9; 2024: 6.1; 2025: 5.7; 2026: 5.4
  - Mortgage lending resilient; consumer loans contracted; corporate lending slowed.
  - Staff estimates a 2.7 percent sectoral SyRB on residential real estate exposures would absorb one-year housing loan losses under IMF stress scenario.

### Unequal pandemic impacts, human capital and structural challenges
- Unequal impact:
  - Women disproportionately exposed due to high involvement in contact-intensive services.
  - Regional disparities: unemployment increased more where pre-pandemic unemployment was already high; Roma population particularly vulnerable.
- Demographics and labor supply:
  - Working-age population projected to decline and old-age dependency ratios to rise (European Commission, The 2021 Ageing Report).
- Education and skills:
  - PISA scores indicate gaps; participation in early childhood education, adult learning, and tertiary attainment below EU average.
- Health investment:
  - RRP envisages sizable healthcare capital expenditures to close investment gaps.
- Green and digital transition:
  - Production relatively carbon intensive; Slovakia falls short of pricing carbon emissions in line with a €30 benchmark.
  - Digital access and connectivity lag peers.
- Productivity and institutions:
  - Convergence slowed; GDP per Capita PPP below several peers.
  - R&D expenditure low; innovation metrics below median; governance perception below average.

### Policy priorities (condensed)
- Maintain pandemic containment and accelerate vaccinations.
- Shift fiscal support from broad emergency measures to targeted ALMPs, training, reskilling, and solvency support for viable firms.
- Timely absorption of RRF and other EU funds to boost recovery and potential output.
- Rebuild fiscal buffers once recovery is robust; plan consolidation contingent on growth and use EU funds to mitigate consolidation costs.
- Re-link retirement age to life expectancy and minimize parental bonus cost to ensure long-term pension sustainability.
- Keep macroprudential and supervisory policies calibrated: maintain liquidity support, condition dividend payouts on adequate buffers, carefully withdraw prudential flexibility, and consider targeted capital-based measures (minimum risk weights, SyRB) if housing imbalances persist.
- Strengthen insolvency and restructuring frameworks, AML/CFT supervision, and measures to boost R&D, digitalization, and skills to raise potential growth.

### Key statistics (selected)
- Nominal GDP (Millions of euros): 2018: 89,357; 2019: 93,900; 2020: 91,555; 2021: 97,037; 2022: 104,080; 2023: 110,693; 2024: 116,863; 2025: 122,908; 2026: 128,881
- Inflation (HICP, annual percent change): 2018: 2.5; 2019: 2.8; 2020: 2.0; 2021: 1.3; 2022: 1.9; 2023: 2.1; 2024: 2.1; 2025: 2.1; 2026: 2.0
- RRF grant envelope: €6.3 billion (6.9 percent of 2020 GDP) over 2021-26
- IMF staff projection for 2021 GDP growth: 4.7 percent

*International Monetary Fund — Staff Report excerpt: "1. Slovakia and the Recovery and Resilience Facility."*

### 1. Slovakia and the Recovery and Resilience Facility __________________________________________________ 11

### 1. Slovakia and the Recovery and Resilience Facility

### Context
- Pre-pandemic position and structural indicators:
  - Per capita income reached 72 percent of the EU average.
  - Growth decelerated in 2019, but the labor market continued to improve with unemployment at record lows and participation at record highs.
  - Slovakia had accumulated fiscal space, and its banking system had strong capital and liquidity buffers.
- Political context:
  - Center-right opposition party OĽaNO won February 2020 elections and formed a coalition government with three other parties.
  - Government had a constitutional majority but experienced mounting tensions over crisis management, culminating in resignation and formation of a new government in April 2021 with a largely unchanged policy agenda.
- Pandemic progress as of late May 2021:
  - Vaccination rollout proceeding but, amid procurement delays at the EU level and vaccine hesitancy, only about one-third of adults had received at least one dose by late May.
  - Infections surged in late 2020 and early 2021, leading to tight containment measures and deep reductions in mobility.

### Pandemic impact and policy response
- Macro outcomes:
  - GDP declined by 4.8 percent in 2020, with a much larger investment collapse.
  - Manufacturing and contact-intensive sectors contracted sharply in Q2 2020; industrial production reached pre-pandemic levels by end-2020.
  - The 2020 contraction was milder than the Euro Area average.
- Fiscal response and outcomes:
  - Direct aid in 2020 amounted to 2.1 percent of GDP.
  - Fiscal deficit rose to 6.1 percent of GDP and public debt reached 60.3 percent of GDP.
  - The package of discretionary measures was somewhat smaller than the average in the EU and other advanced European economies.
- Liquidity and credit support:
  - Government deferred income taxes and social contributions, introduced debt moratoria, and rolled out loan guarantee programs.
  - More than 11 percent of loans to households and corporates had taken advantage of the legislated debt moratorium by June 2020.
  - Authorities estimate utilized liquidity support of 2.2 percent of GDP in 2020.
- Banking-sector and regulatory measures:
  - NBS, together with the ECB and European Banking Authorities, allowed banks to operate temporarily below the Pillar 2 capital guidance, the capital conservation buffer, and the liquidity coverage ratio.
  - NBS reduced the counter-cyclical capital buffer (CCyB) to 1 percent, and recommended banks do not pay out dividends; cancellation of the bank levy provided a further boost to bank capital.
  - Staff estimate that dividend restriction, CCyB cut, and bank levy cancellation could have added roughly 0.9 percent of GDP to banks’ capital.
- Labor market and households:
  - Job and income losses were muted despite the contraction, supported by job retention schemes; most labor market adjustment occurred through lower hours worked.
  - Registered unemployment increased by about 3 percentage points with uneven effects across workers and regions.
  - The 2020 decline in private consumption was among the smallest in Europe.
- Corporate sector and insolvency:
  - Corporate bankruptcies remained subdued in 2020.
  - Implemented policies absorbed a significant fraction of corporates’ liquidity needs; solvency support (e.g., grants) was more limited in 2020, with the crisis potentially widening corporate equity gaps by 2–5 percent of GDP.
  - Surveys indicate a large share of firms that experienced a drop in demand reported using government support; firms in hardest-hit sectors were more likely to use debt moratoria and/or guaranteed loans.
- Financial sector resilience and risks:
  - Bank solvency and liquidity increased, and NPL ratios declined through 2020, though banks proactively tripled provisions in anticipation of support withdrawal.
  - Credit-to-GDP gap widened while the output gap turned negative in 2020; mortgage lending remained resilient while business lending slowed and consumer loans contracted.
  - House prices continued to rise, with an estimated overvaluation of about 20 percent; a decline in GDP is a key driver of the housing price gap given pandemic dynamics.
- External sector:
  - Current account deficit narrowed significantly with improvement in the trade balance as private spending shifted from services to goods.
  - Cyclically adjusted current account balance coincides with EBA-lite model norm, implying no REER misalignment.

### Outlook and risks
- Near-term projection assumptions:
  - Baseline assumes 60 percent of the population is vaccinated by end 2021:Q3 and that semiconductor supply disruptions do not lead to prolonged closures of car factories.
- Growth and inflation outlook:
  - Activity is expected to rebound in 2021:H2 and reach pre-crisis level by 2021:Q3.
  - Projected annual GDP growth for 2021 is 4.7 percent.
  - Some scarring is foreseen with 2025 output about 1.5 percent below pre-pandemic forecasts.
  - Inflation is expected to dip in 2021, reflecting lower regulated energy prices and a sizable output gap.
- Medium-term drivers:
  - Slovakia is set to receive 6.9 percent of 2020 GDP in grants over 2021–26 from the Recovery and Resilience Facility (RRF) of the Next Generation EU (NGEU) Recovery Plan, most of which will be allocated to new public investment.
  - Capacity expansion of the auto sector would boost activity through higher investment and subsequently exports.
  - Population ageing will begin weighing on growth over the medium term.
- Key risks (Annex IV):
  - Downside risks: resurgent infections, new variants, vaccination delays and hesitancy leading to protracted start-stop activity; tensions within government coalition increasing uncertainty; phasing out support measures triggering rise in corporate bankruptcies and unemployment, with potential for increased credit losses and erosion of bank capital; a housing price correction posing a risk to the banking sector after years of mortgage credit growth; supply-chain disruptions, production re-shoring, and technological change affecting the export-dependent economy.
  - Upside risks: successful virus containment boosting confidence; stimulus packages in the US and EU strengthening export demand; stronger investments and reforms raising growth above baseline.

### Authorities’ views
- The authorities broadly agreed with staff’s assessment of the near-term outlook and risks.
- After a weak start to 2021 due to reintroduced lockdowns, authorities expect a rebound as containment measures are eased and vaccination proceeds, with industrial and export sectors remaining key drivers.
- The NBS downside risk scenario assumes the virus will not be successfully suppressed, leading to stricter and more permanent containment measures.
- Conversely, authorities note that faster-than-expected containment and large support packages in the EU and the US present key upside risks.

*International Monetary Fund — Staff Report excerpt: "1. Slovakia and the Recovery and Resilience Facility."*

### Box 1. Slovakia and the Recovery and Resilience Facility

### Box 1. Slovakia and the Recovery and Resilience Facility

### RRF overview and macroeconomic impact
- RRF grant envelope: €6.3 billion (6.9 percent of 2020 GDP), distributed over 2021-26, no co-financing requirements.
- Slovakia’s Recovery and Resilience Plan (RRP) identifies five main areas for investment and reforms: green economy, health, education, public administration, and research and innovation. Various projects within these areas will contribute to digitalization.
- Staff estimate of RRF impact on GDP:
  - Under standard assumptions on multipliers and persistence, the positive effect on the level of GDP is expected to peak in 2025, with GDP 1.6 percent higher than in the absence of grants.
  - RRF funds would help close the output gap faster and boost potential output as the capital stock expands.
  - Beyond the forecast horizon, structural reforms could raise potential output through higher productivity and improvements in both physical and human capital.
- Assumptions underlying staff estimate:
  - Multiplier of 0.5, persistence factor of 0.5.
  - 80 percent of funds are assumed to finance public investment and thus raise potential output by expanding the stock of capital.

### Fiscal policy (A) — near-term stance and medium-term challenges
Findings and projections
- Near-term priority: keep the pandemic at bay, accelerate vaccines, mitigate economic costs through continued policy support.
- Fiscal stance in 2021: projected to remain appropriately expansionary.
- 2021 Stability Program envisages a sizable increase in the fiscal deficit with higher allocation for health spending, extended and expanded job retention schemes, support to selected sectors and buffers for pandemic-related contingencies.
- Staff projects the fiscal deficit to reach 8.8 percent of GDP in 2021, lower than the budgeted 9.9 percent of GDP, reflecting a stronger economic rebound than forecast in the Stability Program and some savings of pandemic-related reserves.
- No-consolidation baseline projection:
  - Fiscal deficit to decline to 2.8 percent of GDP by 2026.
  - Debt would reach 62½ percent of GDP by 2026, above the upper ceiling of national fiscal rules.
- Additional EU funds to absorb:
  - €7.9 billion under the 2014−20 Multiannual Financial Framework (MFF).
  - €12.8 billion under the 2021−27 MFF cycle.

Policy recommendations and planned reforms
- Shift from broad emergency support to targeted measures that enable resource reallocation and prevent scarring:
  - Increase spending on active labor market policies (ALMP) such as well-targeted hiring subsidies, training, reskilling, and job search assistance.
  - Support workers’ reallocation to growth sectors and strengthen balance sheets of viable firms (especially SMEs) to prevent excessive bankruptcies and zombification.
  - Use well-targeted solvency support including equity-like instruments; viability assessments should be based on business forecasts where practical.
- Public investment and EU fund absorption:
  - Timely and effective absorption of sizable EU transfers is crucial to strengthen the recovery, boost potential, and accelerate the green and digital transformation.
  - Continue improving public investment efficiency (central public investment authority, pipeline by ministries); consider better coordination between regional and sectoral strategies, a specialized unit to strengthen financial oversight of major SOEs, and stronger procurement auditing.
- Rebuilding fiscal buffers once recovery is robust:
  - Timing of consolidation should depend on the economic situation; planning should start now to identify measures for a credible medium-term fiscal path.
  - Possible adverse growth impacts of consolidation could be mitigated by faster drawdown of the 2021–27 MFF grants and effective and timely absorption of NGEU funds.
- Specific reforms to strengthen public finances:
  - Taxation: RRP envisages an increase in property and environmental taxes and a reduction in labor taxation. Raising real-estate taxation to EU levels (e.g., linking real-estate taxes to market values) could have sizable fiscal yields and contain house price growth.
  - Revenue and spending efficiency: adoption of eInvoice to strengthen VAT and corporate income tax collection; integrate Value for Money (VfM) into budgetary processes.
  - Fiscal framework reform: amendments to Constitutional Act on Budgetary Responsibility (multiannual expenditure ceilings, debt brake revisions, enhanced role for Council for Budget Responsibility), shift to targeting net debt, modified sanctions and escape clauses.
  - Pension reform: re-link retirement age to life expectancy and minimize cost of parental bonus to ensure long-term sustainability; authorities’ RRP commitment to restore the link between retirement age and life expectancy and introduce expenditure ceilings.

Quantified fiscal-yield estimates (percent of GDP)
- Raising property tax to the EA average controlling for income: 0.9
- Closing half of VAT gap with the EU median level: 0.4
- Realizing half of additional VfM saving potential: 0.4
- Total estimated yield: 1.7

Authorities’ stated intentions
- Authorities view fiscal measures as crucial and broadly agree with staff recommendations to shift gradually to targeted measures.
- Medium-term budgetary objective tightened in the 2021 Stability Program to a structural surplus of 0.5 percent of GDP.
- Authorities noted consolidation of 1 percent of GDP annually will begin in 2023 under their baseline forecast.
- Authorities committed to introduce pension reforms improving the long-term sustainability S2 indicator by at least 1.8 percent of GDP and to amend the Constitutional Act on Budgetary Responsibility to introduce binding multiannual expenditure ceilings.
- Note on fiscal rules: Under current fiscal rules, if debt exceeds 54 percent of GDP in 2023, a vote of confidence would be needed; appointment of a new government in April 2021 triggered a 24-month escape clause.

### Financial sector policies and risks
Banking sector resilience and risks
- Banking sector has sustained credit flow but full pandemic impact remains uncertain; insolvency risks in corporate sector have increased.
- Macroprudential policies since 2016 have limited systemic risk buildup, but risks remain from rapid mortgage growth, growing household indebtedness, rising real estate prices, and bunching of loans just below macroprudential thresholds.

Stress-test outcomes and sensitivity analyses (key figures preserved)
- Aggregate CET1 ratio and stress scenarios:
  - Baseline CET1: 17.0 percent (2020 Q4).
  - “COVID-19 policy unwinding” scenario: CET1 falls to 15.7 percent (130 bps decline).
    - Under this scenario, NPLs could rise to 5.1 percent.
  - “Mortgage stress” scenario: CET1 falls further to 14.2 percent (additional 150 bps decline), still above MDA.
- Mortgage portfolio vulnerabilities:
  - Probability of default of the mortgage book could reach 1.8 percent in an adverse scenario, with probability of default for new vintages up to 4.7 percent.
  - A tightening of the LTV limit from the current 80 percent with exemptions to 70 percent would reduce expected losses by 35 percent and yield an annual reduction of capital depletion under stress of 20 basis points.
- Sensitivity tests:
  - Corporate credit downgrade would reduce capital by 180 basis points.
  - Default of guaranteed loans would reduce capital by 15 basis points.
  - 50 percent default of loans under moratoria would erode capital by 240 basis points.
  - A 30 percent migration of stage 2 loans to default status would breach the MDA trigger.
- Reverse stress-test: banking sector could afford an increase in NPLs to 7.5 percent given its 550-basis points capital management buffer.

Corporate sector distress and policy effectiveness (from Box 2)
- Simulations of roughly 200,000 firms indicate:
  - Policy measures significantly mitigated liquidity risks: policies reduced the pandemic-induced rise in illiquid firms and liquidity gap by almost half; debt moratoria contributed most.
  - Full uptake of guaranteed loans would have allowed an additional 5 percent of firms to fill liquidity needs.
  - Policies less effective in addressing equity gaps: even with support, the share of insolvent firms could increase by 6.5 percentage points, accounting for 8.7 percent of corporate turnover and 5.7 percent debt-at-risk.
  - Pandemic could turn 9.1 percent of firms that were solvent before the pandemic insolvent.
  - Support needed to close equity gaps:
    - Amount to close equity gap of viable firms: 1.9 percent of GDP.
    - Additional amount to reach minimum equity threshold: 2.9 percent of GDP.

*Source: IMF staff analysis as presented in Box 1. Slovakia and the Recovery and Resilience Facility.*

### 20.      Financial sector policies need to remain carefully calibrated to sustain the flow of

### 20.      Financial sector policies need to remain carefully calibrated to sustain the flow of

### Financial sector assessment and risks
- Stress tests and sensitivity tests suggest that the banking system has sufficient capital buffers to withstand a wide range of shocks (Box 3). However, in some stress scenarios, capital erosion could weigh on banks’ willingness and ability to lend.
- Systemic risk stemming from the housing market, while manageable, has not dissipated.
- Notwithstanding the tightening of regulatory limits, mortgage credit and real estate prices continue to grow, and housing loans account for an increasing share in banks’ private sector loan portfolio.
- Consumer loans are contracting, and corporate lending is slowing.
- Staff estimates that a 2.7 percent sectoral SyRB buffer on residential real estate exposures would absorb one-year losses on housing loans under the IMF stress scenario.

### Policy recommendations to support credit provision and financial stability
- To support the recovery, liquidity support through guaranteed loans should be maintained.
  - The low uptake of some of the guaranteed loan schemes points at potential barriers from high administrative costs and strict conditionality.
  - Until the recovery is firmly entrenched, it will be important to extend and redesign programs to incentivize appropriate use by banks and viable businesses.
- Should downside risks materialize, the authorities should release the CCyB or relax regulatory requirements for retail lending.
  - As one of the few jurisdictions with a still positive CCyB, the authorities can create additional balance sheet capacity to support credit provision.
- Supervisors need to carefully balance priorities until the recovery takes hold.
  - Prudential flexibility for loan loss provisions should be carefully withdrawn once the pandemic is under control.
  - Supervisors need to ensure sound IFRS staging of loans and provisioning for timely risk identification, while avoiding excessive pro-cyclicality.
  - Conservative dividend payout distributions should be maintained and made conditional on adequate buffers.
- The authorities should continue upgrading the AML/CFT framework including by:
  - developing a risk-based supervisory model,
  - improving the availability of beneficial ownership information,
  - taking measures to mitigate risks posed by politically exposed persons.

### Macroprudential stance and possible augmentation
- The macroprudential stance is broadly adequate from a financial stability point of view but there is scope to augment the macroprudential policy mix if housing market imbalances persist.
- The NBS could consider complementing borrower-based tools with targeted capital-based measures on mortgage exposures, including minimum risk weights (possibly differentiated across risk buckets).
- The NBS could also explore applying the sectoral systemic risk buffer (SyRB) to target systemic risks from mortgage loans under the new Capital Requirements Directive (CRD V) flexibility.

### Restructuring mechanisms and insolvency frameworks
- Strengthening restructuring mechanisms and insolvency frameworks will help support the reallocation of resources, by releasing the capital trapped in unviable businesses and minimizing inefficient liquidations.
- According to indicator-based measures of efficiency of insolvency regime, Slovakia has room for improvement in pre-insolvency procedures, early warning mechanisms and the degree of court involvement, among others.
- The implementation of measures proposed in Slovakia’s RRP could significantly improve the efficiency of the insolvency framework, including:
  - digitalization of insolvency processes,
  - early warning systems,
  - professionalization of insolvency administrators,
  - specialization of courts.
- Implementation of the 2019 EU Directive on preventive restructuring frameworks presents an opportunity to facilitate early and cost-effective restructuring through hybrid mechanisms that reduce court involvement.

### Authorities’ views
- The authorities emphasized the resilience of the financial sector during the pandemic and concurred that uncertainty about the depth and breadth of its impact remains high.
  - The banking sector has sufficient capital buffers to cover possible losses under a broad range of macro-financial shocks and the level of coverage of loans by provisions is adequate.
  - Although the pandemic has weighed on banks’ profitability, capital ratios have increased, and non-performing loans remain low and decreasing due to supporting measures.
  - The abolition of the bank levy in 2020 will further improve bank profitability.
  - The authorities are continuing to enhance AML/CFT supervisory functions to address MONEYVAL’s recommendations.
  - Cyclical credit risks have not yet fully materialized, though the authorities are encouraged by the relatively low share of firms and households facing repayment difficulties for loans emerging from legislative debt moratoria.
  - Persistently rapid mortgage growth, fueled by fierce competition and declining interest rates, growing household indebtedness, and rising real estate prices call for continued attention.
- The authorities stand ready to relax macroprudential policy further in a countercyclical manner and see merit in expanding the toolkit to contain systemic risk.
  - They are prepared to release the CCyB buffer and ease regulatory requirements for retail lending if provisioning needs increase and credit growth falters.
  - Given persistently robust mortgage credit growth and rising housing prices, they are open to expanding their macroprudential toolkit and exploring minimum risk weights as well as a targeted use of the systemic risk buffer to address risks from real estate market exposures.
  - They highlighted the operational challenges of activating capital-based measures in the EU and noted that any re-calibration of policies should be supported by a thorough cost-benefit analysis.

### Staff appraisal (key points related to financial policies)
- Financial sector policies should continue enabling credit provision, while guarding against the buildup of risks.
  - The banking sector has weathered the COVID-shock well so far but the full impact of the pandemic remains uncertain.
  - To ensure adequate credit supply to the corporate sector, liquidity support through guaranteed loans should be maintained and its design adjusted to remove obstacles to take-up.
  - Should downside risks materialize, the authorities should stand ready to release the CCyB or relax regulatory requirements for retail lending.
  - Prudential flexibility should be carefully withdrawn once the pandemic is under control, with supervisors ensuring sound provisioning.
  - The macroprudential stance is broadly adequate, and the banking system has sufficient capital to withstand a wide range of shocks.
  - The authorities could consider a targeted use of the systemic risk buffer to address real estate market risks under the new CRD-V flexibility.

*Source: IMF staff report excerpt (Slovak Republic).*

### 34.      It is recommended that the next Article IV consultation with the Slovak Republic take

### 1svkea2021001 - 34.      It is recommended that the next Article IV consultation with the Slovak Republic take

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

### Real sector developments
- Slovakia experienced a deep recession in 2020, although private consumption remained very resilient.
- Sectoral heterogeneity:
  - Contact-intensive services share and teleworkability interplay contributed to a somewhat smaller GDP decline than projected based on teleworkability.
  - Sectoral real GVA changes (percentage change compared to 2019Q4) show largest declines in trade/transport/hospitality, with contrasting outperformance in IT/Comm and Finance/Insurance.
- Retail trade:
  - Retail Trade (SA, constant prices, Million Euro) series shown from Jan-19 to Jan-21 (National Bank of Slovakia).
  - With the strong second wave, retail sales declined in early 2021 at a rate comparable to the spring of 2020.
- Economic sentiment:
  - Economic sentiment (2015=100) and business surveys improved significantly as the second wave receded.
- Table 1 projections (Real GDP annual percentage change, constant prices):
  - 2018: 3.7
  - 2019: 2.5
  - 2020: -4.8
  - 2021: 4.7
  - 2022: 4.9
  - 2023: 4.0
  - 2024: 3.2
  - 2025: 2.9
  - 2026: 2.6
- Output gap (percent):
  - 2018: 1.5
  - 2019: 1.0
  - 2020: -4.6
  - 2021: -3.1
  - 2022: -1.5
  - 2023: -0.5
  - 2024: -0.2
  - 2025: -0.2
  - 2026: 0.0

### Labor market developments
- Policy support:
  - The government provided wage subsidies supporting almost a third of total jobs (Wage Support Program: disbursement in € millions; workers supported as percent of employment series).
  - Wage subsidies helped preserve employment despite a large drop in hours worked and shield household balance sheets.
- Labor outcomes:
  - Working hours growth decomposition (2020Q2): jobs, hours per worker, and total hours worked contributions show large negative total hours worked.
  - Unemployment rate and employment:
    - Unemployment rate (Percent): 2018: 6.5; 2019: 5.8; 2020: 6.7; 2021: 7.3; 2022: 6.6; 2023: 6.2; 2024: 6.0; 2025: 5.9; 2026: 5.8.
    - Employment (annual percent change): 2018: 2.0; 2019: 1.0; 2020: -1.9; 2021: -0.3; 2022: 0.8; 2023: 0.3; 2024: 0.1; 2025: 0.0; 2026: 0.0.
  - Wages:
    - Nominal wages (annual percent change): 2018: 6.2; 2019: 7.8; 2020: 3.7; 2021: 4.8; 2022: 4.6; 2023: 4.5; 2024: 4.4; 2025: 4.3; 2026: 4.3.
  - Savings and household disposable income:
    - Household Disposable Income and Savings Rate (2019=100) show savings rate rising in 2020 while disposable income also moved.
- Structural concern:
  - With high long-term unemployment, more targeted support might be needed to reduce labor market scarring.
  - Long-term unemployment (2019, percent of total unemployment) places Slovakia among countries with notable long-term unemployment share.

### External sector developments
- Current account and trade:
  - Slovakia entered the crisis with a moderate current account deficit, which contracted further in 2020.
  - Current account balance (Percent of GDP): 2018: -2.2; 2019: -2.7; 2020: -0.4; 2021: -0.6; 2022: -1.6; 2023: -2.2; 2024: -1.8; 2025: -1.4; 2026: -0.7.
  - Trade balance (goods) (Percent of GDP): 2018: -0.3; 2019: -1.0; 2020: 0.6; 2021: 1.5; 2022: 0.2; 2023: -0.3; 2024: 0.2; 2025: 0.5; 2026: 1.0.
  - Foreign demand for consumption goods boosted exports, particularly during 2020:H2; contribution to export growth shows Transportation equipment and Machinery and electrical equipment among contributors.
- Net International Investment Position (NIIP) and external liabilities:
  - Slovakia has a large negative NIIP, but external liabilities are FDI-heavy, reducing exposure to capital flow reversals.
  - Net International Investment Position (Millions of euros): 2018: -62,228; 2019: -62,227; 2020: -60,437; 2021: -59,117; 2022: -58,880; 2023: -59,232; 2024: -59,153; 2025: -58,951; 2026: -58,347.
  - External Debt (Millions of euros): 2018: 102,701; 2019: 105,517; 2020: 110,925; 2021: 114,572; 2022: 119,739; 2023: 125,795; 2024: 131,505; 2025: 137,362; 2026: 144,379.
- Real Effective Exchange Rate:
  - The REER has remained in line with peer countries; staff assesses the external position in 2020 to be in line with fundamentals.

### Fiscal sector developments and challenges
- Fiscal shock and trajectory:
  - Revenues declined with the contraction of economic activity and expenditures rose reflecting pandemic measures and realized budget risks.
  - Gross public debt (Percent of GDP): 2018: 49.7; 2019: 48.2; 2020: 60.3; 2021: 63.0; 2022: 65.0; 2023: 63.7; 2024: 62.8; 2025: 62.5; 2026: 62.4.
  - Overall balance (Percent of GDP): 2018: -1.0; 2019: -1.3; 2020: -6.1; 2021: -8.8; 2022: -4.9; 2023: -4.1; 2024: -3.3; 2025: -2.8; 2026: -2.8.
  - Primary balance (Percent of GDP): 2018: 0.2; 2019: -0.3; 2020: -5.1; 2021: -7.9; 2022: -4.0; 2023: -3.2; 2024: -2.5; 2025: -1.9; 2026: -1.9.
- Projections and risks:
  - Public debt is projected to stay above 60 percent of GDP over the medium term in the no-consolidation baseline.
  - Although low financing costs could help underpin debt sustainability, fiscal consolidation would be needed given Slovakia’s long-term pension cost challenges.
- Statement of operations (Table 2 highlights, Millions of euros):
  - Revenue: 2018: 36,389; 2019: 38,818; 2020: 38,110; 2021: 40,547; 2022: 43,328; 2023: 47,004; 2024: 47,193; 2025: 49,604; 2026: 51,759.
  - Expenditure: 2018: 37,290; 2019: 40,066; 2020: 43,719; 2021: 49,116; 2022: 48,445; 2023: 51,546; 2024: 51,082; 2025: 53,033; 2026: 55,310.
  - Net lending(+)/borrowing(-) (Millions of euros): 2018: -902; 2019: -1,249; 2020: -5,609; 2021: -8,569; 2022: -5,117; 2023: -4,543; 2024: -3,889; 2025: -3,428; 2026: -3,552.
  - EU Grants (o/w): 2018: 931; 2019: 910; 2020: 1,455; 2021: 2,597; 2022: 3,937; 2023: 2,631; 2024: 2,486; 2025: 2,128.

### Banking sector and financial soundness
- Soundness indicators:
  - Slovak banks have sound capital adequacy:
    - CET1 Ratio (Percent, 2020Q4): displayed as higher than many peers; Capital adequacy (Regulatory capital to risk-weighted assets): 2019: 18.2; 2020: 19.6 (Table 4: Regulatory capital to risk-weighted assets series from 2013–2020).
  - Adequate liquidity buffers supported by a large deposit base (LCR Ratio and customer deposit metrics).
- Asset quality and risk:
  - NPLs decreased during the pandemic and remain lower than the EU average:
    - Nonperforming loans to gross loans (Percent): 2019: 2.9; 2020: 2.7.
  - Cost of risk increased in line with other banks in the EU (Cost of Risk series, basis points).
- Profitability:
  - Return on Equity is more than twice the EU average but decreased during the crisis:
    - Return on equity (after tax): 2019: 9.5; 2020: 5.9 (Table 4 series).
  - Net interest margin compression is a challenge.
- Financial soundness (selected Table 4 indicators):
  - Nonfinancial corporation debt (percent of GDP): 2020: 91.2.
  - Households debt (percent of GDP): 2020: 48.3.
  - Households debt (percent of disposable income): 2020: 76.5.

### Credit developments
- The credit cycle is running ahead of the business cycle supported by financial sector policies.
- Private sector credit growth (year-on-year percent change) shows:
  - Resilient credit growth fueled by mortgage lending while household consumer loans contracted.
  - Private sector credit growth (Table 1): Credit to private sector (Growth rate): 2018: 9.2; 2019: 6.6; 2020: 4.8; 2021: 6.5; 2022: 7.8; 2023: 6.9; 2024: 6.1; 2025: 5.7; 2026: 5.4.
- Corporate loans:
  - Investment loan growth decelerated during the pandemic.
  - Banks expect further easing of credit standards for mortgage loans but tightening for loans to corporates (ECB lending survey signals).

### Unequal impact of the pandemic
- Gender and sectoral exposure:
  - Women’s high involvement in contact-intensive services leaves them vulnerable to a protracted crisis.
  - Female employment by industry (2019) shows high female shares in contact-intensive services (percent female by industry).
- Regional and minority impacts:
  - Unemployment increased more in regions that already had high unemployment rates before the pandemic; registered unemployment across Slovak districts shows positive correlation with 2019 registered unemployment.
  - The Roma population is vulnerable due to high rates of poverty, weak labor market attachment, low educational attainment, and geographic concentration in the east where the increase in unemployment was largest.
  - Selected indicators of social exclusion of Roma (2016, percent of total): Below the poverty line; Households with very low work intensity; Early school leavers — Slovakia compared with Czech Republic, Hungary, 9 Country Average.

### Need for human capital investment
- Demographics and labor supply:
  - Projected decline in working-age population (20-64) and rising old-age dependency ratios intensify the need for greater human capital investment.
  - Working-age population projections (thousands) series from 2019 to 2070 indicate declines; Old-age dependency ratio rises (European Commission, The 2021 Ageing Report).
- Education and skills gaps:
  - PISA scores (average of mean scores) shown: OECD and Slovak Republic series (2006–2018) indicate gaps.
  - Participation in early childhood education, adult participation in learning, and share of population with tertiary education are lower than the EU average.
  - Qualification and education mismatches: job mismatch by field of education (percent) and over-qualification rate (percent) exceed EU averages in several dimensions.
- Health investment:
  - Sizable healthcare capital expenditures envisioned in the RRP can help make up for investment gaps and could help bring health outcomes closer to EU peers.
  - Capital expenditure on health (2018): percent of GDP and percent of current health expenditure series show scope for higher health capital investment.

### Green and digital transition
- Emissions and environmental policy:
  - Due to its large manufacturing sector, Slovakia’s production is relatively carbon intensive (Greenhouse Gas Emissions CO2 equivalent tonnes per euro of GDP, 2018).
  - There has been progress reducing emissions, but achieving carbon-neutrality by 2050 will be challenging.
  - Slovakia falls short of pricing carbon emissions in line with a €30 benchmark; Carbon pricing gap (Percent) shows Slovakia among countries with a material gap.
  - Environmental taxation: scope to increase certain types of environmental taxation (Energy taxes, Transport taxes, Taxes on Pollution/Resources as percent of GDP, 2018).
- Digitalization:
  - Digital access and connectivity lag behind other EU countries; Digital Economy and Society Index components show Slovakia below many peers.
  - Use of internet (OECD: 2017) shows lower use among low-skilled individuals compared with high-skilled.

### Boosting productivity and institutional challenges
- Convergence:
  - Convergence has slowed in recent years; GDP per Capita PPP (Percent, EU = 100) series show Slovakia below several peers.
- Governance and innovation:
  - Below-average perception of governance quality indicates institutional gaps (Corruption Perceptions Index, 2020 score series).
  - Expenditure in R&D is low relative to other EU countries (Euros per capita, 2019) contributing to relatively poor innovation performance.
  - European Innovation Scoreboard (2018) indicators: Slovakia tends to be below median on many innovation metrics (public R&D, private R&D, patent applications, etc.).
- Policy implication:
  - Boosting productivity requires addressing institutional quality, increasing R&D and innovation activity, and upgrading skills to move towards higher value-added activities.

### Key statistics and projections (selected from tables)
- Nominal GDP (Millions of euros, memo): 2018: 89,357; 2019: 93,900; 2020: 91,555; 2021: 97,037; 2022: 104,080; 2023: 110,693; 2024: 116,863; 2025: 122,908; 2026: 128,881.
- Inflation (HICP, annual percent change):
  - 2018: 2.5; 2019: 2.8; 2020: 2.0; 2021: 1.3; 2022: 1.9; 2023: 2.1; 2024: 2.1; 2025: 2.1; 2026: 2.0.
- General government debt (Percent of GDP): see fiscal section above.

*International Monetary Fund staff summary of the Slovak Republic content unit.*

### Annex I. Authorities’ Response to Past IMF Policy

### Annex I. Authorities’ Response to Past IMF Policy

### Fiscal Policy
- IMF 2019 recommendation: Avoid new expansionary measures given the already significant commitments and the need to build up fiscal space.
  - Authorities' response: Prior to the onset of the pandemic, some expansionary measures were introduced including the thirteenth pension, higher parental, and student benefits.
- IMF 2019 recommendation: To avoid pro-cyclical consolidation, consider recalibrating the growth-related escape clause to debt rules to accommodate less drastic shocks.
  - Authorities' response: The proposed amendments to the debt rules envisage growth-related escape clause to accommodate less drastic shocks.
- IMF 2019 recommendation: The capping of the retirement age at 64 will raise long-term pension expenditure.
  - Authorities' response: The retirement age cap was removed in the December 2020 constitutional amendment.
- IMF 2019 recommendation: Strengthen the mandate of the Value for Money implementation unit.
  - Authorities' response: The implementation unit of the Value for Money has established itself as a high-profile team at the heart of government, and the regular publication of its reports ensures ongoing follow-up at the most senior levels.
- IMF 2019 recommendation: Consider removing preferential tax treatment of housing-related capital gains and link real-estate taxation to the market value of the property.
  - Authorities' response: The Recovery and Resilience Plan (RRP) envisages an increase in property taxation.

### Structural Reforms
- IMF 2019 recommendation: Create better synergies between higher education and future skill needs. Strengthen science-business linkages. Consolidate the public research system to improve coordination and ensure full use of EU funds for R&D.
  - Authorities' response: Authorities have taken some initial steps, like the creation of a new Accreditation Agency and an increase in the amount of R&D tax deductions. The RRP includes wider reforms, including the introduction of a system of periodic evaluation of scientific performance, new standards and criteria for accreditation, and the concentration of educational and research capacities through mergers into larger units.
- IMF 2019 recommendation: Provide a more enabling government through increasing regulatory predictability, raise the independence of the judiciary, and minimize conflict of interest in the public administration.
  - Authorities' response: The new construction legislation would improve the expeditiousness of construction permission proceedings. The constitutional amendment on judicial reforms passed in December 2020 dictates that the term of office of constitutional judges will be adjusted to ensure that judges are replaced gradually, thereby preventing a single governing party or coalition from filling the court with its own nominees.
- IMF 2019 recommendation: Strengthen ALMPs to reintegrate the long-term unemployed, including targeted measures for the Roma Population.
  - Authorities' response: Introduction of LMPs aimed at reducing youth unemployment, including subsidies for businesses hiring young unemployed (however, this program was suspended in spring 2020 due to the pandemic), and changes in legislation to facilitate hiring workers of age 15+. A permanent Kurzarbeit scheme will be introduced in 2022 to strengthen the safety net. In order to make inclusion of the Roma more effective, a new Strategy for Equality, Inclusion and Participation of the Roma until 2030 was approved in April 2021, which prioritizes employment, education, health and housing.
- IMF 2019 recommendation: Increase availability of childcare to support female employment.
  - Authorities' response: Compulsory pre-school entry from age 5 as of 2021 and expansion of childcare facilities. The RRP envisages the introduction of a legal right to a place in pre-primary education from age 3, and investment to reduce barriers to access to school, including improving the access to education for marginalized Roma communities.
- IMF 2019 recommendation: Invest in transport and digital infrastructure.
  - Authorities' response: The RRP envisages large investments in digital infrastructure to widen access to fast internet, develop an electronic public administration, and improve digital infrastructure in schools to allow for an early digital education. The RRP also includes ambitious improvements to sustainable transport, including upgrading and electrification of railways, building new or upgrading tram and trolley lines, and increasing public transport connections, among others.

### Financial Sector
- IMF 2019 recommendation: Building societies should be required to increase the NPL coverage ratio.
  - Authorities' response: (No direct implementation statement in provided text.)
- IMF 2019 recommendation: Introduce a cap on the share of uncollateralized loans in total loans by building societies.
  - Authorities' response: (No direct implementation statement in provided text.)
- IMF 2019 recommendation: Consider imposing non-zero Pillar II capital guidance for less systemic institutions in 2019 and introducing a risk weight add-on on housing loans to require banks to better internalize credit risks, which can be complemented with a floor on risk weights.
  - Authorities' response: Pillar II capital guidance has been introduced for less systemic institutions.
- IMF 2019 recommendation: The bank levy should be allowed to expire in 2021.
  - Authorities' response: The bank levy was first doubled for 2020 and subsequently cancelled starting July 2020.
- IMF 2019 recommendation: Strengthen the AML/CFT framework, including to improve disciplinary processes, step-up bank employee trainings, strengthen measures to support anti-corruption efforts, and enhance operational independence and effectiveness of the Financial Intelligence Unit.
  - Authorities' response: A new AML/CFT supervision section was established in March 2020 in the NBS to strengthen on-site supervision and coordinate AML supervision. The Financial Intelligence Unit has set up working groups to implement corrective action (with regard to MONEYVAL recommendations). In September 2020 an amendment to the AML/CFT Act was approved to transpose the 5th AML Directive into law.

### Annex II. Policy Measures in Response to COVID-19 (Percent of GDP)
- Planned wage subsidies ("First Aid"):
  - i) Employment retention allowance for closed enterprises, at 80% (increased to 100% from February 2021) of gross wage (since October 2020, changed to total labor costs including contributions paid by the employer on behalf of the employee), max. €880 per month (increased to €1,100 from October 2020); ii) allowances to self-employed persons, a flat-rate allowance depending on the decrease in revenues, max €540 (increased to €810 from October 2020 and to €870 from February 2021); iii) employment retention allowance for enterprises struck by the crisis, 80% (increased to 100% from February 2021) of gross wage (starting October 2020, changed to total labor costs), maximum €880 (increased to €1,100 from October 2020), or a flat-rate allowance depending on the decrease in revenues, max €540 (increased to €810 from October 2020 and to €870 from February 2021); and iv) allowance to contract workers, single-person companies, and self-employed person (without social security contributions), flat-rate allowance of €210 (increased to €315 from October 2020 and to €360 from February 2021). The initial coverage period was March−July 2020, with the expiration date extended multiple times, to June 2021.
  - 2020: 0.8
  - 2021 (Planned): 1.1
- Sickness and nursing benefits: Payment of sick leave in quarantine or leave to take care of a sick family member for employees, 55% of salary. The benefits will be temporarily increased to 75% of the employee's gross salary for April 2021 only.
  - 2020: 0.3
  - 2021 (Planned): 0.3
- Health care expenditures: Covid screening test, remuneration of front-line workers, other increased expenditures in healthcare.
  - 2020: 0.4
  - 2021 (Planned): 0.8
- Extending unemployment benefits: Extension of unemployment benefits after the maximum duration. The first round took place between March and August 2020, the second round took place between March and May 2021.
  - 2020: 0.03
  - 2021 (Planned): 0.1
- Rental subsidies: Rental subsidies to businesses closed because of Covid containment measures. The subsidy will be equal to the rent reduction given by the landlord, subject to a limit of 50% of the rent. Assistance later extended to owners of shops and restaurants.
  - 2020: 0.04
  - 2021 (Planned): 0.1
- Aid to the tourism and gastronomy sector: For businesses in the tourism and gastronomy sector that had a decrease in net turnover more than 40%.
  - 2020: 0.2
- Other expenditure measures: Kindergartens job retention, remuneration of front-line employees, support for job seekers, economic mobilization measures etc.
  - 2020: 0.4
  - 2021 (Planned): 0.5
- Tax relief: Mainly waiver of social security contributions of employers and self-employed persons for April for closed business, and application of loss carried forward from years 2015−18 to income reported in the corporate income tax return for 2019.
  - 2020: 0.1
  - 2021 (Planned): 0.01
- Reserves for 2021: Provision for additional expenditure due to COVID-19 in the 2021 budget.
  - 2021 (Planned): 0.7
- Total (above-the-line, general government):
  - 2020: 2.1
  - 2021 (Planned): 3.6
- Tax deferrals (without impact on the deficit): Deferment of the employer and self-employed persons' social security contribution in the event of a decrease in sales by more than 40% for March, May−July, December 2020 and January−March 2021 to end-June 2021. Deferment of corporate income tax (CIT) advances in the event of a decrease in sales by more than 40%; Delay of income tax returns (CIT and PIT).
  - 2020: 0.5
  - 2021 (Planned): 0.1
- Public credit guarantees:
  - Scheme 1 (Export-Import Bank): SMEs (excluding micro firms) and large firms; loans between 2m and 20m
  - Scheme 2 (SIH NDF I): SMEs (including micro firms) and large firms; max 2m
  - Scheme 3 (SIH NDF II): SMEs (including micro firms); max 2m
  - Restrictions: the loans cannot be used to refinance existing liabilities.
  - Caps: the maximum loan amount is capped by 25% of turnover or twice the wage bill with some exemptions.
  - 2020: 1.1
  - 2021 (Planned): 0.5
- Debt moratoria: According to Act No 67/2020 and amended by Act No 75/2020 and by Act No 96/2020, a creditor which is a bank or a foreign bank branch shall, at the request of a debtor, authorizes the deferral of payments for the period specified in the deferral request, which shall not exceed nine months from the date of the next outstanding loan payment due after the date of submission of the deferral request. A debtor may request the deferral of payments of the same loan at most once during the pandemic period. This measure was extended to March 2021 in line with EBA's reactivation of its guidance on legislative and non-legislative moratoria published in Dec 2020.
  - 2020: 0.5
  - 2021 (Planned): 0.1
- Total (below-the-line, general government):
  - 2020: 2.2
  - 2021 (Planned): 0.7
- Source of figures: 2021 Stability Program (updated with revised 2020 GDP data).

### Annex III. External Sector Assessment
- Overall assessment: The external position of the Slovak Republic is assessed to be broadly in line with the level implied by its medium-term fundamentals and desirable policies in 2020.
- Current account:
  - Background: The current account deficit fell sharply in 2020, driven mainly by a strong export performance due to high foreign demand for durables in 2020H2. As the economy recovers, the current account deficit is expected to widen from 2021 to 2023. Large public investments in the context of the NGEU program will further increase demand for imports, but this will be more than offset by EU funding. In the outer years, the current account deficit is expected to narrow owing to strong export performance.
- Foreign assets and liabilities (position and trajectory):
  - Background: The net international investment position (NIIP) of the Slovak Republic stood at around -66 percent of GDP at end-2020. Both gross assets and gross liabilities increased during 2020, the former driven by FDI and other investments, and the latter driven mainly by an increase in general government debt due to the large 2020 fiscal deficit. Gross liabilities were at 175 percent of GDP, while gross assets at 109 percent of GDP in 2020.
  - Assessment: The negative NIIP does not imply notable risks to external sustainability. Strong export growth and significant inflows of EU funds (both from the Next Generation EU Recovery Plan and structural and cohesion funds), combined with robust nominal GDP growth, are expected to bring the NIIP down to -45 percent of GDP by 2026. In addition, the large share of long-term, local-currency-denominated and FDI external liabilities reduces the vulnerability to capital outflows.
  - 2020 (% GDP) key figures:
    - NIIP: -66
    - Gross Assets: 109
    - Debt Assets: 82
    - Gross Liab.: 175
    - Debt Liab.: 121
- Current Account detailed assessment:
  - Background: The current account deficit (CAD) narrowed to 0.4 percent of GDP in 2020. Both imports and exports contracted sharply during the first wave of the COVID-19 pandemic. However, exports rebounded rapidly in the second half of the year on the back of strong demand for consumer durables in trading partners, while imports remained relatively more subdued. Primary income outflows also fell in 2020, reflecting lower returns on past foreign investments during the crisis. The CAD is expected to progressively widen from 2021 to 2023 as imports and primary income outflows recover with the economic expansion. Higher public investment will also contribute to an increase in the CAD but will be offset by EU grants. In the outer years, the current account deficit is projected to narrow due to strong export growth.
  - Assessment: The EBA light CA model suggests a cyclically adjusted norm of -1.2 percent of GDP for 2020. The actual cyclically-adjusted CA balance is estimated at -0.6 percent of GDP. An additional COVID-19 related adjustment of -0.6 percentage points is warranted to reflect lower oil prices, a sharp decline in tourism, and a global consumption shift from services to goods due to the pandemic. With the COVID-19 adjustment, the cyclically-adjusted CA balance is equal to the norm, implying no CA and REER gaps. Therefore, staff assesses the Slovak Republic’s external position as broadly consistent with fundamentals.
- Real Exchange Rate:
  - Background: Both CPI- and ULC-based real effective exchange rate (REER) appreciated slightly in 2020 compared with 2019 reflecting higher inflation and wage growth in the Slovak Republic relative to trading partners.
  - Assessment: The REER EBA-lite approach points to a sizable overvaluation of 7.6 percent. Given that the estimated overvaluation in this approach is mostly driven by large residuals, staff relies on the CA approach for assessment of the external position. Overall, staff assesses the real exchange rate to be broadly around its equilibrium value.
- Capital and Financial Accounts:
  - Background: The capital account is expected to continue to display significant inflows through the forecasting period as Slovakia receives sizable EU funds from the NGEU Recovery Plan and structural and cohesion funds. Meanwhile, foreign direct investment, which displayed net inflows in all but two of the previous 10 years, sharply reversed in 2020 in the context of the COVID-19 pandemic, with net outflows totaling 2.1 percent of GDP. This was offset by portfolio investment inflows into government debt, mainly due to debt issued by the government to cover its deficit.
  - Policy change: In March 2021, in the context of an amendment to the Critical Infrastructure Act, the Slovak Republic introduced a new screening mechanism for FDI in strategic industries for national security reasons.
  - Assessment: FDI inflows are expected to resume starting in 2021 as investor interest picks up with the economic recovery and newly announced investments in the automotive sector take place. The dominance of FDI in capital inflows mitigates risks from sudden changes in market sentiment. Significant inflows of EU funds are expected to further improve the Slovak Republic’s external position. Regarding the amendment to the Critical Infrastructure Act, staff recommends that FDI restrictions on the basis of national security be used sparingly and judiciously.
- FX Intervention and Reserves Level:
  - Background: The euro has the status of a global reserve currency.
  - Assessment: Reserves held by euro area economies are typically low relative to standard metrics, but the currency is free floating.

*Annex I. Authorities’ Response to Past IMF Policy; Annex II. Policy Measures in Response to COVID-19; Annex III. External Sector Assessment (extracted from 1svkea2021001).*

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### Risk Matrix Summary
- The Risk Assessment Matrix (RAM) presents events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- Relative likelihood classifications: “low” = probability below 10 percent; “medium” = probability between 10 and 30 percent; “high” = probability between 30 and 50 percent.
- Time horizons in the matrix range from Short Term to Long Term, with expected impacts characterized qualitatively (e.g., High).

### Global Risks (selected entries)
- Unexpected shifts in COVID-19 pandemic
  - Downside scenarios:
    - Asynchronous progress: Limited access to, and longer-than-expected deployment of, vaccines in some countries—combined with dwindling policy space—prompt a reassessment of their growth prospects (for some Emerging and Frontier Markets triggering capital outflows, depreciation and inflation pressures, and debt defaults).
    - Prolonged pandemic: The disease proves harder to eradicate (e.g., due to new virus strains, short effectiveness of vaccines, or widespread unwillingness to take them), requiring costly containment efforts and prompting persistent behavioral changes rendering many activities unviable. For countries with policy space, prolonged support—while needed to cushion the economy—exacerbates stretched asset valuations, fueling financial vulnerabilities. For those with limited space, especially EMs, policy support is insufficient.
  - Upside scenario:
    - Faster containment: Pandemic is contained faster than expected due to the rapid production and distribution of vaccines, boosting confidence and economic activity.
  - Relative Likelihood: Medium
  - Time Horizon: Short Term
  - Expected Impact: High — Extended containment measures lead to prolonged uncertainty, downsizing of some sectors, rise in bankruptcies, need for reallocation toward less contact-intensive industries, deeper long-term scarring, weakening of financial intermediaries’ balance-sheets restricting the flow of credit.
  - Policy Response:
    - Maintain public health measures, ensure adequate resources for the health system and accelerate vaccine rollout.
    - Use available fiscal space to provide targeted support to vulnerable households and affected but viable businesses.
    - Gradually phase-out of support to avoid undermining the recovery.
    - Adopt macroeconomic policies and structural reforms to raise potential output, boost resilience, protect the vulnerable, and make the economy more digital and green.
  - Upside Expected Impact: High — Restoration of confidence and activity boost demand leading to a faster-than-expected recovery.
- Sharp rise in global risk premia exposes financial and fiscal vulnerabilities
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Expected Impact: High — Tightening financial conditions deepen the economic downturn; higher risk premium for sovereigns reduces fiscal space.
  - Policy Response:
    - Continue to extend debt maturity to reduce roll-over needs in the event of an increase in premiums.
    - Accelerate absorption of available EU funds to finance COVID-related measures and public investment.
    - Set a credible path for fiscal consolidation for the medium-term, without withdrawing support prematurely.
    - Provide liquidity support to viable firms and recalibrate macro-prudential policies as necessary to ensure the smooth flow of credit.
- Widespread social discontent and political instability
  - Relative Likelihood: High
  - Time Horizon: Medium
  - Expected Impact: Prolonged containment measures, rising unemployment and corporate bankruptcies could increase tensions, lead to disruptive protests, and challenge policymaking.
  - Policy Response:
    - Provide targeted support to the most vulnerable groups, including through ALMPs to ensure inclusive recovery.
    - Accelerate policies to facilitate reallocation of factors of production while providing an adequate social safety net.
- Accelerating de-globalization
  - Relative Likelihood: Medium
  - Time Horizon: Short to Medium Term
  - Expected Impact: High — A retreat from multilateralism and globalization would significantly impact the Slovak Republic’s growth potential given reliance on export-led growth and integration in global value chains (e.g., cars).
  - Policy Response:
    - Accelerate structural reforms, including by leveraging EU funds, to boost productivity and competitiveness, move up the value chain and diversify export products and destinations.
    - Engage in support for the multilateral rules-based trade system and advocate trade liberalization.

### Local Risks (Slovak Republic — selected entries)
- Deeper scarring of household and corporate balance sheets and labor markets
  - Relative Likelihood: Low/Medium
  - Time Horizon: Short to Medium Term
  - Expected Impact: High — Bankruptcies and job losses lead to destruction of firm-specific physical and human capital, eroding potential; impaired corporate solvency affects financial sector balance sheets leading to credit tightening and potential macro-financial doom-loops.
  - Policy Response:
    - Extend targeted policy support for the labor market and the corporate sector until the recovery is firmly under way.
    - Consider solvency support for viable firms in affected sectors, including through equity-like instruments.
    - Adjust financial sector regulations to maintain the smooth flow of credit.
- Property market downturn as a result of worsening economic conditions
  - Relative Likelihood: Low/Medium
  - Time Horizon: Short to Medium Term
  - Expected Impact: High — Sharp reversal in the real estate market after years of rapid price growth could lead to an increase in NPLs and tightening credit conditions, given banks’ large exposure to housing mortgages.
  - Policy Response:
    - Continue close monitoring of financial conditions and recalibrate macro-prudential policies as needed.
    - Adjust financial sector regulations to maintain the flow of credit.
- Auto sector fails to adjust to shift to electric vehicles and increased automation
  - Relative Likelihood: Low/Medium
  - Time Horizon: Medium Term
  - Expected Impact: High — Loss of competitiveness and shrinking market share of Slovak auto exports threaten the country’s growth model, lowering potential growth and wages.
  - Policy Response:
    - Use EU funds to invest in education and upskilling strategies that take into account rapidly changing skill demands.
    - Boost spending on R&D and increase its efficiency to move up value chains.
- Structural reforms in education, innovation, public administration and digitalization implemented in the context of the NGEU program
  - Relative Likelihood: Low/Medium
  - Time Horizon: Long Term
  - Expected Impact: High — Improvements in educational quality, upskilling of workers and a tighter link between businesses and educational/research institutions allow the Slovak Republic to move up value chains; narrowing of perceived gaps in institutional quality and public efficiency boost productivity growth.

### Key Debt and Fiscal Highlights (from Annex V excerpt included in the source)
- Public debt:
  - Increased from 48.2 percent of GDP in 2019 to 60.3 percent of GDP in 2020.
  - Almost 80 percent of the increase in debt in 2020 took place through long-term instruments.
- Fiscal deficit:
  - Fiscal deficit rose from 1.3 percent of GDP in 2019 to 6.1 percent of GDP in 2020.
  - Staff projects the primary fiscal deficit to rise from 5.1 percent of GDP in 2020 to 7.9 percent in 2021.
  - The primary deficit is projected to decline to 1.9 percent of GDP in 2026 (the debt-stabilizing level).
- Debt maturity and interest rates:
  - Average maturity of public debt at end-2020: 8.2 years.
  - In 2020, T-bills accounted for slightly more than 20 percent of total new government securities issued.
  - Assumption for 2021: 2 billion new T-bills will be issued.
  - Assumed average maturity for new sovereign bonds: 10 years.
  - Effective interest rate declined from 4.7 percent in 2008 to 2.5 percent in 2020; projected to decline to 1.5−1.6 percent during 2022−26.
  - Spread over the 10-year Germany sovereign bond declined from a peak of 114 basis points in April 2020 to 27 basis points in April 2021.
- Debt and gross financing needs projections:
  - Debt level projected to increase by 2.8 percent of GDP in 2021 to 63 percent of GDP.
  - Debt-to-GDP ratio projected to decline slightly after peaking in 2022 to 62.4 percent of GDP by 2026 under the baseline.
  - Under the baseline, gross financing needs of the government would remain below 11½ percent of GDP.
- Fan chart and stress scenarios:
  - Symmetric fan charts indicate debt-to-GDP could drop to 58 percent by 2026 with a 25 percent probability; could increase to 67 percent by 2026 with a 25 percent probability.
  - Downside-only exercise: 25 percent chance debt-to-GDP could increase to 70.5 percent of GDP in the medium term.
  - Combined negative shocks scenario: debt could reach 74.9 percent of GDP in 2026 (compared to 62.4 percent under the baseline).
  - Growth shock: real GDP growth rates in 2022–23 assumed to be one standard deviation (3.0 percentage points) lower than baseline; public debt would increase to about 70 percent of GDP by 2026.
  - Primary balance shock: deterioration in the primary balance by 1.1 percentage points in 2022 and 0.3 percentage points in 2023 → public debt increases to 65.2 percent of GDP in 2026.
  - Interest rate shock: increase of 436 basis points in interest rate throughout the projection period → public debt reaches 65.5 percent of GDP by 2026; gross financing needs at 12.2 percent of GDP.
  - Real exchange rate shock: 14 percent nominal exchange rate depreciation in 2022 → marginal impact due to low share of public debt in foreign currency (3 percent in 2020).
  - Combined macro-fiscal shock: debt reaches 69.1 percent of GDP in 2022 and 74.9 percent by 2026; gross financing needs peak at 15.4 percent of GDP in 2023.
- Contingent liabilities from loan guarantee programs:
  - Announced programs total EUR 4.02 billion and guarantee up to 80−90 percent of the loan value.
  - Usage as of end-2020: about 1.04 billion (1.1 percent of GDP).
  - If 60 percent of the used guarantees are called, it would amount to 0.7 percent of 2020 GDP.

*Source: Annex IV. Risk Assessment Matrix (and attached Annex V excerpts) — IMF staff assessments and projections as presented in the provided content.*

### 6.      Debt    Sustainability Analysis Risk  Assessment (Heat map). The heat map highlights risks

### 6. Debt Sustainability Analysis Risk Assessment (Heat map). The heat map highlights risks

### Key risks identified
- Large total external financing requirements: 56 percent of GDP in 2020, mainly reflecting high short-term external debt.
- Central bank (NBS) short-term external liabilities:
  - “Currency and deposits” liabilities of the National Bank of Slovakia (NBS), influenced mainly by transactions of other central banks or other institutions participating in Target 2, account for about half of total short-term external debt.
  - “Loan” liabilities of the NBS account for 13 percent of short-term external debt and are connected mainly with repurchase agreements, reflecting the active investment policy of the NBS.
- Intra-company FDI loans boost gross external financing needs: 15 percent of total short-term external debt and tend to be more stable.
- Share of public debt held by non-residents: 58 percent; risk mitigants include the important role of institutional investors (tending to be long-term investors) and ECB backstop.
- ECB holdings through the public sector purchase program: about 38 percent of total government debt (66 percent of government external debt).

### Public sector DSA — Baseline scenario (selected projections and indicators)
- Nominal gross public debt (in percent of GDP): 50.0 (2019), 48.2 (2020), 60.3 (2021), 63.0 (2022), 65.0 (2023), 63.7 (2024), 62.8 (2025), 62.5 (2026), 62.4 (projection table entries).
- Public gross financing needs (in percent of GDP): 8.1 (2019), 1.3 (2020), 6.1 (2021), 11.5 (2022), 8.8 (2023), 11.0 (2024), 10.3 (2025), 11.3 (2026), 10.5 (projection table entries).
- Net public debt (in percent of GDP): 45 (2019), 43 (2020), 49 (2021), 56 (2022), 57 (2023), 58 (2024), 57 (2025), 57 (2026).
- Real GDP growth (in percent): 3.1 (2019), 2.3 (2020), -4.8 (2021), 4.7 (2022), 4.9 (2023), 4.0 (2024), 3.2 (2025), 2.9 (2026), 2.6 (projection table entries).
- Inflation (GDP deflator, in percent): 0.7 (2019), 2.5 (2020), 2.4 (2021), 1.2 (2022), 2.3 (2023), 2.2 (2024), 2.3 (2025), 2.2 (2026).
- Nominal GDP growth (in percent): 3.8 (2019), 4.9 (2020), -2.5 (2021), 6.0 (2022), 7.3 (2023), 6.4 (2024), 5.6 (2025), 5.2 (2026), 4.9 (projection entries).
- Effective interest rate (in percent): 3.5 (2019), 2.6 (2020), 2.5 (2021), 1.8 (2022), 1.6 (2023), 1.6 (2024), 1.5 (2025), 1.6 (2026), 1.6 (projection entries).
- Change in gross public sector debt (cumulative): 1.5 (2019), -1.6 (2020), 12.1 (2021), 2.8 (2022), 1.9 (2023), -1.3 (2024), -0.9 (2025), -0.3 (2026), -0.1 (additional entry).
- Identified debt-creating flows (cumulative): 2.1 (2019), -2.4 (2020), 13.5 (2021), 3.0 (2022), 2.0 (2023), -1.2 (2024), -0.8 (2025), -0.2 (2026), -0.1 (additional entry).
- Primary deficit (in percent of GDP): 1.9 (2019), 0.3 (2020), 5.1 (2021), 7.9 (2022), 4.0 (2023), 3.2 (2024), 2.5 (2025), 1.9 (2026), 1.9 (additional entry).
- Primary (noninterest) revenue and grants (in percent of GDP): 39.0 (2019), 41.2 (2020), 41.4 (2021), 41.7 (2022), 41.6 (2023), 42.4 (2024), 40.3 (2025), 40.3 (2026), 40.1 (cumulative).
- Primary (noninterest) expenditure (in percent of GDP): 40.9 (2019), 41.4 (2020), 46.5 (2021), 49.6 (2022), 45.6 (2023), 45.6 (2024), 42.8 (2025), 42.2 (2026), 41.9 (cumulative).

### Composition of public debt and alternative scenario assumptions (selected)
- Baseline underlying assumptions (in percent):
  - Real GDP growth: 4.7 (2021), 4.9 (2022), 4.0 (2023), 3.2 (2024), 2.9 (2025), 2.6 (2026).
  - Inflation: 1.2 (2021), 2.3 (2022), 2.2 (2023), 2.3 (2024), 2.2 (2025), 2.2 (2026).
  - Primary Balance: -7.9 (2021), -4.0 (2022), -3.2 (2023), -2.5 (2024), -1.9 (2025), -1.9 (2026).
  - Effective interest rate: 1.8 (2021), 1.6 (2022), 1.6 (2023), 1.5 (2024), 1.6 (2025), 1.6 (2026).
- Historical scenario assumptions (selected):
  - Real GDP growth: 4.7 (2021), 1.9 (2022), 1.9 (2023), 1.9 (2024), 1.9 (2025), 1.9 (2026).
  - Primary Balance: -7.9 (2021), -1.6 (2022), -1.6 (2023), -1.6 (2024), -1.6 (2025), -1.6 (2026).
  - Effective interest rate: 1.8 (2021), 1.6 (2022), 1.9 (2023), 2.1 (2024), 2.4 (2025), 2.7 (2026).
- Constant Primary Balance scenario:
  - Primary Balance fixed at -7.9 for 2021–2026.

### Stress tests — macro-fiscal shocks and outcomes (selected)
- Stress test types shown: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock.
- Example baseline and shock values (selected):
  - Baseline Real GDP growth (in percent): 4.7 (2021), 4.9 (2022), 4.0 (2023), 3.2 (2024), 2.9 (2025), 2.6 (2026).
  - Primary Balance under baseline and selected shocks: baseline -7.9 (2021), Primary Balance Shock path: -7.9 (2021), -6.0 (2022), -3.6 (2023), -2.8 (2024), -2.2 (2025), -1.9 (2026).
  - Effective interest rate under shocks: Real Interest Rate Shock includes rates rising to 2.2, 2.6, 3.1, 3.6 in later years under that shock scenario.
- Stress test outputs illustrated in charts: gross nominal public debt (in percent of GDP) and public gross financing needs (in percent of GDP) under baseline and alternative shocks (charts span 2019–2026 and 2016–2026 across figures).

### Public DSA risk assessment heat map — indicators and benchmarks
- Heat map logic:
  - A cell is green if a debt burden benchmark of 85% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
  - For gross financing needs benchmark: green if gross financing needs benchmark of 20% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.
  - Lower and upper risk-assessment benchmarks (selected): 400 and 600 basis points for bond spreads; 17 and 25 percent of GDP for external financing requirement; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for public debt held by non-residents.
- Market perception indicators and values noted for Slovak Republic (2020):
  - Bond spread: 24 bp (long-term bond spread over German bonds, average over 05-Dec-20 through 05-Mar-21).
  - External Financing Requirement: 56% (in percent of GDP).
  - Public Debt Held by Non-Residents: 58% (in percent of total).
  - Annual Change in Short-Term Public Debt: 1 (in percent of GDP).
  - Public Debt in Foreign Currency: 0% (in percent of total).

### External debt sustainability — bound tests and key external-debt metrics
- Baseline external debt (in percent of GDP): 92.5 (2016), 108.3 (2017), 114.7 (2018), 112.4 (2019), 121.2 (2020), 118.1 (2021), 115.0 (2022), 113.6 (2023), 112.5 (2024), 111.7 (2025), 112.0 (2026).
- Change in external debt (in percent of GDP): 8.0 (2016), 15.8 (2017), 6.4 (2018), -2.4 (2019), 8.8 (2020), -3.1 (2021), -3.1 (2022), -1.4 (2023), -1.1 (2024), -0.8 (2025), 0.3 (2026).
- Identified external debt-creating flows (in percent of GDP): 0.4 (2016), -4.3 (2017), -4.6 (2018), -4.5 (2019), 3.8 (2020), -6.0 (2021), -4.9 (2022), -3.3 (2023), -2.8 (2024), -2.9 (2025), -3.2 (2026).
- Current account deficit, excluding interest payments (in percent of GDP): 0.8 (2016), 0.0 (2017), 0.4 (2018), 0.9 (2019), -1.4 (2020), -0.7 (2021), 0.5 (2022), 1.1 (2023), 0.7 (2024), 0.4 (2025), -0.3 (2026).
- Exports (in percent of GDP): 97.2 (2016), 90.1 (2017), 99.0 (2018), 93.0 (2019), 80.4 (2020), 93.7 (2021), 91.0 (2022), 90.7 (2023), 92.0 (2024), 93.2 (2025), 94.5 (2026).
- Imports (in percent of GDP): 95.1 (2016), 88.5 (2017), 98.2 (2018), 92.7 (2019), 78.7 (2020), 90.8 (2021), 89.6 (2022), 90.0 (2023), 90.7 (2024), 91.5 (2025), 92.3 (2026).
- Net non-debt creating capital inflows (in percent of GDP): -0.8 (2016), -2.8 (2017), -1.3 (2018), -2.3 (2019), 2.0 (2020), -1.3 (2021), -1.1 (2022), -1.1 (2023), -1.1 (2024), -1.1 (2025), -1.2 (2026).
- Automatic debt dynamics (in percent of GDP): 0.3 (2016), -1.5 (2017), -3.7 (2018), -3.2 (2019), 3.2 (2020), -4.1 (2021), -4.2 (2022), -3.3 (2023), -2.4 (2024), -2.1 (2025), -1.8 (2026).
- External debt-to-exports ratio (in percent): 95.2 (2016), 120.2 (2017), 115.9 (2018), 120.9 (2019), 150.7 (2020), 126.1 (2021), 126.4 (2022), 125.2 (2023), 122.2 (2024), 119.9 (2025), 118.5 (2026).
- Gross external financing need (in billions of US dollars): 33.1 (2016), 39.5 (2017), 60.3 (2018), 69.8 (2019), 64.7 (2020), 76.8 (2021), 79.8 (2022), 84.4 (2023), 88.8 (2024), 92.7 (2025), 95.9 (2026).
- Baseline summary external-debt stylized values (from scenario boxes): baseline external debt average projection 112 (selected box values); historical scenario values show higher peaks e.g., 136 (historical) in certain charts; combined shocks and depreciation scenarios drive higher debt peaks up to 130–136 in figures.

### Robustness checks, realism, and forecast track record
- Forecast track record measures and percentile ranks (selected):
  - Real GDP growth: Slovak Republic forecast error median -0.44; percentile rank 60%.
  - Primary Balance: Slovak Republic forecast error median 0.00; percentile rank 66%.
  - Inflation (Deflator): Slovak Republic forecast error median -1.31; percentile rank 13%.
- Boom-bust analysis and assessing realism of projected fiscal adjustment: charts report distributional placement and indicate Slovakia does not meet positive output gap or private credit growth criteria for certain tests (not applicable statements in figures).

### Pension system (Annex VI) — long-term context and fiscal implications
- Demographics and long-term challenge:
  - Life expectancy: 72.5 years in 1998; 77.8 years in 2019.
  - Old-age dependency ratio projected: 25.9 percent in 2019 to 63.1 percent in 2070.
  - Slovakia faces one of the largest increases in old-age dependency in the EU and one of the highest projected increases in public pension expenditures in coming years.
- Structure of pension system:
  - Three pillars with dominant public PAYG first pillar (mandatory defined benefit based on a point system; benefits depend mainly on average earnings and years of contribution).
  - Second pillar: voluntary individual account scheme with defined-contribution and private pension management (history: mandatory without opt-out initially; changed to voluntary in 2008; mandatory with opt-out in 2012; back to voluntary in 2013 with option to defer entry until age 35).
  - Third pillar: voluntary private defined-contribution scheme with tax preferences.
- Generosity and contribution rates:
  - Average pensioner in Slovakia receives 50 percent of average wage, higher than euro area average of 46 percent.
  - Slovakia’s contribution rate is about 3 percentage points lower than the EU average; without reform this gap is projected to persist until 2070.
- Social outcomes:
  - Elderly poverty rate in Slovakia is below the EU average and lower than the poverty rate for the whole population.

*Source: IMF staff (As of June 02, 2021; figures and tables from the Slovak Republic country report).*

### 4.      The Slovak Republic has undertaken significant reforms to its pension system in the

### 4.      The Slovak Republic has undertaken significant reforms to its pension system in the

### Background and earlier reforms
- The 2004 reform established a new universal three-pillar system to replace the earlier reliance on a public PAYG system that faced severe sustainability challenges (World Bank 2004).
- A major reform in 2012 improved sustainability by:
  - unifying the retirement age and indexing it to life expectancy,
  - moving pension indexation to inflation-only,
  - raising the assessment base for contributions (Ministry of Finance 2020, IMF 2017).

### 2019 reforms and immediate fiscal impact
- The 2019 constitutional amendment and amendment to the Social Insurance Act:
  - capped the statutory retirement age at 64 years.
  - reduced women’s retirement age for mothers by six months for every child up to three children (women’s retirement age was supposed to converge to men’s by 2024).
- Slovakia had an effective retirement age of 62 years in 2018.
- The minimum pension was increased by 17 percent by changing the calculation basis from 136 percent of the subsistence level to 33 percent of the economy-wide average wage.
- 13.1 percent of pensioners were receiving the minimum pension as of February 2021.
- The Christmas bonus was doubled (to a maximum of 200 euros) and eligibility loosened from pensioners with 60 percent of average national wage to 65 percent; the Christmas bonus is progressive with its value decreasing with higher pensions.
- The reduction of the first pillar benefit for those who participate in the second pillar was lowered, resulting in higher public pension expenditures.
- Official estimates (Country Fiche on 2018 pension projections of the Slovak Republic, December 2020 Update, Table 23) indicate public old-age pension spending would rise from 8.3 percent of GDP in 2019 to 13.8 percent of GDP by 2070.
- The 2012 pension reform savings (reflected in the 2015 and 2018 Ageing Reports) were entirely reversed by the 2019 constitutional amendment.

### Macroeconomic consequences of the 2019 changes
- The 2012 link between retirement age and life expectancy implied an effective retirement age could increase to above 67 years by 2070.
- Staff estimates: capping the retirement age at 64 (binding by 2045) would lower the supply of labor by over 10 percent in 2070, implying a 5.8 percent lower output (assuming a simple Cobb-Douglas production function with a labor share of 0.56).
- Baksa, Munkacsi, and Nerlich (2020) using a dynamic general equilibrium overlapping-generations model find per capita GDP would be 6.4 percent lower in 2070 with retirement age capped at 64 compared to a scenario in which retirement age rises with life expectancy.

### 2020 pension policy changes and projections
- February 2020: a thirteenth pension was introduced to replace the Christmas bonus, initially set at the level of average pension (460 euros) and covering all pensioners.
  - The benefit amount was subsequently lowered to a maximum of 300 euros and decreasing with higher pensions (minimum 50 euros).
  - This would still lead to a doubling of the previous expenditure on the Christmas bonus.
- Mothers with children: previously guaranteed a lower retirement age than men (6 months per child) only once men’s retirement age hit the cap in 2030; 2020 changes retroactively lowered the retirement age of mothers from 2019, raising pension expenditure until 2030.
- The level of minimum pensions will be frozen at the 2020 level between 2021 and 2024, after which indexation to the average wage will resume.
- As a result of 2020 changes, pension expenditure for 2070 is projected to increase from the projected 13.8 percent of GDP to 14.2 percent of GDP.

### Ongoing reforms, principles, and policy direction
- The December 2020 constitutional amendment on judicial reform contains pension policy changes to take effect in 2023, setting principles to:
  - abolish the retirement age ceiling of 64,
  - introduce a parental pillar allowing working children to transfer part of their social security contribution directly to their parents,
  - allow retirement once a certain number of years of working has been reached,
  - establish the principle that having children should not negatively affect one’s pension benefits (currently maternity leave contributions are calculated using minimum wage).
- Authorities have committed to restore the link between retirement age and life expectancy in the Recovery and Resilience Plan.
- The authorities envisage:
  - making entry into the second pillar automatic for workers under the age of 35 with the possibility to opt out,
  - introducing a default investment strategy based on the life-cycle principle.
- Ministry of Finance analysis indicates re-linking retirement age to life expectancy could lower pension expenditure by 2.3 percent of GDP by 2070.

### Policy recommendations and priorities
- Priority: ensure long-term pension sustainability given sizable fiscal pressures under the current system.
- Re-linking the retirement age to life expectancy should be a core consideration because it:
  - would significantly lower fiscal costs,
  - would have a positive macroeconomic impact by limiting the projected decline in the labor force.
- Authorities should minimize the cost of the parental bonus given the potentially large fiscal cost.

*Source: STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION — INFORMATIONAL ANNEX (Slovak Republic).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1svkea2021001.pdf_