## _cr09221

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### Executive Summary — background, near-term developments, and outlook
- Background/context:
  - Slovakia adopted the euro in January 2009 after a period of rapid growth with few signs of overheating.
  - During 2004–08: Real GDP grew by an average 7.4 percent; the harmonized unemployment rate dropped by 10 percentage points to 9 percent (seasonally adjusted) by September 2008.
  - General government deficit fell by about 1 percentage point to around 2 percent of GDP during 2006–08; general government debt-to-GDP declined to about 27 percent at end-2008.
  - Banks had no significant exposure to sub-prime lending or “toxic” structured products; current account deficit declined and was mainly financed by FDI.
- Q1 2009 key indicators:
  - Real GDP fell by 11.4 percent (q-o-q).
  - Exports fell by 16.2 percent (q-o-q).
  - Private consumption contracted by 2.8 percent (q-o-q).
  - Harmonized unemployment rate rose to 11.1 percent (seasonally adjusted) by April 2009.
  - Inflation (y-o-y) decelerated rapidly to slightly above 1 percent.
- Outlook:
  - Staff projects output will contract by close to 5 percent in 2009; Ministry of Finance projects a 6.2 percent contraction in 2009.
  - Growth expected to resume in 2010 and accelerate in 2011, stabilizing at around 4½ percent over the medium term.
  - Risks to growth described as unusually large and broadly balanced (explicit upside and downside scenarios).

### Staff view on vulnerabilities, financing, and social impact
- Vulnerabilities and financing:
  - Underlying systemic vulnerabilities are limited; projected increases in external and public debts are viewed as temporary and not raising sustainability concerns.
  - With euro membership, gross external financing requirements (~10 percent of GDP) are expected to be easily covered.
  - Central government prefunded financing needs for remainder of 2009 and early 2010.
- Households and social outlook:
  - Households’ loan-to-value ratios are in the 50-60 percent range; housing prices broadly stable except for commercial and high-end residential property.
  - Recession not expected to produce social tensions due to cooperation with social partners and measures increasing working hour flexibility.

### Fiscal policy — current position, near-term response, and staff assessment
- First six months of 2009:
  - Central government tax revenue dropped by more than 13 percent compared with the same period in 2008.
  - VAT revenue plummeted due to a decline in domestic consumption and collapse in imports.
  - Central government budget deficit in the first six months of 2009 was already above the budgetary estimate for the year.
  - Social security collections fell short of targets and spending rose due to higher unemployment.
- Authorities’ 2009 stance:
  - Intend to maintain the 2009 budget expenditure envelope and let automatic stabilizers operate fully; no new stimulus initiatives planned for remainder of 2009.
  - Revenue shortfall for the year projected to reach about 2 percent of GDP; general government deficit projected to be about 5 percent of GDP (could be larger with negative growth surprises).
- Staff assessment and market signals:
  - Letting the deficit widen in 2009 in line with falling revenue is appropriate and should not raise investor concern.
  - Stimulus package and accelerated utilization of EU transfers will provide at least 1 percentage point of GDP in support.
  - Successful Eurobond issuance in early May 2009; relatively low government bond spreads versus Germany; sovereign CDS spreads significantly below those of other central and eastern European EU members.
  - Mission supports government decision not to add to the stimulus package now; additional discretionary loosening should be considered only if a much worse-than-expected downturn occurs.

### Fiscal policy — medium-term strategy and staff recommendations
- Recommended fiscal path:
  - Bring the deficit to about 4 percent of GDP in 2010 and to below 3 percent of GDP by 2011.
  - Anchor the accommodating short-term stance within a credible medium-term consolidation strategy to avoid breaching the Maastricht ceiling and to boost investor confidence.
  - Announce deficit targets for 2010–11 and embed cost-cutting and spending-quality measures in a well-defined strategy.
- Policy instruments suggested:
  - Sustained efforts to cut costs and improve spending efficiency, notably additional health care reform along previously recommended IMF lines and moderation of public sector wage growth.
  - Broaden the base and simplify the rate structure of social security contributions.
  - Given Slovakia’s tax burden among the lowest in the EU, a realistic medium-term strategy would likely require higher taxes on income.
- Authorities’ position:
  - Committed to fiscal consolidation and searching for ways to reduce the deficit in 2010 with the goal of achieving the Maastricht criteria as soon as feasible; want to raise spending in certain priority areas.
  - Staff emphasized protecting targeted social spending and public investment.

### Fiscal stimulus package — measures and impacts
- Aggregate budgetary impact: around ½ percent of GDP in 2009 and 2010.
- Main measures:
  - Tax reductions: higher basic tax allowance on personal income tax and higher employee tax credit for low-income taxpayers, both expiring at end-2010.
  - Subsidies: incentives for corporate research and development, and a temporary car scrapping scheme.
  - Liquidity measures for corporates:
    - Reduction in VAT refunding period from 60 to 30 days.
    - Lending of around ⅓ percent of GDP to the railway freight transport and railway infrastructure companies.
  - Incentives to accelerate EU funds use: temporary simplification of legislative requirements for enterprises employing disadvantaged workers.

### Financial sector — performance, policy measures, and stress tests
- Structure and recent trends:
  - Credit to the private sector remains moderate despite strong credit growth in recent years; loan-deposit ratio around 0.8.
  - Banks have no significant exposure to sub-prime lending, “toxic” structured products or exchange rate risks; concentration: three foreign owned banks with combined market share around 60 percent of total assets.
- Euro adoption effects and crisis performance:
  - Euro adoption on January 1, 2009, went smoothly; transition costs and lost FX revenue reduced profitability.
  - Banks remained profitable, but profits declined by 40 percent in January-May compared with the previous year.
  - The share of non performing loans increased to around 4 percent in April 2009; loan delinquency rates on the rise.
- Policy and supervisory measures:
  - Unlimited guarantee for all deposits by individuals and small enterprises until end-2010; as at February 28, 2009, deposits covered estimated at some €24 billion (63 percent of total deposits from non-banks).
  - Support for SMEs through state loan guarantees and higher loan volumes.
  - Allowing more flexibility in restructuring retail loans including mortgages.
  - Capital increases: raise capital of Exim Banka and the Slovak Guarantee and Development Bank by €41.4 and €32 million, respectively.
  - Enhanced monitoring: daily monitoring of exposures; under European regulations, foreign bank subsidiaries can only have an exposure to the parent bank of 20 percent of own funds.
  - Legislation on banking sector stability expected to come into force in 2009 (would allow government to guarantee bank bonds and inject capital; will lapse after 1½ years).
- Stress testing and resilience:
  - NBS stress tests based on end-2008 bank balance sheets: a highly unlikely further pronounced deterioration would be required to push capital positions into danger zones.
  - Capital adequacy ratios appear resilient to household risk and market (interest rate) risk; banks would be able to maintain adequate liquidity even after particularly severe shocks.
  - Continued vigilance and further strengthening of credit risk monitoring urged.

### Structural issues and competitiveness
- Wage, productivity, and competitiveness dynamics:
  - Wage growth in line with productivity gains has helped maintain competitiveness.
  - Real effective exchange rate appreciated considerably since 2002 in CPI terms, but much less in unit labor cost (ULC) terms.
  - Relative profitability in Slovak manufacturing improved significantly; market share in the world increased rapidly.
- Policy priorities:
  - Sustained efforts to enhance productivity and maintain wage discipline in line with productivity.
  - Monitor real exchange rate developments carefully; further productivity gains relative to the euro zone essential to maintaining competitiveness.
  - Labor market flexibility and education (post-secondary and vocational) are areas of concern.
  - In the monetary union, enhanced labor market flexibility will help capacity to respond to shocks.

### Staff appraisal — overall assessment and recommendations
- Macro-financial assessment:
  - Strong fundamentals, prudent macroeconomic policies, and a sound financial sector supported growth and successful euro adoption.
  - The 2004–08 growth acceleration did not instigate domestic or external imbalances; GDP per capita rose, unemployment fell, external and public debt remained low.
  - Downturn is putting severe pressure on government revenue and beginning to impact bank asset quality; systemic vulnerabilities remain limited.
- Recommended policy stance:
  - Fiscal accommodation in 2009 is appropriate.
  - Anchor the short-term response within a credible medium-term consolidation strategy targeting about 4 percent of GDP in 2010 and below 3 percent of GDP by 2011.
  - Financial sector: maintain adequate profitability while avoiding excessive risk taking; continued vigilance and strengthened risk monitoring and management remain essential.
  - Structural reform: prioritize productivity-enhancing reforms, wage discipline, labor market flexibility, business environment improvements, and education strengthening.

### Recommendation on consultation cycle
- It is recommended that Slovakia remain on a 12-month consultation cycle.

### Macroeconomic outlook and selected projections (2006–2014 / 2006–2011 highlights)
- Real GDP (annual percentage change, constant prices): 8.5, 10.4, 6.4, -4.7, 1.9, 5.2, 4.4, 4.3, 4.2 (2006–2014).
- Inflation (CPI, period average): 4.5, 2.8, 4.6, 2.3, 2.9, 3.1, 2.5, 2.5, 2.5 (2006–2014).
- Unemployment rate (percent, annual average): 13.3, 11.0, 9.6, 12.4, 12.5, 12.1, 11.7, 11.5, 11.2 (2006–2014).
- General government balance (percent of GDP): -3.5, -1.9, -2.5, -5.2, -4.5, -3.0, -2.4, -1.4, -0.7 (2006–2014).
- General government debt (percent of GDP, ESA-95 basis): 30.4, 29.4, 27.6, 33.7, 36.7, 37.0, 37.0, 36.0, 34.4 (2006–2014).
- Current account balance (percent of GDP, memorandum): -8.5, -7.0, -5.4, -6.5, -6.5, -5.9, -5.5, -4.9, -4.4, -3.7 (2005–2014).
- Gross external debt (percent of GDP): 54.7, 52.0, 50.3, 50.3, 49.8, 48.9, 48.1, 47.3, 46.4 (2006–2014).

### Public finances, external sector, banking indicators, and statistical issues (selected)
- Public finances (2009–2011 projections): Total revenue (percent of GDP): 36.7, 37.1, 36.9; Total expenditure (percent of GDP): 40.7, 40.4, 38.6; Fiscal balance (percent of GDP): -5.2, -4.5, -3.0 (2009–2011).
- Balance of payments (current account, US$ millions excerpt): -4,090; -3,951; -4,071; -6,189; -5,573; -5,264; -5,268; -5,040; -4,810; -4,366 (2005–2014).
- Reserves/short-term debt (percent, remaining maturity basis): 92.9, 78.0, 76.9, 95.9, 75.9, 77.9, 83.8, 90.0, 96.8, 99.2 (2005–2014).
- Banking sector indicators (selected): Regulatory capital to risk-weighted assets: 18.7, 14.8, 13.0, 12.8 (2004–End-Sep 2008 sequence); Nonperforming loans to gross loans: 2.6, 5.0, 3.2, 2.5, 2.9, 3.2, 3.6 (2004–End-Mar 2009 sequence); Return on assets (after tax): 1.2, 1.2, 1.3, 1.0, 0.9, 0.9, 0.2 (selected years).
- Statistical issues and data quality:
  - Coverage, periodicity, and timeliness adequate for surveillance, but main shortcomings: (i) weaknesses in data on prices and volumes of imports and exports; (ii) lack of timely data on general government operations; (iii) slow compilation cycle of annual national accounts and lack of proper benchmarking of quarterly data.
  - Authorities subscribe to SDDS since 1996 and observe or exceed related standards.
  - Data release lags for core variables documented (examples: foreign exchange reserves: a week or less; foreign trade data: two months; national accounts: about three months).

*Source: _cr09221 - Executive Summary; IMF staff report material for the 2009 Article IV Consultation with the Slovak Republic (May–July 2009).*

### Executive Summary

### _cr09221 - Executive Summary

### Background / Context
- Slovakia adopted the euro in January 2009 after a period of rapid growth with few signs of overheating.
- During 2004–08:
  - Real GDP grew by an average 7.4 percent.
  - The harmonized unemployment rate dropped by 10 percentage points to 9 percent (seasonally adjusted) by September 2008.
- The general government deficit fell by about 1 percentage point to around 2 percent of GDP during 2006–08.
- General government debt-to-GDP declined to about 27 percent at end-2008.
- Banks had no significant exposure to sub-prime lending or “toxic” structured products; current account deficit declined and was mainly financed by FDI.
- Slovakia is highly influenced by external developments; the euro-area slowdown led to a sharp decline in activity in Q1 2009.

### Near-term developments and key indicators
- Q1 2009 performance:
  - Real GDP fell by 11.4 percent (q-o-q).
  - Exports fell by 16.2 percent (q-o-q).
  - Private consumption contracted by 2.8 percent (q-o-q).
  - Harmonized unemployment rate rose to 11.1 percent (seasonally adjusted) by April 2009.
  - Inflation (y-o-y) decelerated rapidly to slightly above 1 percent.
- High-frequency indicators show some stabilization, but rebound expected to be slow; consumer and industrial confidence remain negative.
- Business cycle synchronization with the EU increased after 2002:
  - An autoregressive estimate implies that a 1 percentage point increase in EU real GDP growth leads to about a ½ percentage point increase in Slovak growth in the same quarter, with accumulated impact reaching about 2 percentage points.

### Staff view on vulnerabilities and financing
- Underlying systemic vulnerabilities are limited; projected increases in external and public debts are viewed as temporary and do not raise sustainability concerns.
- With euro membership, gross external financing requirements (~10 percent of GDP) are expected to be easily covered.
- Central government prefunded financing needs for remainder of 2009 and early 2010.
- Households’ loan-to-value ratios are in the 50-60 percent range; housing prices broadly stable except for commercial and high-end residential property.
- The recession is not expected to produce social tensions due to cooperation with social partners and measures increasing working hour flexibility.

### Outlook (staff and authorities)
- Staff projects output will contract by close to 5 percent in 2009.
- Ministry of Finance projection: a 6.2 percent contraction in 2009.
- Growth is expected to resume in 2010 and accelerate in 2011, stabilizing at around 4½ percent over the medium term (significantly below the 2004–08 average).
- Risks to growth are unusually large and broadly balanced:
  - Upside: one-time inventory adjustments, faster euro-area recovery, car incentives boosting the Slovak automobile industry.
  - Downside: weaker euro-area recovery, less-beneficial external linkages, deterioration in banks’ conditions.

### Fiscal policy—current position and near-term response
- First six months of 2009:
  - Central government tax revenue dropped by more than 13 percent compared with the same period in 2008.
  - VAT revenue plummeted due to a decline in domestic consumption and collapse in imports.
  - Government spending was kept in line with budget plans via reallocation and rationalization; a stimulus package was offset by reallocation.
  - Central government budget deficit in the first six months of 2009 was already above the budgetary estimate for the year.
  - Social security collections fell short of targets and spending rose due to higher unemployment.
- Authorities’ 2009 stance:
  - Intend to maintain the 2009 budget expenditure envelope and let automatic stabilizers on the revenue side operate fully.
  - No new stimulus initiatives planned for the remainder of 2009.
  - Revenue shortfall for the year projected to reach about 2 percent of GDP.
  - General government deficit projected to be about 5 percent of GDP (could be larger with negative growth surprises).
- Staff assessment:
  - Letting the deficit widen in 2009 in line with falling revenue is appropriate and should not raise investor concern.
  - The stimulus package and accelerated utilization of EU transfers will provide at least 1 percentage point of GDP in support.
  - Market indicators: successful Eurobond issuance in early May 2009, relatively low government bond spreads versus Germany, and sovereign CDS spreads significantly below those of other central and eastern European EU members.
  - Mission supports government decision not to add to the stimulus package now; additional discretionary loosening should be considered only if a much worse-than-expected downturn occurs.

### Fiscal policy—medium-term strategy and recommendations
- Staff recommended:
  - Bring the deficit to about 4 percent of GDP in 2010 and to below 3 percent of GDP by 2011.
  - Anchor an accommodating fiscal stance during the recession within a credible medium-term consolidation strategy to avoid breaching the Maastricht ceiling and to boost investor confidence.
  - Announce deficit targets for 2010–11 and embed cost-cutting and spending-quality measures in a well-defined strategy.
- Policy instruments suggested:
  - Sustained efforts to cut costs and improve spending efficiency, notably additional health care reform along previously recommended IMF lines and moderation of public sector wage growth.
  - Broaden the base and simplify the rate structure of social security contributions.
  - Given Slovakia’s tax burden among the lowest in the EU, a realistic medium-term strategy would likely require higher taxes on income.
- Authorities’ position:
  - Committed to fiscal consolidation and searching for ways to reduce the deficit in 2010 with the goal of achieving the Maastricht criteria as soon as feasible.
  - Want to raise spending in certain priority areas; staff emphasized protecting targeted social spending and public investment.

### Fiscal stimulus package (measures and impacts)
- Aggregate budgetary impact: around ½ percent of GDP in 2009 and 2010.
- Main measures:
  - Tax reductions: higher basic tax allowance on personal income tax and higher employee tax credit for low-income taxpayers, both expiring at end-2010.
  - Subsidies: incentives for corporate research and development, and a temporary car scrapping scheme.
  - Liquidity measures for corporates:
    - Reduction in VAT refunding period from 60 to 30 days.
    - Lending of around ⅓ percent of GDP to the railway freight transport and railway infrastructure companies.
  - Incentives to accelerate EU funds use: temporary simplification of legislative requirements for enterprises employing disadvantaged workers.

### Financial sector
- The financial sector will face a particularly challenging environment in the near future, but appears well-prepared.
- Authorities’ steps to increase monitoring and supervisory cooperation are appropriate.
- Staff emphasized preparation of policies to deal with contingencies; they should be transparent, comprehensive and credible to maintain market confidence.

### Structural issues and medium-term challenges
- Key medium-term challenges:
  - Maintain high productivity growth.
  - Preserve competitiveness and achieve rapid, balanced growth without rekindling imbalances.
- Recommended structural measures include further health care reform and measures that improve the quality of public spending.

### Mission and consultations
- Mission visited Bratislava May 11–25, 2009.
- Mission team: Mr. De Broeck (Head), Ms. Banerji, Mr. Konuki, and Mr. Mehrez (all EUR); Mr. Jakoby (Adviser to the Executive Director) also attended meetings.
- Meetings held with the Minister of Finance, Governor of the National Bank of Slovakia, other central bank and government officials, and financial sector, labor, and business representatives.

*Source: _cr09221 - Executive Summary (IMF staff mission report, May 11–25, 2009).*

### 16.      To be credible and effective, the strategy should be supported by fiscal

### _cr09221 - 16.      To be credible and effective, the strategy should be supported by fiscal

### Fiscal strategy and public finances
- To be credible and effective, the strategy should be supported by fiscal institutional reforms and enhanced transparency.
- Mission recommendations:
  - Better align the annual budget process with medium-term spending objectives.
  - Improve investment planning and execution and the capacity to expeditiously absorb related EU funding.
  - Put in place a proper legal framework for Public-Private Partnerships (PPPs) for major road projects, and establish arrangements for effectively monitoring and reporting related risks and contingent liabilities.
- Authorities acknowledged that meeting the 2009 budget targets on accelerated use of EU funds would be particularly challenging, in part due to the decentralized set-up of EU-funded programs within Slovakia.
- Fiscal projections and policy stance:
  - The economy is projected to shrink by near 5 percent this year.
  - Fiscal policy is appropriately accommodating in 2009.
  - Reflecting the revenue shortfall, the general government deficit will widen to around 5 percent of GDP.
  - Combined with stimulus of about 1 percent of GDP as a result of some reallocation of expenditure towards items with a higher multiplier and accelerated utilization of EU transfers, this would provide an appropriate counter-cyclical fiscal response and would not raise concerns involving funding or investor confidence.
  - A fiscal strategy aimed at bringing down the deficit to about 4 percent of GDP next year and to below 3 percent of GDP by 2011 is recommended.
- Policy needs to achieve the recommended deficit trajectory:
  - Sustained efforts to further cut costs, improve the quality of spending, and ensure adequate revenues.
  - Address expenditure dynamics in health care through structural reforms in line with IMF advice.
  - With limited scope for savings from further expenditure rationalization, higher taxation of income likely will be needed.
  - Strengthen the medium-term expenditure framework incorporated in Slovakia’s three-year rolling budget to better align the annual budget process with underlying spending priorities.
  - Improve investment planning and accelerate absorption of EU funds.
  - Properly monitor and disclose fiscal risks and contingent liabilities associated with PPPs.

### Financial sector performance and resilience
- Structure and recent trends:
  - Despite strong credit growth in recent years, credit to the private sector remains moderate and the financial system concentrated on traditional domestic banking activities.
  - Credit growth has been largely financed by rapid growth in domestic retail sources, and the loan-deposit ratio is around 0.8.
  - Bank lending has focused on the domestic private sector.
  - Banks have no significant exposure to sub-prime lending, “toxic” structured products or exchange rate risks, have been resilient to adverse developments in parent banks, and are not dependent on deposits and loans from non-affiliated banks.
  - Concentration among commercial banks remains relatively high as three foreign owned banks dominate the market with a combined market share of around 60 percent of total assets.
- Euro adoption and short-term effects:
  - The euro adoption on January 1, 2009, went smoothly.
  - Costs associated with the transition, and lost revenue from eliminated foreign exchange operations have reduced profitability.
  - The transition to the euro also reversed speculative inflows in the running up to the adoption: foreign investor positions were unwound and deposits at the central bank dropped at end-2008.
- Recent performance under the global crisis:
  - Slovakia’s banks have so far withstood the global crisis relatively well: currently well capitalized, liquid, and properly provisioned owing to prudent regulation.
  - The level of nonperforming loans is still low, albeit rising.
  - Banks are supported by a set of financial measures proactively introduced when the global crisis hit Europe.
  - Banks remained profitable, but profits declined by 40 percent in January-May compared with the previous year.
  - The share of non performing loans increased to around 4 percent in April 2009, and loan delinquency rates are on the rise.
  - Stress on banks is projected to intensify in the coming months as the impact of the recession deepens and more borrowers face financial difficulties.
- Policy and supervisory measures (Box 3 highlights):
  - Unlimited guarantee for all deposits by individuals and small enterprises until end-2010.
    - As at February 28, 2009, deposits covered by the deposit guarantee scheme are estimated at some €24 billion (63 percent of total deposits from non-banks).
  - Support for small and medium-sized enterprises through state loan guarantees and higher loan volumes.
  - Allowing more flexibility in restructuring retail loans including mortgages.
  - Raising the capital of state-owned Exim Banka and of the Slovak Guarantee and Development Bank by €41.4 and €32 million, respectively, to strengthen support for export-oriented industries.
  - Bank supervisors stepped up monitoring, including daily monitoring of banks’ adherence to regulations regarding foreign banks’ exposure to parent banks; third party exposure of banks to problem banks and assets abroad; and liquidity indicators.
    - Under European regulations, foreign bank subsidiaries can only have an exposure to the parent bank of 20 percent of own funds.
  - A Standing Committee comprising representatives of the Finance Ministry and the National Bank met frequently to discuss forward looking hypothetical scenarios and responses.
  - Central bank engagement on cross-border supervisory arrangements and home-host country issues in supervisory colleges.
  - Legislation on banking sector stability expected to come into force in 2009 establishing several forms of state support to the real economy and the banking system on a precautionary basis (would allow government to guarantee bank bonds, and inject capital in banks).
    - This legislation will lapse after 1½ years.
- Bank behavior and supervisory assessment:
  - Banks have tightened lending requirements, reduced the maturity of new loans, and raised interest rates.
  - In consultation with foreign owners, banks reduced dividend payments, augmented capital, and sharply raised provisions.
  - Exposure to foreign owner risk is mitigated by owners’ clear commitment to stay fully engaged, limited reliance on parent bank funding, and increased NBS monitoring of liquidity indicators and cross-border and third party exposures.
  - The supervisory and regulatory framework has been further improved, and the supervisor is appropriately proactive.
  - Staff cautioned that the unlimited deposit guarantee will in due course have to be reconsidered, in line with EU-wide initiatives.
- Stress testing and resilience:
  - The NBS conducted stress tests under different scenarios reflecting weakening economic conditions.
  - The most pessimistic scenario assumes a particularly severe output contraction—not currently envisaged—combined with a surge in unemployment and jump in default rates.
  - Stress test results, based on end-2008 bank balance sheets, suggest that it would take a highly unlikely further pronounced deterioration in the economic environment to push capital positions into danger zones.
  - Capital adequacy ratios appear resilient to household risk and market (interest rate) risk in particular.
  - Results indicate banks would be able to maintain adequate liquidity even after particularly severe shocks.
  - Continued vigilance and further strengthening of credit risk monitoring were urged.

### Structural issues and competitiveness
- Wage and productivity developments:
  - Wage growth in line with productivity gains has helped maintain competitiveness.
  - The real effective exchange rate has appreciated considerably since 2002 in CPI terms, but much less so in unit labor cost (ULC) terms.
  - Relative profitability in the Slovak manufacturing sector vis-à-vis trading partners improved significantly over the past several years, and its market share in the world increased rapidly in recent years, outpacing that of neighboring countries.
- Competitiveness assessments:
  - The macroeconomic balance approach suggests Slovakia’s saving-investment balance is consistent with medium-term economic fundamentals.
  - The external sustainability approach implies that Slovakia is competitive.
  - However, if recent sharp currency depreciations in some neighboring countries are not reversed or are not undone by higher inflation, Slovakia will have to make additional efforts to maintain its competitiveness edge.
- Policy priorities to sustain competitiveness in the euro zone:
  - Sustained efforts to enhance productivity are required.
  - Slovak inflation is projected to continue outpacing the euro zone average; if this differential is a symptom of productivity-driven convergence it may be an equilibrium phenomenon, but real exchange rate developments need careful monitoring.
  - Further productivity gains relative to the rest of the euro zone will be essential to maintaining competitiveness.
  - Labor market flexibility and education, especially at the post-secondary and vocational levels, are areas of concern.
  - In a monetary union, enhanced labor market flexibility will help improve the economy’s capacity to respond to shocks.

### Staff appraisal: overall assessment and recommendations
- Macro-financial assessment:
  - Strong economic fundamentals, prudent macroeconomic policies, and a sound financial sector boosted growth and helped pave the way for successful euro adoption.
  - The 2004–08 growth acceleration did not instigate domestic or external imbalances or unsustainable dynamics.
  - While GDP per capita rose significantly and unemployment fell sharply, external and public debt remained low, and the current account deficit and inflation declined.
  - Slovakia is highly influenced by external economic developments.
  - The downturn is putting severe pressure on government revenue and is beginning to impact bank asset quality.
  - Systemic vulnerabilities remain limited, and projected increases in external and public debts do not reflect structural imbalances or raise sustainability concerns.
- Recommended fiscal path and rationale:
  - Fiscal policy accommodation in 2009 is appropriate given the downturn.
  - Without policy adjustments, the budget deficit will remain worrisomely high in 2010 and beyond because expenditure growth sustained from the 2004–08 revenue boom could result in persistent deficits in excess of the Maastricht ceiling and loss of investor confidence.
  - Anchoring the short-term fiscal response within a credible medium-term consolidation strategy is key.
  - A fiscal strategy targeting about 4 percent of GDP next year and below 3 percent of GDP by 2011 would balance recovery support and consolidation credibility.
- Financial sector recommendations:
  - Banks appear overall well-positioned to cope with the downturn, but face severe pressures from the recession and permanent reduction in revenue from foreign exchange transactions.
  - Banks should maintain adequate profitability while avoiding excessive risk taking.
  - Continued vigilance by both the NBS and banks, and sustained efforts to strengthen risk monitoring and management, remain essential.
- Structural reform recommendations:
  - Productivity-enhancing structural reforms, wage discipline, and labor market flexibility should remain policy priorities.
  - Continue to improve the business environment and place special focus on strengthening the education system.
  - The tri-partite agreement to maintain real wage growth in line with productivity growth in 2009 will help maintain competitiveness; similar arrangements should be envisaged for coming years.

*Source: _cr09221 - 16.      To be credible and effective, the strategy should be supported by fiscal*

### 36.      It is recommended that Slovakia remain on a 12-month consultation cycle.

### _cr09221 - 36.      It is recommended that Slovakia remain on a 12-month consultation cycle.

### Recommendation
- It is recommended that Slovakia remain on a 12-month consultation cycle.

### Macroeconomic outlook and projections (selected indicators)
- Real GDP (annual percentage change, constant prices): 8.5, 10.4, 6.4, -4.7, 1.9, 5.2, 4.4, 4.3, 4.2 (2006–2014).
- Domestic demand: 6.1, 5.8, 6.6, -1.5, 2.7, 5.0, 4.1, 3.9, 4.0 (2006–2014).
- Net exports contribution: 3.3, 4.9, -0.1, -3.0, -1.0, 0.2, 0.3, 0.5, 0.2 (2006–2014).
- Exports of goods and services (annual change): 21.0, 13.8, 3.2, -16.0, -1.3, 8.8, 8.0, 6.7, 6.2 (2006–2014).
- Inflation (CPI, period average): 4.5, 2.8, 4.6, 2.3, 2.9, 3.1, 2.5, 2.5, 2.5 (2006–2014).
- Inflation (CPI, end of period): 3.7, 3.2, 4.4, 3.9, 3.8, 3.1, 3.1, 3.1, 3.1 (2006–2014).
- Core inflation (end of period): 1.5, 2.1, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0 (2006–2014).
- Employment (ESA95, annual change): 2.3, 2.1, 2.8, -2.4, 0.1, 0.8, 0.6, 0.5, 0.5 (2006–2014).
- Nominal wages (annual change): 8.0, 7.2, 8.1, 2.7, 4.8, 7.0, 6.3, 6.0, 6.0 (2006–2014).
- Productivity (annual change): 6.1, 8.1, 3.5, -2.3, 1.8, 4.4, 3.7, 3.8, 3.7 (2006–2014).
- Real wages (annual change): 3.3, 4.3, 3.4, 0.4, 1.8, 3.8, 3.7, 3.4, 3.4 (2006–2014).
- Unemployment rate (percent, annual average): 13.3, 11.0, 9.6, 12.4, 12.5, 12.1, 11.7, 11.5, 11.2 (2006–2014).

### Public finances (consolidated general government, selected)
- General government balance (percent of GDP): -3.5, -1.9, -2.5, -5.2, -4.5, -3.0, -2.4, -1.4, -0.7 (2006–2014).
- Primary balance (percent of GDP): -2.1, -0.6, -1.3, -3.7, -3.2, -1.6, -1.0, 0.0, 0.7 (2006–2014).
- Primary expenditure (percent of GDP): 36.5, 35.3, 36.0, 39.2, 39.1, 37.2, 36.5, 35.3, 34.4 (2006–2014).
- General government debt (percent of GDP, ESA-95 basis): 30.4, 29.4, 27.6, 33.7, 36.7, 37.0, 37.0, 36.0, 34.4 (2006–2014).
- Projections (2009–2011) — Total revenue (percent of GDP): 36.7, 37.1, 36.9; Total expenditure (percent of GDP): 40.7, 40.4, 38.6; Fiscal balance (percent of GDP): -5.2, -4.5, -3.0 (2009–2011).

### Balance of payments and external sector (selected)
- Current account balance (US$ millions, 2005–2014 series excerpt): -4,090; -3,951; -4,071; -6,189; -5,573; -5,264; -5,268; -5,040; -4,810; -4,366 (2005–2014).
- Current account balance (percent of GDP, memorandum): -8.5, -7.0, -5.4, -6.5, -6.5, -5.9, -5.5, -4.9, -4.4, -3.7 (2005–2014).
- Trade balance (percent of GDP, memorandum): -5.1, -4.6, -1.2, -0.7, -1.3, -1.0, -0.8, -0.6, -0.3, -0.1 (2005–2014).
- Gross official reserves (US$ millions): 13,364; 18,964; 20,257; 17,460; 17,673; 19,763; 21,980; 24,348; 25,654 (2006–2014).
- Gross external debt (percent of GDP): 54.7, 52.0, 50.3, 50.3, 49.8, 48.9, 48.1, 47.3, 46.4 (2006–2014).
- Total external debt (percent of GDP, memorandum): 59.3, 54.7, 52.0, 50.3, 50.3, 49.8, 48.9, 48.1, 47.3, 46.4 (2005–2014).
- Short-term external debt (remaining maturity basis, US$ millions): 16,658; 17,129; 24,666; 21,128; 23,013; 22,673; 23,592; 24,420; 25,146; 25,861 (2005–2014).
- Reserves/short-term debt (percent, remaining maturity basis): 92.9, 78.0, 76.9, 95.9, 75.9, 77.9, 83.8, 90.0, 96.8, 99.2 (2005–2014).
- GDP (US$ millions, memorandum): 47,885; 56,046; 74,988; 95,739; 85,511; 88,894; 96,112; 103,037; 110,394; 117,920 (2005–2014).

### Banking sector and financial soundness indicators (selected)
- Regulatory capital to risk-weighted assets: 18.7, 14.8, 13.0, 12.8 (2004–End-Sep 2008 sequence).
- Regulatory Tier I capital to risk-weighted assets: 18.9, 15.0, 13.2, 12.3, 11.1, 10.7, 11.2 (selected years).
- Nonperforming loans to gross loans: 2.6, 5.0, 3.2, 2.5, 2.9, 3.2, 3.6 (2004–End-Mar 2009 sequence).
- Return on assets (after tax): 1.2, 1.2, 1.3, 1.0, 0.9, 0.9, 0.2 (selected years).
- Return on equity (after tax): 11.9, 16.9, 16.6, 16.6, 14.6, 13.8, 2.8 (selected years).
- Liquid assets to total assets: 13.3, 33.5, 36.5, 30.7, 29.7, 29.3, 18.3 (selected years).
- Foreign currency-denominated loans (percent of total loans): 22.8, 28.2, 27.1, 23.6, 21.5, 21.9, 2.2 (selected years).
- Customer deposits to total (non-interbank) loans: 166.4, 136.3, 130.2, 118.4, ... , 119.6 (selected years).
- Private sector credit growth (selected): 7.2, 86.7, -17.3, 22.3, ..., 15.3 (selected years).
- Lending rates (average of interest rates on new loans to households and nonfinancial corporations): 8.6, 7.3, 8.0, 8.3, ..., 8.4 (selected years).
- Deposit rates (average of interest rates on deposits from households and nonfinancial corporations): 2.5, 1.5, 2.2, 2.4, ..., 2.5 (selected years).

### National accounts and sectoral composition (selected)
- Consumption (percent of GDP): 75.6, 75.4, 72.7, 73.7, 77.5, 78.3, 78.0, 77.7, 77.3, 77.0 (2005–2014).
  - Nongovernment consumption: 55.6, 55.5, 53.5, 53.9, 55.9, 56.5, 56.9, 57.2, 57.5, 57.7 (2005–2014).
  - Government consumption: 20.0, 19.8, 19.2, 19.8, 21.6, 21.8, 21.2, 20.5, 19.8, 19.3 (2005–2014).
- Gross capital formation (percent of GDP): 28.9, 27.8, 27.8, 28.8, 27.8, 27.8, 28.1, 28.2, 28.3, 28.4 (2005–2014).
- Foreign saving (percent of GDP, national accounts concept): 8.5, 7.1, 5.4, 6.5, 5.7, 5.0, 4.5, 3.9, 3.5, 3.0 (2005–2014).
- Gross national saving (percent of GDP): 20.3, 21.2, 22.4, 22.3, 21.3, 21.9, 22.6, 23.3, 23.9, 24.7 (2005–2014).
- Households' gross saving (percent of disposable income): 5.8, 3.9, 5.8, 6.7, 5.2, 4.3, 3.8, 2.1, 2.5, 2.6 (2005–2014).

### Fund relations, consultation and technical assistance (selected)
- Membership: Joined 01/01/1993; Article VIII.
- Quota (SDR million, percent of quota): Quota 357.50 100.00; Fund Holdings of Currency 311.50 87.13; Reserve Position 46.00 12.87.
- Stand-by arrangement: Approval Date 07/22/1994; Expiration Date 03/21/1996; Amount Approved (SDR Million) 115.80; Amount Drawn (SDR Million) 32.15.
- Exchange rate arrangement: The currency of the Slovak Republic is the euro, which was adopted on January 1, 2009.
- Article IV consultation: Discussions held in Bratislava during May 12–25, 2009; mission concluding statement published on June 16, 2009; previous consultation concluded on June 6, 2007 (IMF Country Report No. 07/226).
- FSAP and ROSCs: FSAP concluded with the 2002 Article IV consultation (missions Feb and Apr 2002); FSSA update mission December 2006; Fiscal ROSC issued August 2002 with updates August 2003 and March 2005; Data ROSC issued May 2005.
- Technical assistance (2000–2007) — examples:
  - MFD: February 2000; December 2001; May 2002.
  - FAD: April 2000; February 2001; April 2001; August 2001–August 2002; December 2001; June 2002; February 2003; March 2003; May 2003.
  - STA: February 2000; March 2001; July 2003; February–March 2004.

*Prepared by the European Department; Staff Report for the 2009 Article IV Consultation—Informational Annex (July 2, 2009).*

### Appendix II. Slovak Republic: Statistical Issues

### Appendix II. Slovak Republic: Statistical Issues

### Coverage, periodicity, and timeliness — overview and main shortcomings
- Coverage, periodicity, and timeliness of data provided to the Fund are adequate for surveillance purposes.
- A data ROSC mission during February–March 2004 found integrity, methodological soundness, and reliability satisfactory, despite shortcomings in the data revision policy.
- Main remaining issues:
  - (i) weaknesses in the data on prices and volumes of imports and exports;
  - (ii) a lack of timely data on the general government operations;
  - (iii) slow compilation cycle of the annual national accounts and lack of proper benchmarking of quarterly data.
- The Slovak Republic subscribes to the Special Data Dissemination Standard (SDDS) since 1996 and observes or exceeds all related standards.

### Timeliness and public access
- Authorities follow a free and open data publication policy; data released promptly to news services and published in monthly/quarterly publications and on the Internet.
- Data on core surveillance variables are provided regularly to the Fund with minimal lags:
  - foreign exchange reserves: a week or less;
  - monthly state budget implementation data: a day;
  - consumer prices, reserve money, broad money, and interest rates: 10 days to a month;
  - foreign trade data: two months;
  - other fiscal, balance of payments, and national accounts data: about three months.
- 2004 data ROSC mission reported difficulties reconciling balance of payments with national accounts, monetary, and government finance statistics.

### Real sector and prices — progress and outstanding problems
- Significant progress in national accounts compilation, but:
  - quarterly national accounts expenditure data exhibit weaknesses;
  - significant statistical discrepancy between supply side and demand side.
- Trade price deflators and import/export volume measures:
  - lack of reliable price deflators for imports and exports impedes decomposition into volume and price changes;
  - unit value trade price indices—basis for national accounts trade price deflators—are published with long delays and are not appropriately adjusted for quality changes.
- Retail sales, consumption, and wages:
  - fast development of chain stores not fully captured in surveys may bias retail sales and consumption measures (especially relative to VAT receipts);
  - wage statistics also might be biased.
- Enterprise sector:
  - recommendation: line ministries should produce systematic accounts of financial positions of public enterprises under their purview.

### Fiscal sector — compilation, reporting, and systems
- General government statistics compiled annually in accordance with ESA95 and disseminated on the Ministry of Finance (MOF) website.
- Authorities report semi-annually on general government net lending/borrowing on ESA95 basis per EU acquis communautaire.
- Monthly reconciliation above and below-the-line restricted to state budget transactions on a cash basis.
- A modern treasury system has operated since January 2004, improving fiscal control and public debt management by recording expenditures at planning and commitment stages.
- MOF has converted fiscal accounts to ESA95 standards and compiles Government Finance Statistics according to GFSM 2001:
  - data available and disseminated on a cash basis for 1996–05;
  - data available on an accrual basis for 2003–08.

### External and monetary sector statistics
- External sector statistics: of good quality and reported on a timely basis to the Fund.
- Monetary statistics: of good quality and reported on a timely basis to the Fund.

### Table of common indicators — frequency, timeliness, and data quality assessments (selected items, as of July 1, 2009)
- Exchange Rates
  - Date of latest observation: 07/01/09
  - Date received: 07/01/09
  - Frequency of Data/Reporting/Publication: D / D / D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities
  - Date of latest observation: 06/24/09
  - Date received: 06/26/09
  - Frequency: W / W / W
- Reserve/Base Money
  - Date of latest observation: 05/09
  - Date received: 06/12/09
  - Frequency: M / M / M
- Broad Money
  - Date of latest observation: 05/09
  - Date received: 06/09
  - Frequency: M / M / M
- Consumer Price Index
  - Date of latest observation: 05/09
  - Date received: 06/16/09
  - Frequency: M / M / M
- Revenue, Expenditure, Balance and Composition of Financing – General Government
  - Date of latest observation: 2008
  - Date received: 04/2009
  - Frequency: A / A / A
- Revenue, Expenditure, Balance and Composition of Financing – Central Government
  - Date of latest observation: 06/09
  - Date received: 07/01/09
  - Frequency: M / M / M
- GDP/GNP
  - Date of latest observation: Q1/09
  - Date received: 06/03/09
  - Frequency: Q / Q / Q
- Gross External Debt
  - Date of latest observation: 03/09
  - Date received: 06/30/09
  - Frequency: M / M / M
- International Investment Position
  - Date of latest observation: 12/08
  - Date received: 06/30/09
  - Frequency: Q / Q / Q
- Data Quality assessments reflect the 2004 ROSC (published May 17, 2005): observance categories are O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed). Accuracy/reliability assessments follow the same scale.

### Executive Board assessment — macroeconomic context, risks, and policy recommendations (Public Information Notice No. 09/90, July 28, 2009)
- Background and outlook:
  - economic activity tumbled in the first half of 2009 due to the global crisis;
  - projected to shrink by about 5 percent in 2009 and return to growth on the order of 2 percent in 2010;
  - unemployment projected to increase to more than 12 percent by end-2009 and remain high through 2010;
  - fiscal position weakening due to revenue underperformance; tax and social contribution shortfall projected to reach about 2 percent of GDP for the year; general government deficit forecast to widen to about 5 percent of GDP, up from 2¼ percent in 2008.
- Banking sector:
  - banks have so far withstood the global crisis relatively well: well capitalized, liquid, properly provisioned, relying mainly on domestic retail deposits;
  - strains evident: profits in the first half of 2009 down sharply year-on-year, share of non-performing loans rising;
  - banks and supervisor (NBS) have tightened lending requirements, limited dividend payouts, raised capital, increased provisions, and strengthened cross-border supervisory coordination.
- Executive Directors’ policy messages and recommendations:
  - short-term: support domestic demand while preserving strong medium-term economic foundations;
  - fiscal policy: considered appropriately accommodating in 2009; welcome acceleration of EU funds utilization and improvement of investment planning, implementation, and absorption capacity;
  - public-private partnerships: develop proper legal, monitoring, and reporting framework to underpin plans;
  - medium-term fiscal consolidation: formulate and announce a credible strategy aimed at bringing down the general government deficit to within the Maastricht norm in a timely manner; move ahead with identified consolidation measures; sustainable deficit reduction will require additional expenditure savings as well as revenue enhancing measures, including some tax increases;
  - fiscal institutions: consider binding expenditure rules and move forward with pension reform to preserve long-term sustainable public finances;
  - financial sector: continued vigilance required; sustain efforts to strengthen risk monitoring and management; recent stress tests indicate very severe shocks would be required to push capital and liquidity into danger zones, but loan losses expected to intensify as recession deepens;
  - competitiveness and structural reform: maintain wage discipline in line with productivity growth (tripartite wage agreements welcomed); implement productivity-enhancing reforms, improve business environment, and strengthen education and human capital formation.

### Summary of economic indicators, 2006–2011 (selected projections)
- Real GDP: 2006: 8.5; 2007: 10.4; 2008: 6.4; 2009: -4.7; 2010: 1.9; 2011: 5.2
- Domestic demand: 2006: 6.1; 2007: 5.8; 2008: 6.6; 2009: -1.5; 2010: 2.7; 2011: 5.0
  - Public consumption: 2006: 10.2; 2007: -1.3; 2008: 4.3; 2009: 4.1; 2010: 2.7; 2011: 2.2
  - Private consumption: 2006: 5.9; 2007: 7.1; 2008: 6.1; 2009: 0.2; 2010: 3.0; 2011: 5.5
  - Gross capital formation: 2006: 4.1; 2007: 8.1; 2008: 9.1; 2009: -8.0; 2010: 2.0; 2011: 6.1
- Net exports (goods and services):
  - Exports: 2006: 21.0; 2007: 13.8; 2008: 3.2; 2009: -16.0; 2010: -1.3; 2011: 8.8
  - Imports: 2006: 17.7; 2007: 8.9; 2008: 3.3; 2009: -13.0; 2010: -0.3; 2011: 8.6
- Prices:
  - Inflation (CPI): 2006: 4.5; 2007: 2.8; 2008: 4.6; 2009: 2.3; 2010: 2.9; 2011: 3.1
  - Inflation (CPI, end of period): 2006: 3.7; 2007: 3.2; 2008: 4.4; 2009: 3.9; 2010: 3.8; 2011: 3.1
  - Core inflation (end of period) 1/: 2006: 1.5; 2007: 2.1; 2008: 2.0; 2009: 2.0; 2010: 2.0; 2011: 2.0
  - Inflation (GDP deflator): 2006: 2.9; 2007: 1.1; 2008: 3.4; 2009: 1.8; 2010: 2.4; 2011: 2.7
- Labor and wages:
  - Employment (ESA95): 2006: 2.3; 2007: 2.1; 2008: 2.8; 2009: -2.4; 2010: 0.1; 2011: 0.8
  - Nominal wages: 2006: 8.0; 2007: 7.2; 2008: 8.1; 2009: 2.7; 2010: 4.8; 2011: 7.0
  - Productivity: 2006: 6.1; 2007: 8.1; 2008: 3.5; 2009: -2.3; 2010: 1.8; 2011: 4.4
  - Real wages: 2006: 3.3; 2007: 4.3; 2008: 3.4; 2009: 0.4; 2010: 1.8; 2011: 3.8
  - Unit labor costs: 2006: 1.8; 2007: -0.9; 2008: 4.4; 2009: 5.1; 2010: 3.0; 2011: 2.5
  - Unemployment rate (percent): 2006: 13.3; 2007: 11.0; 2008: 9.6; 2009: 12.4; 2010: 12.5; 2011: 12.1
- Public finance (percent of GDP):
  - General government balance: 2006: -3.5; 2007: -1.9; 2008: -2.5; 2009: -5.2; 2010: -4.5; 2011: -3.0
  - Primary balance: 2006: -2.1; 2007: -0.6; 2008: -1.3; 2009: -3.7; 2010: -3.2; 2011: -1.6
  - Primary expenditure: 2006: 36.5; 2007: 35.3; 2008: 36.0; 2009: 39.2; 2010: 39.1; 2011: 37.2
  - General government debt: 2006: 30.4; 2007: 29.4; 2008: 27.6; 2009: 33.7; 2010: 36.7; 2011: 37.0
- Monetary and financial indicators:
  - Credit to private sector: 2006: 39.6; 2007: 43.4; 2008: 45.7
  - Lending rates 2/: 2006: 8.0; 2007: 8.3; 2008: 8.4
  - Deposit rates 3/: 2006: 2.2; 2007: 2.4; 2008: 2.5
  - Government bond yield: 2006: 4.2; 2007: 4.6; 2008: 4.7
- Balance of payments (percent of GDP):
  - Trade balance: 2006: -4.6; 2007: -1.2; 2008: -0.7; 2009: -1.3; 2010: -1.0; 2011: -0.8
  - Current account balance: 2006: -7.0; 2007: -5.4; 2008: -6.5; 2009: -6.5; 2010: -5.9; 2011: -5.5
  - Gross external debt: 2006: 54.7; 2007: 52.0; 2008: 50.3; 2009: 50.3; 2010: 49.8; 2011: 48.9

*Source: IMF staff report material for the 2009 Article IV Consultation with the Slovak Republic.*

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