## _cr14254 - part in the concluding meeting.

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---

### Recent developments — fundamentals and near-term dynamics
- Growth momentum:
  - Slovakia experienced one of the fastest recoveries from the 2009 crisis among EU countries; growth bottomed out in mid-2013 and picked up with investment rising strongly at end-2013 and private consumption increasing sharply in Q1 2014.
- Inflation and prices:
  - Headline inflation declined sharply and moved into negative territory in the first months of 2014.
  - Producer price inflation has been negative since mid-2013.
  - Declining energy prices, abating food price pressure, euro appreciation, and Czech koruna depreciation lowered import prices.
- Labor market:
  - Unemployment stabilized at around 14 percent in 2013.
  - Youth unemployment is near 33 percent.
  - Long-term unemployment represents more than two-thirds of the total.
  - Working-age population declining; employment uptick in early 2014.
  - Moderate wage increases and robust productivity resulted in subdued unit labor cost growth.
- Fiscal developments:
  - General government deficit declined to 2.8 percent of GDP in 2013 (target 2.9 percent of GDP), enabling exit from the EU Excessive Deficit Procedure (EDP).
  - General government debt rose above the debt brake threshold of 55 percent of GDP in 2013.
  - Explicit one-off measures in 2013 totaled 0.3 percent of GDP.
  - Savings from lower co-financing on EU Funds totaled 0.4 percent of GDP.
  - Improvements in VAT collection yielded about 0.4 percent of GDP.
  - Railway company inclusion in general government contributed to better-than-budgeted outturn.
  - Cash balances: 6 percent of GDP at end-2013.
- Market and financing conditions:
  - Government secured more than 65 percent of its 2014 financing needs by early June.
  - Strong demand from non-resident investors; non-resident holdings of government debt now more than 50 percent.
  - Bond and CDS spreads remain low; rating agencies upgraded outlooks to stable.
- External position and trade:
  - Robust exports continued to support trade and current account surpluses.
  - Current account surplus around 2 percent of GDP in 2013.
  - External debt rose to 83 percent of GDP in 2013.
  - Net international investment position (NIIP) at negative 66 percent.
  - Exports to Russia equal 2 percent of GDP; trade and financial links with Ukraine negligible.
- Banking and credit:
  - Household borrowing grew at around 11 percent (mainly housing).
  - Average LTV ratios remain around 70 percent.
  - Property prices flat or slightly falling; loans with higher LTVs becoming more common.
  - Nonperforming loans low and well provisioned; banks strengthened capital buffers.
  - Corporate lending turned just positive, aided by large transactions of two state-owned enterprises.
- Structural and regional issues:
  - Significant regional disparities persist in per-capita income and unemployment (central and eastern Slovakia more affected).
  - Openness to trade rose to about 170 percent of GDP in 2013; export market share in the EU tripled since the mid-1990s.
  - Per-capita income rose to roughly 75 percent of the EU average in 2012 from less than half in the mid-1990s.

### Outlook, projections, and risks
- Staff projections and baseline:
  - Growth projected to accelerate to 2.4 percent in 2014 and to 3 percent over the next few years.
  - Headline inflation projected to edge up in the second half of 2014 but remain subdued over the forecast period.
  - Trade and current account balances expected to remain in surplus.
  - Unemployment expected to fall gradually but stay near 12 percent in the medium term.
- Upside risks:
  - Improving market sentiment and conditions in key trading partners.
  - ECB easing could provide additional support.
  - Additional positive impulses from residential and infrastructure investment and greater absorption of EU funds.
- Downside risks:
  - Prolonged low-growth/low-inflation in Europe harming an open, trade- and FDI-dependent economy; slower growth could place public debt on an upward trajectory and make fiscal policy more pro-cyclical due to operation of debt brakes.
  - Further appreciation of the euro could put additional downward pressure on prices.
  - Potential escalation of tensions between Russia and Ukraine could affect Slovakia via dependence on Russian energy; Slovakia has sufficient reserves to withstand a short-lived gas interruption.
  - Domestic risk: prolonged high unemployment could inhibit domestic demand recovery and erode human capital, damaging potential output.
- Financial and external resilience:
  - Relatively low public and private debt, declining government financing needs, and healthy cash balances suggest limited impact from bouts of financial market volatility.
  - External vulnerabilities mitigated by large share of FDI among liabilities and increased portfolio liabilities largely due to government debt with long maturities.

### Growth, competitiveness, and structural priorities
- Medium-term potential growth: estimated at around 2½ percent, reflecting continued improvements in total factor productivity.
- Competitiveness and REER assessments:
  - Some approaches indicate modest undervaluation (about 2.5 to 9 percent in 2013); an ERER approach suggests a large overvaluation; tailored analysis for transition economies suggests REER broadly in line with fundamentals.
  - Large errors and omissions in balance of payments complicate assessment.
- Regional and labor market constraints:
  - Growth concentrated around Bratislava (automobile and electronics assembly) with weaker per-capita income, productivity, and job opportunities in central and eastern regions.
  - Low mobility (high home-ownership, underdeveloped rental market), skill mismatches, poor infrastructure, and business climate challenges inhibit investment and job creation in weaker regions.

### Policy recommendations to sustain growth and support domestic demand
- General policy mix:
  - Structural policies to unlock growth, moderately paced fiscal adjustment focused on enhanced revenue collection to fund key priorities, and steps to facilitate access to credit, especially for small firms.
- Infrastructure:
  - Strengthen infrastructure, especially highways (main east-west route) to open investment opportunities and foster job creation in lagging regions.
  - Increase absorption of EU funds and improve procurement practices.
  - Facilitate access to rental housing to enhance labor mobility and regional integration.
- Business climate and governance:
  - Strengthen contract enforcement and address payment delays affecting small firms.
  - Improve administrative procedures, public procurement, legal system, and anti-corruption efforts.
  - Reduce regulation in professional services and retail trade; lower energy costs for firms.
- Labor market and incentives:
  - Maintain labor market flexibility; reconsider extension of collective bargaining agreements and consider opt-outs or higher thresholds for extension.
  - Consider regional differentiation of minimum wage (staff note: authorities view regional differentiation as not feasible).
  - Reduce the tax wedge and improve benefit incentives (e.g., tapering general social benefits while continuing some support when beginning work).
  - Strengthen active labor market policies (ALMPs): increase spending, focus on training, tailor activation incentives, and accelerate Public Employment Service (PES) reform.
- Education and training:
  - Improve quality of teachers; strengthen vocational training curricula and develop a dual system with business cooperation.
- Access to finance and capital markets:
  - Use EU Funds and financial instruments (including JEREMIE) to support SMEs.
  - Develop capital markets: reduce taxation of investment income, create a new central depository, modernize collective investment framework, and promote pension fund investment in start-ups and long-term assets.
- Fiscal policy emphasis:
  - Prioritize revenue measures and durable fiscal actions rather than reliance on one-off measures; maintain VAT rate and continue VAT collection improvements.
  - Consider property value-based real estate tax to raise revenue equitably.
  - Privatization (e.g., sale of 49 percent stake in Slovak Telekom) could yield substantial revenue (about 1 percent of GDP).

### Fiscal outlook, rules, and consolidation challenges
- Current figures and medium-term plans:
  - Current projection: "2.9 percent of GDP."
  - Debt expected to remain "just above 55 percent of GDP," assuming some drawdown of cash reserves and successful restructuring of EOSA.
  - Medium-term plan aims for a drop of "about 4 percentage points of GDP from 2014 to 2017" in outlays to achieve a "2017 headline deficit of 0.5 percent of GDP" and meet the MTO.
  - Under authorities’ plan, implicit structural adjustment in 2015–16 would amount to "almost 1 percent of GDP per year."
- Fiscal Responsibility Act (FRA) constraints:
  - Breaching 55 percent of GDP debt threshold in 2013 mandates a 3 percentage point cut in general government expenditure in 2014 (with exemptions), amounting to 0.4 percent of GDP and submission of a budget that freezes spending while debt remains above 55 percent of GDP.
  - Staff estimate: implementation of the FRA would result in 2015 growth being lower by 0.3 percentage points (i.e., 2.7 versus 3.0 percent), assuming fiscal multipliers of 0.3 in year one and 0.1 in year two.
  - Crossing 57 percent of GDP would require submission of a balanced budget.
- 2014 budget specifics:
  - 2014 budget contained measures of about 1 percent of GDP, intended to deliver a deficit of 2.6 percent of GDP.
  - A little more than half the savings from public wages and other spending; remainder from special levy on regulated industries and minimum lump-sum corporate income tax (partially offset by corporate tax rate cut from 23 percent to 22 percent).
  - Roughly half the measures in the 2014 budget are one-off or temporary items.
  - Adverse Eurostat determination created a revenue shortfall of 0.5 percent of GDP; stronger VAT and mandatory cuts could address much of the shortfall.
- Revenue-strengthening priorities:
  - Improve VAT efficiency (comprehensive 50-point action plan; VAT control statements).
  - Improving VAT efficiency by "1 percentage point" could lift revenue by "about 0.5 percent of GDP."
  - Maintaining the current VAT rate of "20 percent" would yield "about 0.3 percent of GDP."
  - Merge tax, customs, and social contribution collections.
  - Consider market value-based real estate tax; current real estate taxation yields "about 0.4 percent of GDP," more than 1 percentage point lower than the EU average.
- Other options:
  - Privatization: sale of government's "49 percent stake in Slovak Telekom" could yield "about 1 percent of GDP."
  - EU Funds: "about 46 percent of the 2007–13 allocation remains available until 2015," equivalent to "about 7 percent of GDP."
  - Spending efficiency: healthcare outlays offer potential savings or better outcomes.

### Public debt sustainability and stress tests (Annex III highlights)
- Baseline nominal gross public debt (percent of GDP): 36.3 (2012); 52.7 (2013); 55.4 (2014); 55.4 (2015); 55.3 (2016); 53.8 (2017); 51.8 (2018); 49.9 (2019); 48.2 (2019 final listed).
- Public gross financing needs (percent of GDP): 11.6 (2012); 12.2 (2013); 10.9 (2014); 6.7 (2015); 6.0 (2016); 7.0 (2017); 6.8 (2018); 5.7 (2019); 5.5 (2019 final).
- Change in gross public sector debt (cumulative, percent of GDP): 0.1 (2012); 9.0 (2013); 2.8 (2014); 0.0 (2015); -0.1 (2016); -1.4 (2017); -2.0 (2018); -1.9 (2019); cumulative -7.2 through projection horizon.
- Identified debt-creating flows (total identified, percent of GDP): 1.3 (2012); 3.8 (2013); 2.9 (2014); 0.6 (2015); -0.1 (2016); -1.4 (2017); -2.0 (2018); -2.0 (2019); cumulative -6.7.
- Key baseline macro assumptions:
  - Real GDP growth: 4.8 (2012); 1.8 (2013); 0.9 (2014); 2.4 (2015); 2.7 (2016); 2.9 (2017); 3.1 (2018); 3.1 (2019); final 3.0.
  - Inflation (GDP deflator): 2.4 (2012); 1.3 (2013); 0.5 (2014); 0.4 (2015); 1.4 (2016); 1.7 (2017); 1.7 (2018); 1.8 (2019); final 1.8.
  - Effective interest rate: 4.9 (2012); 4.3 (2013); 3.8 (2014); 3.3 (2015); 3.0 (2016); 3.0 (2017); 3.0 (2018); 2.9 (2019); final 3.2.
- External DSA baseline external debt (percent of GDP): 71.2 (2009); 75.6 (2010); 55.3 (2011); 76.0 (2012); 83.3 (2013); 84.9 (2014); 83.8 (2015); 83.3 (2016); 82.0 (2017); 80.3 (2018); 78.8 (2019).
- Stress-test scenarios include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, and Combined Macro-Fiscal Shock; combined shocks produce materially higher debt trajectories as shown in source charts and tables.

### Financial sector and macroprudential recommendations
- Banking system strength:
  - Sound capital levels and liquidity buffers, rising profits, and deposit-based funding underpin resilience.
  - About "70 percent" of the banking sector will come under ECB direct supervision with the SSM.
  - NBS stress tests indicate resilience.
- Capital and resolution:
  - NBS to require capital conservation buffer: "1.5 percent of risk-weighted assets from August 2014 and 2.5 percent from October 2014."
  - The special bank levy is "relatively high" and should be decreased and replaced once SRF contributions are implemented; proceeds should be placed in a well-defined resolution fund.
- Credit and household risk:
  - Household lending expanded rapidly; higher LTVs are becoming more prevalent.
  - Recommendation: adopt regulation on maximum LTV or debt-to-income ratios to curb borrower and bank risk build-up.
- Corporate credit and SME finance:
  - Corporate credit sluggish; SMEs face collateral, information, and administrative barriers.
  - Recommendation: greater use of EU-supported financial instruments (including JEREMIE) and improve business environment and insolvency proceedings.
- Capital markets:
  - Limited listings and secondary trading; high transaction costs, taxation/fees, poor market infrastructure, and investment restrictions for second pillar pension funds constrain development.
  - Authorities' strategy: reduce taxation of investment income, create a central depository, modernize frameworks, and ensure non-bank supervision.

### Data quality, coverage, and timeliness
- Coverage, periodicity, and timeliness adequate for surveillance; significant improvements in national accounts.
- Remaining issues:
  - Statistical discrepancy between supply and demand sides for GDP.
  - Weaknesses in prices and volumes of imports and exports.
  - Errors and omissions in the balance of payments are large; financial account flows volatile.
- Timeliness of key series (selected):
  - Foreign exchange reserves: a week or less.
  - Monthly state budget implementation data: a day.
  - Consumer prices, reserve money, broad money, interest rates: 10 days to a month.
  - Foreign trade data: two months.
  - Other fiscal, balance of payments, and national accounts data: about three months.
- ESA2010 transition scheduled: ESA 2010 methodology to be implemented from September 2014; BPM6 reporting to the Fund starting September 2014.

### Key selected statistics and projections (exact figures highlighted)
- Real GDP growth: 3.01 (2011); 1.8 (2012); 0.9 (2013); 2.4 (2014 proj.); 2.7 (2015 proj.); 2.9 (2016 proj.); 3.1 (2017 proj.); 3.1 (2018 proj.); 3.0 (2019 proj.).
- Unemployment rate (percent): 13.7 (2011); 14.0 (2012); 14.2 (2013); 14.0 (2014 proj.); 13.7 (2015 proj.); 13.2 (2016 proj.); 12.7 (2017 proj.); 12.1 (2018 proj.); 11.6 (2019 proj.).
- General government debt (percent of GDP): 43.6 (2011); 52.7 (2012); 55.4 (2013); 55.4 (2014 proj.); 55.3 (2015 proj.); 53.8 (2016 proj.); 51.8 (2017 proj.); 49.9 (2018 proj.); 48.2 (2019 proj.).
- Current account balance (percent of GDP): -3.8 (2011); 2.2 (2012); 2.1 (2013); 2.2 (2014 proj.); 2.4 (2015 proj.); 2.5 (2016 proj.); 2.5 (2017 proj.); 2.6 (2018 proj.); 2.6 (2019 proj.).
- Headline inflation (HICP): 4.1 (2011); 3.7 (2012); 1.5 (2013); 0.4 (2014 proj.); 1.5 (2015 proj.); 1.5 (2016 proj.); 1.7 (2017 proj.); 2.0 (2018 proj.); 2.0 (2019 proj.).

### Executive Board and staff appraisal — priorities restated
- Growth: recovery gathering pace with domestic demand pickup; export sector remains central.
- Unemployment and regional disparities: very high unemployment (around 14 percent) with youth near 33 percent and long-term unemployment two-thirds of total—requiring coordinated policy and budget priorities.
- Fiscal policy: durable, revenue-focused measures recommended to sustain fiscal progress and avoid pro-cyclical outcomes from the FRA; maintain VAT rate and continue VAT efficiency measures.
- Financial sector: continued prudence endorsed; monitor rising LTVs and household borrowing; encourage capital market development to diversify financing.
- Policy priority summary:
  - Implement structural reforms to boost investment and jobs, especially in lagging regions.
  - Strengthen VAT and other revenue collection, consider property value taxation and privatization to reduce debt in a growth-friendly manner.
  - Protect growth-friendly spending while meeting fiscal rules where possible.

*Source: IMF staff report — Slovak Republic (part in the concluding meeting).*

### part in the concluding meeting.

### _cr14254 - part in the concluding meeting.

### Recent developments — fundamentals and near-term dynamics
- Growth momentum
  - Slovakia experienced one of the fastest recoveries from the 2009 crisis among EU countries; growth bottomed out in mid-2013 and picked up with investment rising strongly at end-2013 and private consumption increasing sharply in Q1 2014.
- Inflation and prices
  - Headline inflation declined sharply and moved into negative territory in the first months of 2014.
  - Producer price inflation has been negative since mid-2013.
  - Declining energy prices, abating food price pressure, euro appreciation, and Czech koruna depreciation lowered import prices.
- Labor market
  - Unemployment stabilized at around 14 percent in 2013.
  - Youth unemployment is near 33 percent.
  - Long-term unemployment represents more than two-thirds of the total.
  - Working-age population declining; employment uptick in early 2014.
  - Moderate wage increases and robust productivity resulted in subdued unit labor cost growth.
- Fiscal developments
  - General government deficit declined to 2.8 percent of GDP in 2013 (target 2.9 percent of GDP), enabling exit from the EU Excessive Deficit Procedure (EDP).
  - General government debt rose above the debt brake threshold of 55 percent of GDP in 2013.
  - Explicit one-off measures in 2013 totaled 0.3 percent of GDP.
  - Savings from lower co-financing on EU Funds totaled 0.4 percent of GDP.
  - Improvements in VAT collection yielded about 0.4 percent of GDP.
  - Railway company inclusion in general government contributed to better-than-budgeted outturn.
  - Cash balances: 6 percent of GDP at end-2013.
- Market and financing conditions
  - Government secured more than 65 percent of its 2014 financing needs by early June.
  - Strong demand from non-resident investors; non-resident holdings of government debt now more than 50 percent.
  - Bond and CDS spreads remain low; rating agencies upgraded outlooks to stable.
- External position and trade
  - Robust exports continued to support trade and current account surpluses.
  - Current account surplus around 2 percent of GDP in 2013.
  - External debt rose to 83 percent of GDP in 2013.
  - Net international investment position (NIIP) at negative 66 percent.
  - Exports to Russia equal 2 percent of GDP; trade and financial links with Ukraine negligible.
- Banking and credit
  - Household borrowing grew at around 11 percent (mainly housing).
  - Average LTV ratios remain around 70 percent.
  - Property prices flat or slightly falling; loans with higher LTVs becoming more common.
  - Nonperforming loans low and well provisioned; banks strengthened capital buffers.
  - Corporate lending turned just positive, aided by large transactions of two state-owned enterprises.
- Structural and regional issues
  - Significant regional disparities persist in per-capita income and unemployment (central and eastern Slovakia more affected).
  - Openness to trade rose to about 170 percent of GDP in 2013; export market share in the EU tripled since the mid-1990s.
  - Per-capita income rose to roughly 75 percent of the EU average in 2012 from less than half in the mid-1990s.

### A. Economic recovery gathering pace — key details and channels
- Growth drivers and projections
  - Slovakia’s export-led recovery was complemented by a recovery in domestic demand in 2014 as investment and private consumption strengthened.
  - Medium-term potential growth estimated at around 2½ percent, reflecting continued improvements in total factor productivity.
- Fiscal consolidation issues and institutional constraints
  - Fiscal consolidation continued but relied partly on low-quality and temporary measures (under-spending EU funds, cuts in local government capital outlays, shift of pension assets from the second to first pillar).
  - Under the Fiscal Responsibility Act (FRA), breaching 55 percent of GDP debt threshold triggers expenditure cuts during 2014 and a 2015 budget that freezes much spending at 2014 budgeted levels.
- Competitiveness and external adjustments
  - Export market share gains consolidated trade and current account surpluses.
  - Mixed assessments of real effective exchange rate (REER): some approaches indicate modest undervaluation (about 2.5 to 9 percent in 2013), while an ERER approach suggests a large overvaluation; tailored analysis for transition economies suggests REER broadly in line with fundamentals.
  - Large errors and omissions in balance of payments complicate assessment; anecdotal accounts of “branding” could overstate export prices.

### B. Outlook and risks — projections, scenarios, and downside factors
- Staff projections
  - Growth projected to accelerate to 2.4 percent in 2014 and to 3 percent over the next few years.
  - Headline inflation projected to edge up in the second half of 2014 but remain subdued over the forecast period.
  - Trade and current account balances expected to remain in surplus.
  - Unemployment expected to fall gradually but stay near 12 percent in the medium term.
- Upside risks
  - Improving market sentiment and conditions in key trading partners.
  - ECB easing could provide additional support.
  - Additional positive impulses from residential and infrastructure investment and greater absorption of EU funds.
- Downside risks
  - Prolonged low-growth/low-inflation in Europe would hurt an open, trade- and FDI-dependent economy; slower growth could place public debt on an upward trajectory and make fiscal policy more pro-cyclical due to operation of debt brakes.
  - Further appreciation of the euro could put additional downward pressure on prices.
  - Potential escalation of tensions between Russia and Ukraine could affect Slovakia via dependence on Russian energy; Slovakia has sufficient reserves to withstand a short-lived gas interruption.
  - Domestic risk: prolonged high unemployment could inhibit domestic demand recovery and erode human capital, damaging potential output.
- Financial and external resilience
  - Relatively low public and private debt, declining government financing needs, and healthy cash balances suggest limited impact from bouts of financial market volatility.
  - External vulnerabilities mitigated by large share of FDI among liabilities and increased portfolio liabilities largely due to government debt with long maturities.

*Source: IMF staff report — Slovak Republic (part in the concluding meeting).*

### 10.      Policies should be geared toward sustaining growth and supporting domestic demand.

### 10.      Policies should be geared toward sustaining growth and supporting domestic demand.

### Overview and authorities’ views
- With external surpluses and falling debt levels projected over the medium term, domestic demand is only recently starting to rebound amid very high unemployment; policies should encourage investment and job creation.
- Policy mix suggested: structural policies to unlock growth, moderately paced fiscal adjustment focused on enhanced revenue collection to fund key priorities, and steps to facilitate access to credit, especially for small firms.
- Authorities and staff generally agreed on the outlook and risks; government forecasts are similar to staff projections, somewhat more optimistic for 2015 growth.
- Authorities concurred on importance of strengthening domestic demand and foresaw somewhat greater reductions in unemployment; a long-lasting interruption of gas supply by Russia was viewed as unlikely.
- Authorities noted Slovak banks are considered robust but flagged potential for broader market volatility if stress tests reveal capital deficiencies elsewhere in Europe.

### Strengthening growth and employment — assessment
- Trade and financial integration placed Slovakia among Europe’s fastest growing economies, helping rapidly close much of the gap with European income levels; unemployment remains very high and large regional disparities persist.
- Export-led growth model strengths and vulnerabilities:
  - Growth driven by investment and exports by high-productivity multinational firms, especially around Bratislava in automobile and electronics assembly.
  - Many SMEs are often very small and have limited innovation capacity.
  - Growth driven by capital accumulation funded mainly though FDI, and increases in total factor productivity.
  - Labor income share, as measured by real unit labor costs, has been on a downward trend amid cost competition from neighboring countries.
- Regional differences:
  - Regions outside Bratislava have lower per-capita income, lower productivity, significant innovation performance gaps, higher unemployment, and limited job opportunities.
  - Low mobility (high home-ownership, underdeveloped rental market), skill mismatches, poor infrastructure, and business climate challenges inhibit investment and job creation in weaker regions.
- Unemployment:
  - Very high overall, especially long-term and among youth.
  - Youth unemployment has nearly doubled since the crisis.
  - Joblessness concentrated in eastern and central parts of the country with limited vacancies.
  - Marginal participation of the Roma population: only 20 percent of Roma men and less than 10 percent of Roma women (World Bank estimate).

### Policy priorities and recommended actions to unlock potential
- Improve infrastructure
  - Strengthen infrastructure, especially highways such as the main east-west route where faster progress is needed, to open up investment opportunities and foster job creation in lagging regions.
  - Increased absorption of EU funds and more efficient procurement practices could help.
  - Facilitate access to rental housing to enhance labor mobility and regional integration.
- Strengthen the business climate
  - Slovakia’s regulatory burden compares unfavorably with other EU countries and regional peers.
  - Perceived widespread corruption, including involving EU Funds.
  - Actions: strengthen contract enforcement (e.g., address payment delays affecting small firms), improve administrative procedures and public procurement, enhance legal system, and strengthen anti-corruption efforts.
  - Firms would benefit from lower energy costs (among the highest in the EU).
  - Reduce regulation in professional services and retail trade to foster competition.
- Maintain labor market flexibility
  - Employment protection legislation generally in line with peers, but early 2014 decision to allow extension of collective bargaining agreements to most employers introduces rigidity that could discourage hiring and hinder adaptation to regional differences.
  - Consider re-introducing opt-outs from collective bargaining agreements (e.g., Germany and Italy allow opt-outs) or increasing the threshold number of employees at which collective agreements would be extended to firms.
  - Consider setting different minimum wages across regions to reflect widely varying labor market conditions; plans for a uniform minimum wage rise could increase challenges to securing employment for some workers.
- Lower labor taxes and improve incentives
  - Reduce the high tax wedge that makes it unattractive for firms to hire and for low-skill workers to work; this should be a high priority in the budget (¶22).
  - Improve incentives under the benefit structure (e.g., consider tapering general social benefits over time while continuing to provide some benefits when beginning work).
- Improve the quality of education and training
  - Deteriorating PISA scores highlight educational challenges.
  - Strengthen quality of teachers (consistent with OECD recommendations).
  - Improve vocational training curricula to better match workforce needs and create an effective dual system of vocational training based on close cooperation with businesses to ensure substantial practical experience.
- Strengthen active labor market policies (ALMPs)
  - ALMP spending compares unfavorably with other EU countries; should be raised and effectiveness improved.
  - Increase share of spending allocated to training, deliver more tailored activation incentives and services.
  - Accelerate envisaged reform of the Public Employment Service (PES) and increase its resources.
  - Focus recent initiatives on youth unemployment while complementing with greater attention to the long-term unemployed and marginalized groups.

### Authorities’ reported or planned measures
- Infrastructure: ongoing efforts, especially highway construction; technical challenges (e.g., building tunnels); procurement reform measures approved.
- Business climate: government resolution on improving business environment; facilitation of tax payment and cross-border trade (simplified customs); major reform (ESO initiative) to streamline public administration and improve service efficiency; shorter time for incorporation and granting trade licenses; intention to lower relevant fees.
- Education: teacher salaries raised in 2013; testing strengthened to track school quality; new higher education act drafted to strengthen universities and create closer private-sector links; new vocational educational and training act to introduce a dual system with workplace experience; pre-school capacities being enhanced.
- ALMPs and incentives to work:
  - Less effective ALMP programs eliminated; emphasis increased on educational programs and counseling.
  - One-year relief for firms from social and health contributions for hiring the long-term unemployed introduced.
  - Creation of new jobs for people under 29 years being subsidized using European Social Funds.
  - Government considering gradually reducing social benefits after hiring to increase disposable income for new hires.
  - Authorities intend to decrease significantly health contributions for low-income workers.
  - PES reforms underway to create a three-pillar system (information counseling services, professional services, and data centralization) by 2020.
  - Measures to increase Roma inclusion are being implemented.
- Authorities’ stance on labor code and minimum wage:
  - Authorities did not expect recent changes to the Labor Code and the extension of collective agreements to have adverse effects on employment.
  - Regional differentiation of the minimum wage is not viewed as feasible.
  - Government intends to increase the minimum wage, expecting impact on wage costs for low-income workers to be offset by decrease in health contributions.

### Sustaining fiscal consolidation — assessment and recommendations
- Fiscal progress and context:
  - Since 2009, the budget deficit has been reduced by about 5 percentage points to 2.8 percent of GDP in 2013—just below the threshold for exiting the EU’s EDP.
  - Over 2010–13 the annual average fiscal effort reached 1.5 percent of GDP, above the EU call of at least 1 percent of GDP, and was largely pro-cyclical.
- Macroeconomic perspective on adjustment:
  - Given an output gap, subdued inflation, and spending needs (e.g., high unemployment and infrastructure gaps), gradual adjustment with emphasis on correcting revenue underperformance would be advisable.
  - Public debt has been easily financed and would stabilize at around 60 percent of GDP with little additional action.
  - A gradual adjustment path toward the EU medium-term objective (MTO) of a structural deficit of 0.5 percent of GDP would be reasonable—with the target preferably being met in 2018, rather than 2017—and would put debt-to-GDP on a downward path.
  - With both revenue and expenditure well below averages for the EU and CE3 neighbors, adjustment should focus largely on revenue measures.
- Constraints from EU and domestic fiscal frameworks:
  - EU commitments require a positive structural adjustment of at least 0.1 percent of GDP this year given cyclical position.
  - Achieving the EU MTO in 2017 would call for much larger consolidation efforts in the following years.
  - Slovakia’s domestic FRA is more restrictive and emphasizes spending reductions now: breaching the 55 percent of GDP debt threshold in 2013 mandates a 3 percentage point cut in general government expenditure in 2014 (excluding debt service payments, EU funds and co-financing, EU budget contributions, transfers to the Social Insurance Agency and natural disaster spending) amounting to 0.4 percent of GDP and submission of a budget that freezes spending (with the same exemptions) in subsequent years as long as debt remains above 55 percent of GDP.
  - Staff estimate that implementation of the FRA would result in 2015 growth being lower by 0.3 percentage points (i.e., 2.7 versus 3.0 percent). (The estimate assumes fiscal multipliers of 0.3 in year one, and 0.1 in year two.)
  - Crossing the next debt threshold at 57 percent of GDP would require submission of a balanced budget and potentially sharp adjustment with more negative growth effects.
- 2014 budget specifics and risks:
  - Given expected widening of the deficit in absence of policy changes, the 2014 budget contained measures of about 1 percent of GDP, intended to deliver a deficit of 2.6 percent of GDP.
  - A little more than half of the savings would come from public wages and other spending, with much of the rest from continuation of a special levy on regulated industries and a minimum lump-sum corporate income tax (partially offset by reducing the corporate tax rate from 23 percent to 22 percent).
  - Roughly half of the measures in the 2014 budget are one-off or temporary items.
  - An adverse determination by Eurostat on carryover of dividends from 2013 into 2014 created a revenue shortfall (0.5 percent of GDP). Stronger-than-budgeted taxes, especially VAT, and mandatory expenditure cuts triggered by the domestic debt brake could address much of the shortfall.
  - The budget and growth impact of the FRA is limited in 2014 since much of the required spending reduction can be met by unwinding budgeted but unallocated outlays.
  - Staff see risks in containing spending, especially on the public wage bill given past overruns. There are also risks from one-off special levy revenue associated with still-to-be-determined changes in the ownership structure of a gas company.
- Staff estimate: 2014 deficit (staff estimate referenced but truncated in source extract).

*Source: _cr14254 - 10.      Policies should be geared toward sustaining growth and supporting domestic demand.*

### 2.9 percent of GDP. Debt is expected to remain just above 55 percent of GDP, assuming some

### _cr14254 - 2.9 percent of GDP. Debt is expected to remain just above 55 percent of GDP, assuming some

### Fiscal outlook and medium-term consolidation
- Current projection: "2.9 percent of GDP."
- Debt projection: Debt is expected to remain "just above 55 percent of GDP," assuming some drawdown of accumulated cash reserves and successful restructuring of the oil agency (EOSA) to reverse its 2013 contribution to debt.
- Medium-term budget plan aims for a drop of "about 4 percentage points of GDP from 2014 to 2017" in outlays to achieve a "2017 headline deficit of 0.5 percent of GDP" and meet the MTO.
- Under authorities’ medium-term plan, debt would remain above the "55 percent of GDP" threshold through 2015 before falling; share held by non-residents would remain "more than 50 percent."
- Debt-to-GDP ratio would remain above "55 percent" through 2015, requiring submission of budgets with spending freezes in 2015 and 2016; debt would not cross the "57 percent of GDP" threshold that would require submission of a balanced budget.
- Implicit structural adjustment in 2015–16 would amount to "almost 1 percent of GDP per year."
- Fiscal actions after FRA constraints could be constrained by political moves (example: Prime Minister announced plans for "€250 million (0.3 percent of GDP)" in new spending and tax breaks).

### Challenges of expenditure-based consolidation
- Staff forecast assumptions: constitutional-level FRA implemented via proportional spending cuts; recent revenue/VAT improvements sustained; cash reserves constant in nominal terms after 2014.
- Risks and constraints:
  - Difficulty controlling the public wage bill.
  - Substantial cuts to investment spending in recent years.
  - Need to fund priority items addressing unemployment and regional disparities (infrastructure, reducing tax wedge).
  - Spending cuts reliance could be difficult to sustain and undesirable for key objectives.

### Revenue-strengthening priorities (recommended)
- Improving tax collection
  - Sustain and further improve VAT efficiency; strengthen tax collection; reduce evasion and fraud.
  - Implementation of a "comprehensive 50-point action plan" with focus on VAT control statements.
  - Estimate: improving VAT efficiency by "1 percentage point" could lift revenue by "about 0.5 percent of GDP."
  - Maintaining the current VAT rate of "20 percent" (it was to fall to 19 percent in 2015 given a 2013 deficit below 3 percent of GDP) would yield "about 0.3 percent of GDP."
  - Merging tax, customs, and social contribution collections could reduce administrative costs and combat evasion/fraud.
- Market value-based real estate tax
  - Current real estate taxation (based on square meters) yields "about 0.4 percent of GDP," noted as "more than 1 percentage point lower than the EU average."
  - A property value-based real estate tax could yield substantial revenue, be more equitable, and less distortive; support for low-income households could mitigate social concerns.

### Other options to alleviate expenditure pressure
- Privatization
  - Sale of government’s "49 percent stake in Slovak Telekom" could yield "about 1 percent of GDP," potentially lowering debt below "55 percent of GDP" and avoiding an additional year’s spending freeze.
  - Further privatization of state ownership could benefit debt, the budget, and capital market development.
  - Recent increase in state role in a key energy company runs opposite to privatization and could imply fiscal costs if energy price changes are not passed through.
- EU Funds
  - Slovakia’s EU Funds execution lags peers: "about 46 percent of the 2007–13 allocation remains available until 2015," equivalent to "about 7 percent of GDP."
  - Improving procurement and procedures could facilitate priority outlays; use of EU Funds and co-financing is exempted from FRA spending cuts and freezes.
- Spending efficiency
  - Healthcare outlays remain inefficient relative to outcomes compared to peers and could offer room for savings or better care without adding costs.

### Fiscal framework considerations
- The FRA alongside evolving EU fiscal rules creates complexity with undesirable effects.
- Credibility costs argue against adjusting the FRA when it first becomes binding, but over time government might consider:
  - Making the FRA less biased toward expenditure cuts and less pro-cyclical (smoother adjustment path).
  - Assessing whether FRA is still needed given European commitments.
  - Making the framework more reflective of debt vulnerabilities (e.g., acknowledging that accumulation of cash balances increases gross debt but reduces short-term rollover risks).
  - Considering contingency provisions for changes in EU statistical definitions affecting general government.

### Pension reforms
- 2012 reforms improved long-term sustainability by linking retirement age with demographic trends, changing pension indexation, and capping accruals for higher earners.
- A long-term financing gap persists.
- Possible further reforms: linking pension calculations to a sustainability factor and shortening transition to a higher retirement age.

### Financial stability and banking sector
- Banking system assessment
  - Banking system described as sound with strong liquidity and capital levels, stable deposit-based funding, and improving profitability.
  - About "70 percent" of the banking sector will come under ECB direct supervision with the Single Supervisory Mechanism (SSM); NBS continues to play a crucial role.
  - NBS stress tests indicate resilience to financial and real shocks.
  - Recent domestic transposition of EU directives (Basel III implementation) strengthened NBS supervisory powers.
- Bank levy and resolution
  - The special levy on bank liabilities to fund potential resolution costs is "relatively high" and should be reduced and replaced once contributions to the Single Resolution Fund (SRF) are implemented.
  - Proceeds from the levy should be placed in a more well-defined resolution fund.
- Capital conservation buffer
  - NBS will require full implementation of the capital conservation buffer: "1.5 percent of risk-weighted assets from August 2014 and 2.5 percent from October 2014."

### Credit conditions and risks
- Household lending
  - Household lending continued to expand rapidly, reflecting home refinancing and equity withdrawals.
  - Competition has increased prevalence of high LTVs (higher LTV mortgages or topping up mortgages with housing loans).
  - Although real estate prices remain subdued and household debt is not high, higher LTVs could lead to over-borrowing.
  - Recommendation: adopt regulation on LTV or debt-to-income ratios to curb borrower and bank risk build-up.
- Corporate credit
  - Credit to corporate sector remained sluggish, reflecting weak domestic demand despite low interest rates on new corporate loans.
  - SMEs face access-to-finance challenges: insufficient collateral/guarantees, information requirements, administrative burdens.
  - Recommendation: greater use of financial instruments supported by EU Funds (including JEREMIE) and business climate improvements (e.g., reducing length of court insolvency proceedings).

### Capital markets
- Domestic capital market activity is limited: few listings and little secondary market trading in equities and government bonds.
- Contributing factors: limited issuance, embryonic institutional investors, high transaction costs, taxation/fees, administrative burdens, poor market infrastructure, conservative household investment behavior, investment restrictions for second pillar pension funds.
- A more efficient capital market could offer an alternative to bank financing, though small market size and large SME share are constraints.
- Authorities’ strategy: reduce taxation of investment income, create a new central depository, promote start-ups and long-term investment by pension funds, modernize collective investment legal framework, and enhance financial education.
- Supervision of non-banks must be ensured as part of capital market development.

### Staff appraisal — key judgments and recommendations
- Growth: After slowing, growth is gathering pace and becoming more balanced; pick-up in domestic demand and favorable trading partner conditions expected to lift growth.
- Risks: Upside from stronger domestic demand and ECB policies; downside from protracted slow global growth, geopolitical tensions (Russia/Ukraine) affecting energy and trade, and high unemployment.
- Unemployment and regional disparities: Very high unemployment, particularly youth and long-term unemployed, and significant regional disparities in income, employment, and infrastructure warrant coordinated policy and budget priorities to encourage investment and job creation, reduce disincentives to work/hire, enhance skills, and improve labor market entry/return.
- Fiscal progress: Significant adjustment since 2009 enabled EDP exit; debt remains manageable and market conditions allowed extension of maturities at lower interest rates.
- Need for durable measures: Given the budget framework and past reliance on temporary measures, durable fiscal measures are needed. Early fiscal adjustment is recommended given crossing of the FRA debt brake and the potential harm of rapid moves to a balanced budget.
- Expenditure-based adjustment caution: Medium-term plans to substantially reduce outlays are challenging due to already low revenue/spending shares and difficulties controlling the public wage bill; lower spending could obstruct investment and priority initiatives.
- Priority: Strengthening revenue collection is a priority; continued progress in VAT collection and maintenance of the current VAT rate are welcome. Property value-based real estate tax and privatization of state assets would help reduce debt in a growth-friendly way.

*Source: IMF staff report content provided in the supplied document excerpt.*

### 40.      Continued prudence will maintain the strength of the banking system. Sound capital

### Continued prudence will maintain the strength of the banking system. Sound capital

### Banking system strength and resilience
- Sound capital levels and liquidity buffers, rising profits, and deposit-based funding contribute to the strength of the banking system.
- These factors make the banking system resilient to shocks and should facilitate corporate lending as demand picks up, complementing strong household lending growth.
- The ECB’s comprehensive banking assessment in preparation for the SSM as well as implementation of the Basel III framework to strengthen the already robust supervisory and regulatory framework should further enhance confidence.

### Risks and targeted recommendations for banks and mortgages
- While risks from higher LTV ratios are moderate at this stage, a recommendation on maximum LTV levels for mortgages and housing loans or debt-to-income levels would be appropriate.
- The bank levy should be decreased and replaced once the system for contributions to the SRF is implemented.
- Revenues from the levy should be placed in a more well-defined resolution fund.

### Measures to support non-bank finance and small firms
- Actions could help support non-bank finance and credit to small firms.
- Reducing high taxes on investment income and lowering transaction fees by establishing a more efficient central depository would address some of the factors that have contributed to very limited capital market activity.
- Prospects for small businesses could be enhanced by efforts to facilitate access to finance in addition to steps to strengthen the business environment.

*Source: IMF staff report excerpt.*

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

### _cr14254 - 42.      It is proposed that the next Article IV consultation with the Slovak Republic take place on the

### Main economic developments
- Output growth (Real GDP): 3.0 (2019 projection).
- Recent contributions to output growth:
  - Net exports and exports of goods and services supported growth (Exports: 12.2 (2011), 9.9 (2012), 4.5 (2013), 6.4 (2014 proj.), 6.5 (2015 proj.), 6.0 (2016 proj.), 5.7 (2017 proj.), 5.7 (2018 proj.), 5.6 (2019 proj.)).
  - Domestic demand varied: Domestic demand growth: 1.2 (2011), -4.5 (2012), -0.9 (2013), 2.0 (2014 proj.), 2.0 (2015 proj.), 2.5 (2016 proj.), 2.7 (2017 proj.), 2.7 (2018 proj.), 2.6 (2019 proj.).
- Inflation (HICP): 4.1 (2011), 3.7 (2012), 1.5 (2013), 0.4 (2014 proj.), 1.5 (2015 proj.), 1.5 (2016 proj.), 1.7 (2017 proj.), 2.0 (2018 proj.), 2.0 (2019 proj.).
- Output gap and potential growth:
  - Output Gap: -0.3 (2011), -1.1 (2012), -2.4 (2013), -2.4 (2014 proj.), -2.2 (2015 proj.), -1.8 (2016 proj.), -1.2 (2017 proj.), -0.5 (2018 proj.), 0.0 (2019 proj.).
  - Potential Growth: 3.4 (2011), 2.6 (2012), 2.3 (2013), 2.4 (2014–2019 projections range: 2.4–2.5).

### Labor market developments
- Employment and unemployment:
  - Employment growth: 1.8 (2011), 0.1 (2012), -0.8 (2013), 0.4 (2014 proj.), 0.4 (2015 proj.), 0.6 (2016 proj.), 0.7 (2017 proj.), 0.7 (2018 proj.), 0.6 (2019 proj.).
  - Unemployment rate (percent): 13.7 (2011), 14.0 (2012), 14.2 (2013), 14.0 (2014 proj.), 13.7 (2015 proj.), 13.2 (2016 proj.), 12.7 (2017 proj.), 12.1 (2018 proj.), 11.6 (2019 proj.).
  - Youth unemployment emphasized as particularly high (figures in charts).
- Structural and long-term unemployment:
  - High long-term unemployment contributes to elevated structural joblessness (NAIRU charts and commentary).
- Labor market policy spending:
  - Public expenditure on active labor market policies remained low (charts), relative to peers.
- Wages and productivity:
  - Nominal wages: 3.7 (2011), 4.1 (2012), 3.6 (2013), 3.9 (2014 proj.), 3.5 (2015 proj.), 3.3 (2016 proj.), 3.4 (2017 proj.), 3.4 (2018 proj.), 3.4 (2019 proj.).
  - Wages remain low relative to productivity and unit labor costs decreased.

### Fiscal developments and public finances
- General government revenue and expenditure (percent of GDP):
  - Revenue: 34.1 (2011), 33.7 (2012), 35.9 (2013), 35.4 (2014 proj.), 34.1 (2015 proj.), 33.2 (2016 proj.), 33.0 (2017 proj.), 32.9 (2018 proj.), 32.7 (2019 proj.).
  - Expenditure: 38.9 (2011), 38.2 (2012), 38.7 (2013), 38.3 (2014 proj.), 36.3 (2015 proj.), 34.3 (2016 proj.), 33.6 (2017 proj.), 33.4 (2018 proj.), 33.3 (2019 proj.).
- Fiscal balances:
  - Overall balance (percent of GDP): -4.8 (2011), -4.5 (2012), -2.8 (2013), -2.9 (2014 proj.), -2.2 (2015 proj.), -1.2 (2016 proj.), -0.7 (2017 proj.), -0.5 (2018 proj.), -0.5 (2019 proj.).
  - Primary balance: -3.2 (2011), -2.7 (2012), -0.8 (2013), -1.1 (2014 proj.), -0.5 (2015 proj.), 0.6 (2016 proj.), 1.1 (2017 proj.), 1.1 (2018 proj.), 1.2 (2019 proj.).
  - Structural balance (percent of potential GDP): -5.1 (2011), -4.2 (2012), -2.2 (2013), -2.3 (2014 proj.), -1.4 (2015 proj.), -0.5 (2016 proj.), -0.2 (2017 proj.), -0.4 (2018 proj.), -0.5 (2019 proj.).
- Debt dynamics:
  - General government debt (percent of GDP): 43.6 (2011), 52.7 (2012), 55.4 (2013), 55.4 (2014 proj.), 55.3 (2015 proj.), 53.8 (2016 proj.), 51.8 (2017 proj.), 49.9 (2018 proj.), 48.2 (2019 proj.).
  - Gross public debt (millions of euros): 30,106 (2011), 37,439 (2012), 39,975 (2013), 41,113 (2014 proj.), 42,696 (2015 proj.), 43,516 (2016 proj.), 43,925 (2017 proj.), 44,413 (2018 proj.), 44,925 (2019 proj.).
- Fiscal drivers and notes:
  - Revenue composition (2013 levels in millions of euros): Taxes 11,739; Social contributions 9,932; Grants 818; Other revenue 3,437.
  - Expenditure composition (2013): Social benefits 13,661; Compensation of employees 5,488; Interest 1,411; Net acquisition of nonfinancial assets 1,462.
  - Projections assume 3 percent cut of some expenditures in 2014 and partial spending freeze in 2015-16, consistent with Fiscal Responsibility Act provisions.

### External sector and balance of payments
- Current account and trade:
  - Current account (millions of euros): -2,597 (2011), 1,585 (2012), 1,550 (2013), 1,661 (2014 proj.), 1,873 (2015 proj.), 1,983 (2016 proj.), 2,142 (2017 proj.), 2,311 (2018 proj.), 2,435 (2019 proj.).
  - Trade balance (goods, millions of euros): 1,015 (2011), 3,578 (2012), 4,284 (2013), 4,529 (2014 proj.), 4,951 (2015 proj.), 5,290 (2016 proj.), 5,671 (2017 proj.), 6,063 (2018 proj.), 6,418 (2019 proj.).
  - Exports, f.o.b. (millions of euros): 56,783 (2011), 62,308 (2012), 64,362 (2013), 66,730 (2014 proj.), 69,453 (2015 proj.), 72,777 (2016 proj.), 76,041 (2017 proj.), 79,206 (2018 proj.), 82,317 (2019 proj.).
  - Current account balance (percent of GDP): -3.8 (2011), 2.2 (2012), 2.1 (2013), 2.2 (2014 proj.), 2.4 (2015 proj.), 2.5 (2016 proj.), 2.5 (2017 proj.), 2.6 (2018 proj.), 2.6 (2019 proj.).
- Financial account and NIIP:
  - Financial Account (millions of euros): 3,460 (2011), -343 (2012), 1,423 (2013), -2,434 (2014 proj.), -2,740 (2015 proj.), -2,854 (2016 proj.), -3,050 (2017 proj.), -3,158 (2018 proj.), -3,244 (2019 proj.).
  - Net International Investment Position (millions of euros): -44,534 (2011), -45,580 (2012), -47,322 (2013), -44,888 (2014 proj.), -42,148 (2015 proj.), -39,294 (2016 proj.), -36,244 (2017 proj.), -33,086 (2018 proj.), -29,842 (2019 proj.).
  - External Debt (millions of euros): 51,970 (2011), 54,062 (2012), 60,062 (2013), 62,996 (2014 proj.), 64,741 (2015 proj.), 67,370 (2016 proj.), 69,527 (2017 proj.), 71,437 (2018 proj.), 73,410 (2019 proj.).
- Observations:
  - Goods exports shifted the current account into surplus and placed Slovakia among stronger exporters in Europe.
  - Errors and omissions grew larger and the financial account recorded large swings.
  - NIIP remained negative but relatively limited and deteriorated slightly, as did external debt.

### Competitiveness and business environment
- Trade and external competitiveness:
  - Real GDP, exports and imports (million EUR) show steady recovery from 2000–2012 (charted).
  - Slovak export shares to World, Euro area, and European Union trended upward (charted).
  - Nominal and real effective exchange rates largely stabilized after some depreciation (2005=100 series).
  - Unit labor costs decreased; wages remain low relative to productivity.
- Competitiveness indicators:
  - Labor productivity and average monthly gross wage comparisons indicate productivity above some peers while wages remain comparatively low (figures charted).
  - Global Competitiveness Index: deterioration from 2008-09 to 2013-14 (charted).
- Business environment (OECD indices, scale 0–6 where lower is better):
  - Employment Protection and Product Market Regulation compare reasonably with peers.
  - Areas for improvement identified: reduce state control, lower administrative burdens on start-ups, improve competition in retail sector, and liberalize professional services further.
  - Recent reform reversals noted in the commentary.

### Monetary and banking sector
- Credit and deposits:
  - Private sector credit growth and deposits: annual year-on-year percentage changes shown; credit growth inched up, funded by domestic deposits.
- Interest rates and ECB operations:
  - Lending rates tracked core euro area rates; ECB borrowing limited with LTROs largely repaid.
  - Lending rates (average indicator): 4.7 (2011), 4.4 (2012), 4.1 (2013) (Table 1 footnotes).
- Asset quality and profitability:
  - Nonperforming loans to gross loans: 5.3 (2009), 5.8 (2010), 5.6 (2011), 5.2 (2012), 5.1 (2013) (Table 6).
  - Provisions and NPL coverage remained adequate; provisioning levels charted.
  - Return on assets (after tax): 0.6 (2009), 1.2 (2010), 0.7 (2011), 1.0 (2012), 1.3 (2013) (Table 6).
  - Capital adequacy: Regulatory capital to risk-weighted assets: 12.6 (2009), 12.7 (2010), 13.4 (2011), 15.7 (2012), 16.5 (2013).
- Liquidity and leverage:
  - Customer deposits to total (noninterbank) loans: 116.1 (2010), 116.6 (2011), 109.4 (2012), 114.2 (2013).
  - External indicators: gross external debt and net IIP trends noted above.

### Key statistics and projections (selected exact figures)
- Real GDP growth: 3.01 (2011), 1.8 (2012), 0.9 (2013), 2.4 (2014 proj.), 2.7 (2015 proj.), 2.9 (2016 proj.), 3.1 (2017 proj.), 3.1 (2018 proj.), 3.0 (2019 proj.).
- Unemployment rate (percent): 13.7 (2011), 14.0 (2012), 14.2 (2013), 14.0 (2014 proj.), 13.7 (2015 proj.), 13.2 (2016 proj.), 12.7 (2017 proj.), 12.1 (2018 proj.), 11.6 (2019 proj.).
- General government debt (percent of GDP): 43.6 (2011), 52.7 (2012), 55.4 (2013), 55.4 (2014 proj.), 55.3 (2015 proj.), 53.8 (2016 proj.), 51.8 (2017 proj.), 49.9 (2018 proj.), 48.2 (2019 proj.).
- Current account balance (percent of GDP): -3.8 (2011), 2.2 (2012), 2.1 (2013), 2.2 (2014 proj.), 2.4 (2015 proj.), 2.5 (2016 proj.), 2.5 (2017 proj.), 2.6 (2018 proj.), 2.6 (2019 proj.).

*Sources: Eurostat; National Authorities; Bloomberg; Haver; OECD; World Economic Forum; IMF DOTS; IMF WEO; Global Financial Stability Report; and IMF staff calculations.*

### Annex I. Slovak Republic: Risk Assessment Matrix

### Annex I. Slovak Republic: Risk Assessment Matrix

### Overview and methodology
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff).
- Relative likelihood categories: "low" is meant to indicate a probability below 10 percent, "medium" a probability between 10 and 30 percent, and "high" a probability between 30 and 50 percent.
- The RAM reflects staff views on sources of risk and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

### External risks
- Side-effects from global financial conditions (short-term)
  - Relative Likelihood: High
  - Impact if Realized: Low
  - Key considerations and channels:
    - Surges in global financial market volatility, triggered by geopolitical tensions or revised market expectations on UMP exit/emerging market fundamentals.
    - The Slovak banking sector is self-funded by deposits and enjoys robust capitalization.
    - Interest costs could rise somewhat.
    - The government has already pre-funded much of 2014 financing needs.
    - Non-residents hold about half of government debt, but the stock is relatively low and financing needs are declining.
    - Lower exports and growth if trading partners are substantially affected.
  - Policy response:
    - Draw on cash balances.
    - Slow diversification of holders of government debt and turn to domestic banking sector as a backstop.

- Protracted period of slower growth in advanced and emerging economies (medium-term)
  - Relative Likelihood: High
  - Impact if Realized: High
  - Key considerations and channels:
    - Advanced Economies: Lower-than-anticipated potential growth and persistently low inflation due to a failure to fully address legacies of the financial crisis, leading to secular stagnation.
    - Emerging Economies: Maturing of the cycle, misallocation of investment, and incomplete structural reforms leading to prolonged slower growth.
    - Strong trade links to Europe, especially Germany, would hit exports and growth, exacerbating high unemployment.
    - Given integration into global supply chains, slower emerging market growth could hit Slovakia.
    - Public debt dynamics are especially sensitive to growth shocks and debt brakes harmful to growth could be breached.
    - Banks’ asset quality could deteriorate due to weaker growth and higher unemployment.
  - Policy response:
    - Over long-term, diversify exports and FDI.
    - Improve labor market and business climate to attract FDI and boost growth, including through stronger domestic demand.
    - Recalibrate a more gradual fiscal adjustment path to the extent possible (given debt brake rules), while prioritizing spending on active labor market and other policies to address high unemployment.
    - Banks can draw on strong provision and capital buffers.

- A sharp increase in geopolitical tensions surrounding Russia/Ukraine (short/medium-term)
  - Relative Likelihood: Medium
  - Impact if Realized: Medium
  - Key considerations and channels:
    - Could create significant disruptions in global financial, trade and commodity markets.
    - Trade and financial links with Ukraine are limited, but Slovakia is largely dependent on Russia for energy and as a market for exports worth about 2 percent of GDP.
    - Potential headwinds would strengthen if Germany and the euro area were significantly affected.
  - Policy response:
    - Draw on cash balances.
    - Draw on gas reserves.
    - Over long-term, diversify sources of energy supply.
    - Improve labor market and business climate to boost growth, including through stronger domestic demand.

- Bond market stress from a reassessment of sovereign risk (short-term)
  - Relative Likelihood: Low
  - Impact if Realized: Low
  - Key considerations and channels:
    - Euro area: Sovereign stress re-emerges due to incomplete reforms, unanticipated outcomes from the asset quality review and stress tests in the absence of a fiscal backstop.
    - Slovak sovereign spreads remained relatively contained even at the height of the crisis and financing needs are falling.
    - Interest costs could rise.
    - The government has already pre-funded much of 2014 financing needs.
    - Non-residents hold about half of government debt, but the stock is relatively low and financing needs are declining.
    - Possible adverse AQR/stress test findings are likely manageable given low non-performing loans, subdued credit growth, and robust bank capitalization.
  - Policy response:
    - Draw on cash balances.
    - Slow diversification of holders of government debt and turn to domestic banking sector as a backstop.
    - Banks can draw on strong provision and capital buffers.

### Domestic risks
- Prolonged high unemployment (medium-term)
  - Relative Likelihood: Medium
  - Impact if Realized: High
  - Key considerations and channels:
    - Sustained high unemployment would inhibit recovery in domestic demand and lower growth.
    - Hysteresis effects could lower potential growth and contribute to a lost generation of workers.
    - Public debt is especially sensitive to growth shocks.
  - Policy response:
    - Improve labor market / business climate.
    - Recalibrate a more gradual fiscal adjustment path to the extent possible (given debt brake rules), while prioritizing spending on active labor market and other policies to address high unemployment.

### Annex II — Authorities’ Response to Past IMF Policy Recommendations
- Achieving High-quality Fiscal Consolidation
  - IMF 2013 recommendations:
    - Maintain VAT rate, improve VAT collection efficiency, and reduce tax evasion.
    - Introduce a property value-based real estate tax.
    - Move more quickly to a higher retirement age and raise the overall retirement age to strengthen the pension system.
  - Authorities’ response:
    - Parliament approved maintaining VAT rate.
    - Reducing tax evasion and VAT efficiency are top priorities and has benefited from FAD analysis. An ambitious action plan to combat tax fraud is being implemented.
    - Property tax changes are being considered, but implementation is unlikely before 2016.
    - Raising the retirement age is not desirable due to low life expectancy and small expected savings.

- Boosting Growth and Reducing Unemployment
  - IMF 2013 recommendations:
    - Address high unemployment by lowering labor taxes, strengthening active labor market policies (ALMPs), improving education, and training, and enhancing mobility.
    - Use EU Funds effectively.
    - Improve investment climate by strengthening infrastructure and governance, lowering administrative burdens for businesses and ensuring a predictable legal climate, including with respect to labor regulations.
  - Authorities’ response:
    - The government is committed to reducing unemployment, has taken steps to streamline and improve ALMPs and focus on disadvantaged job seekers, including through a labor cost subsidy.
    - Education and training initiatives, including to create a dual system, are underway.
    - Efforts to improve government efficiency and to facilitate financing for SMEs are underway.
    - Labor Code changes are unlikely to affect unemployment.

- Preserving Financial Stability
  - IMF 2013 recommendations:
    - Lower the bank levy in line with other European countries and allocate proceeds to a well-defined special resolution fund.
    - Enhance the supervisory framework through a more well-specified intervention and resolution framework, in line with European directives and banking union developments.
  - Authorities’ response:
    - The proceeds of the bank levy are available for resolution if needed and the levy rate will gradually decline with the accumulation of resources.
    - All the recent EU directives (CRD IV/CRR, etc.) have been transposed into national legislation. Risks are low and well-understood by the NBS.

*Source: Annex I. Slovak Republic: Risk Assessment Matrix, Slovak Republic — INTERNATIONAL MONETARY FUND*

### Annex III. Slovak Republic: Public Sector Debt Sustainability

### Annex III. Slovak Republic: Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

### Baseline results and projections
- Nominal gross public debt (in percent of GDP):
  - 2012: 36.3
  - 2013: 52.7
  - 2014: 55.4
  - 2015: 55.4
  - 2016: 55.3
  - 2017: 53.8
  - 2018: 51.8
  - 2019: 49.9
  - 2019 (final listed): 48.2
- Public gross financing needs (in percent of GDP):
  - 2012: 11.6
  - 2013: 12.2
  - 2014: 10.9
  - 2015: 6.7
  - 2016: 6.0
  - 2017: 7.0
  - 2018: 6.8
  - 2019: 5.7
  - 2019 (final listed): 5.5
- Public debt (in percent of potential GDP) mirrors nominal series: 36.5 (2012) rising to 52.1 (2013) then declining to 48.2 (2019).
- Change in gross public sector debt (cumulative, in percent of GDP):
  - 2012: 0.1
  - 2013: 9.0
  - 2014: 2.8
  - 2015: 0.0
  - 2016: -0.1
  - 2017: -1.4
  - 2018: -2.0
  - 2019: -1.9
  - cumulative (through projection horizon): -7.2
- Identified debt-creating flows (annual contributions, in percent of GDP):
  - Total identified: 1.3 (2012); 3.8 (2013); 2.9 (2014); 0.6 (2015); -0.1 (2016); -1.4 (2017); -2.0 (2018); -2.0 (2019); -1.9 (2019 final); cumulative -6.7
  - Primary deficit contribution: 2.7 (2012); 2.9 (2013); 1.0 (2014); 1.1 (2015); 0.5 (2016); -0.5 (2017); -1.0 (2018); -1.1 (2019); -1.1 (2019 final); cumulative -2.0
  - Primary (noninterest) revenue and grants (in percent of GDP): 33.6 (2012); 33.5 (2013); 35.7 (2014); 35.3 (2015); 34.1 (2016); 33.1 (2017); 32.9 (2018); 32.8 (2019); 32.7 (2019 final); cumulative 200.9
  - Primary (noninterest) expenditure (in percent of GDP): 36.3 (2012); 36.4 (2013); 36.7 (2014); 36.5 (2015); 34.6 (2016); 32.6 (2017); 31.9 (2018); 31.7 (2019); 31.6 (2019 final); cumulative 198.9
- Automatic debt dynamics (interest rate/growth differential contribution, in percent of GDP): -1.5 (2012); 0.5 (2013); 1.1 (2014); 0.2 (2015); -0.6 (2016); -0.9 (2017); -0.9 (2018); -1.0 (2019); -0.7 (2019 final); cumulative -3.9
  - Real interest rate contribution: 0.8 (2012); 1.3 (2013); 1.7 (2014); 1.5 (2015); 0.8 (2016); 0.7 (2017); 0.7 (2018); 0.6 (2019); 0.7 (2019 final); cumulative 4.9
  - Real GDP growth contribution: -1.6 (2012); -0.8 (2013); -0.5 (2014); -1.3 (2015); -1.4 (2016); -1.5 (2017); -1.6 (2018); -1.5 (2019); -1.4 (2019 final); cumulative -8.8
- Other identified debt-creating flows and asset changes:
  - Other identified flows: 0.0 (2012); 0.4 (2013); 0.8 (2014); -0.8 (2015); 0.0 thereafter; cumulative -0.8
  - Net privatization proceeds (negative): 0.0 (2012); 0.0 (2013); 0.0 (2014); -1.0 (2015); 0.0 thereafter; cumulative -1.0
  - Accumulation of deposits and ESM contribution: 0.0 (2012); 0.4 (2013); 0.8 (2014); 0.2 (2015); 0.0 thereafter; cumulative 0.2
  - Residual, including asset changes: -1.2 (2012); 5.3 (2013); -0.2 (2014); -0.6 (2015); -0.1 (2016); -0.1 (2017); -0.1 (2018); 0.2 (2019); 0.1 (2019 final); cumulative -0.5

### Key macroeconomic assumptions underlying the baseline
- Real GDP growth (in percent): 2012: 4.8; 2013: 1.8; 2014: 0.9; 2015: 2.4; 2016: 2.7; 2017: 2.9; 2018: 3.1; 2019: 3.1; final 3.0
- Inflation (GDP deflator, in percent): 2012: 2.4; 2013: 1.3; 2014: 0.5; 2015: 0.4; 2016: 1.4; 2017: 1.7; 2018: 1.7; 2019: 1.8; final 1.8
- Nominal GDP growth (in percent): 7.4 (2012); 3.1 (2013); 1.5 (2014); 2.9 (2015); 4.1 (2016); 4.6 (2017); 4.9 (2018); 4.9 (2019); final 4.8
- Effective interest rate (in percent; interest payments / debt stock at end previous year): 4.9 (2012); 4.3 (2013); 3.8 (2014); 3.3 (2015); 3.0 (2016); 3.0 (2017); 3.0 (2018); 2.9 (2019); final 3.2
- Ratings (as reported): Moody's A2/A2; S&P AA/AA; Fitch A+/A+

### Alternative scenarios and composition of debt
- Alternative scenario assumptions shown:
  - Historical Scenario:
    - Real GDP growth: 2.4 (2014–2019 constant)
    - Inflation: 0.4; 1.4; 1.7; 1.7; 1.8; 1.8 (2014–2019)
    - Primary Balance: -1.1 (2014), then -2.7 (2015–2019)
    - Effective interest rate: 3.3 (2014), 3.0 (2015), 3.1 (2016), 3.4 (2017), 3.5 (2018), 3.9 (2019)
  - Constant Primary Balance Scenario:
    - Primary Balance held at -1.1 (2014–2019)
    - Other macro assumptions as baseline
- Composition of public debt charts indicate medium/long-term vs short-term and local vs foreign currency shares over 2003–2019 (figures presented graphically in source).

### Stress tests and scenario outcomes
- Stress tests performed include:
  - Primary Balance Shock
  - Real GDP Growth Shock
  - Real Interest Rate Shock
  - Real Exchange Rate Shock
  - Combined Macro-Fiscal Shock
- Selected stress-test parameter outcomes (examples from tables):
  - Primary Balance Shock scenario (sample annual projections):
    - Real GDP growth path: 2.4; 2.7; 2.9; 3.1; 3.1; 3.0
    - Inflation path: 0.4; 1.4; 1.7; 1.7; 1.8; 1.8
    - Primary balance: -1.1; -1.6; -0.6; 0.5; 1.0; 1.1
    - Effective interest rate: 3.3; 3.0; 3.0; 3.1; 3.0; 3.3
  - Real GDP Growth Shock scenario (sample annual projections):
    - Real GDP growth path: 2.4; -1.6; -1.4; 3.1; 3.1; 3.0
    - Primary balance: -1.1; -2.4; -3.2; 1.0; 1.1; 1.1
    - Effective interest rate: 3.3; 3.0; 3.0; 3.2; 3.2; 3.4
  - Real Interest Rate Shock scenario:
    - Effective interest rate increases: 3.3; 3.0; 3.5; 4.1; 4.6; 5.4
  - Real Exchange Rate Shock scenario:
    - Inflation changes (example): 0.4; 1.9; 1.7; 1.7; 1.8; 1.8
    - Effective interest rate path similar to baseline
  - Combined Shock:
    - Real GDP growth: 2.4; -1.6; -1.4; 3.1; 3.1; 3.0
    - Inflation: 0.4; 0.3; 0.6; 1.7; 1.8; 1.8
    - Primary balance: -1.1; -2.4; -3.2; 1.0; 1.1; 1.1
    - Effective interest rate: 3.3; 3.0; 3.6; 4.4; 4.9; 5.6
- Stress-test outcomes (graphical):
  - Under baseline and selected shocks, gross nominal public debt trajectories and public gross financing needs are charted through 2019, showing higher debt under adverse shocks (figures in source).

### Risk assessment and vulnerability indicators
- Market perception indicators cited:
  - EMBIG (bp): 76 (average long-term bond spread over German bonds)
  - 5Y CDS (bp): 44
- Debt profile and risk benchmarks (2013 indicators):
  - Gross financing needs benchmark of 20% of GDP not exceeded under baseline (country value for gross financing needs reported as 12; chart indicates "Not applicable for Slovak Republic" in one panel).
  - Public debt held by non-residents: 61 percent of total (2013)
  - Public debt in foreign currency: not explicitly listed numerically in table extract; graphical presentation provided in source.
- External financing requirement (definition provided): sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at end of previous period.
- Predictive density evolution charts and percentile bands for gross nominal public debt presented (10th–25th, 25th–75th, 75th–90th percentiles) for 2012–2019.

### External DSA (selected highlights)
- Baseline external debt (in percent of GDP) and projections:
  - 2009: 71.2
  - 2010: 75.6
  - 2011: 55.3
  - 2012: 76.0
  - 2013: 83.3
  - 2014: 84.9
  - 2015: 83.8
  - 2016: 83.3
  - 2017: 82.0
  - 2018: 80.3
  - 2019: 78.8
- Change in external debt (in percent of GDP): 13.6 (2009); 4.3 (2010); -0.2 (2011); 0.7 (2012); 7.2 (2013); 1.6 (2014); -1.1 (2015); -0.5 (2016); -1.3 (2017); -1.7 (2018); -1.5 (2019)
- Identified external debt-creating flows (sum, in percent of GDP): 17.3 (2009); 7.4 (2010); -4.3 (2011); -0.1 (2012); 0.4 (2013); 3.1 (2014); 1.2 (2015); 2.0 (2016); 1.2 (2017); 0.7 (2018); 0.7 (2019)
- Current account deficit excluding interest payments (in percent of GDP): 1.1 (2009); 2.4 (2010); 2.2 (2011); -4.1 (2012); -4.1 (2013); -4.0 (2014); -4.1 (2015); -4.2 (2016); -4.3 (2017); -4.3 (2018); -4.4 (2019)
- Gross external financing need (in billions of US dollars): 27.4 (2009); 38.6 (2010); 39.1 (2011); 34.9 (2012); 27.9 (2013); 25.5 (2014); 26.6 (2015); 27.8 (2016); 29.1 (2017); 30.3 (2018); 31.5 (2019)
- External DSA bound tests and shock scenarios presented graphically (interest rate shock, current account shock, growth shock, combined shocks, 30% real depreciation) with baseline and historical comparators.

*Source: IMF staff (Annex III. Slovak Republic: Public Sector Debt Sustainability, as of July 07, 2014).*

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

### _cr14254 - 1.      Coverage, periodicity, and timeliness of data provided to the Fund are adequate for

### Data coverage, periodicity, and timeliness — summary findings
- Coverage, periodicity, and timeliness of data provided to the Fund are adequate for surveillance purposes.
- Significant data improvements have been made, particularly in the national accounts.
- A data ROSC mission during February–March 2004 found integrity, methodological soundness, and reliability of the data were satisfactory, despite shortcomings in the data revision policy.
- Main remaining issues:
  - A significant statistical discrepancy between the supply and demand sides for GDP.
  - Weaknesses in the data on prices and volumes of imports and exports.
- The Slovak Republic has subscribed 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 are promptly released to news services and published monthly/quarterly and on the Internet according to a pre-announced schedule.
  - Core surveillance variables provided 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.

### Real sector and prices — findings and ongoing work
- National accounts compilation has seen significant progress but still exhibits weaknesses.
- Quarterly and annual national accounts show statistical discrepancies between supply side and demand side.
- Outstanding issue: compilation of reliable price deflators for imports and exports to enable better decomposition into volume and price changes.
- Statistical authorities are transitioning to ESA2010; improvements are ongoing as part of this transition.

### Fiscal sector — methodology and systems
- General government statistics are in transition to the ESA2010 methodology.
- Ministry of Finance has compiled fiscal accounts according to ESA95 standards and reports general government net lending/borrowing and gross debt on a quarterly basis.
- Monthly reconciliation of government operations above and below-the-line is restricted to state budget transactions on a cash basis.
- A modern treasury system has been operating since January 2004, improving fiscal control and public debt management by recording expenditures at planning and commitment stages.
- ESA 2010 methodology will be implemented from September 2014.

### External sector — quality and planned changes
- External sector statistics are generally of good quality and reported timely to the Fund.
- Errors and omissions in the balance of payments are large; reported financial account flows are subject to large volatility.
- Statistical authorities are addressing these issues.
- Authorities will start submitting data to the Fund following BPM6 in September 2014.

### Monetary sector — assessment
- Monetary statistics are of good quality and are reported on a timely basis to the Fund.

### Table of Common Indicators — selected timeliness and data-quality notes (As of July 11, 2014)
- Exchange Rates: Latest Observation: Current; Date Received: Current; Frequency of Data/Reporting/Publication: D / D / D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities 1/: Latest Observation: July 2014; Date Received: July 2014; Frequency: D / W / W.
- Reserve/Base Money: Latest Observation: May 2014; Date Received: July 2014; Frequency: M / M / M.
- Broad Money: Latest Observation: May 2014; Date Received: July 2014; Frequency: M / M / M.
- Central Bank Balance Sheet: Latest Observation: May 2014; Date Received: July 2014; Frequency: M / M / M.
- Consolidated Balance Sheet of the Banking System: Latest Observation: May 2014; Date Received: July 2014; Frequency: M / M / M.
- Interest Rates 2/: Latest Observation: Current; Date Received: Current; Frequency: D / D / D.
- Consumer Price Index: Latest Observation: May 2014; Date Received: July 2014; Frequency: M / M / M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government 4/: Latest Observation: 2013; Date Received: July 2014; Frequency: A / A / A; Data Quality – Methodological soundness: LO, LO, LO, O; Data Quality – Accuracy and reliability: O, O, O, O, O, NA.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Latest Observation: June 2014; Date Received: July 2014; Frequency: M / M / M.
- Stocks of Central Government and Central Government-Guaranteed Debt 5/: Latest Observation: 2014Q1; Date Received: May 2014; Frequency: Q / Q / Q.
- External Current Account Balance: Latest Observation: Apr. 2014; Date Received: July 2014; Frequency: M / M / M; Data Quality – Methodological soundness: O, O, LO, O; Data Quality – Accuracy and reliability: LO, O, LO, O, LO.
- Exports and Imports of Goods and Services: Latest Observation: Apr. 2014; Date Received: July 2014; Frequency: M / M / M.
- GDP/GNP: Latest Observation: 2014Q1; Date Received: May 2014; Frequency: Q / Q / Q; Data Quality – Methodological soundness: O, O, LO, LO; Data Quality – Accuracy and reliability: LO, O, LO, O, LO.
- Gross External Debt: Latest Observation: 2014Q1; Date Received: Jun. 2014; Frequency: Q / Q / Q.
- International Investment Position 7/: Latest Observation: 2014Q1; Date Received: Jun. 2014; Frequency: Q / Q / Q.

Notes relevant to the Table:
- 1/ Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
- 2/ Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
- 3/ Foreign, domestic bank, and domestic nonbank financing.
- 4/ The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 5/ Including currency and maturity composition.
- 6/ Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).
- 7/ Includes external gross financial asset and liability positions vis-à-vis nonresidents.
- 8/ Reflects the assessment provided in the data ROSC (published on May 17, 2005, based on the mission during February 18–March 3, 2004). Assessment categories: O (fully observed), LO (largely observed), LNO (largely not observed), NO (not observed).
- 9/ Same as footnote 7, except referring to accuracy and reliability aspects.

### IMF staff statement (August 27, 2014) — main updates since July 31, 2014 staff report
- Growth:
  - Preliminary Q2 2014: seasonally adjusted output growth 0.6 percent quarter-on-quarter and 2.6 percent year-on-year, consistent with forecast growth of 2.4 percent for the year.
- Inflation:
  - July headline HICP inflation: -0.2 percent year-on-year; core HICP inflation: 0.5 percent.
  - Staff notes somewhat greater downside risks to the forecast of 0.4 percent headline inflation for 2014, although annual deflation is not expected.
- Fiscal policy:
  - Q1 2014 data broadly in line with expectations and confirm improvement in VAT collection seen in 2013.
  - Government debt reached 58 percent of GDP in Q1, mainly reflecting pre-funding; debt forecast just above 55 percent of GDP at end-2014.
  - First draft of the budget for 2015 and the medium term largely in line with staff projections.
- Minimum wage proposal:
  - Finance Ministry proposed increase from €352 to €380 per month, effective January 2015.
  - Proposal includes reduction in employer health contributions for low-wage workers to offset labor-cost impact.

### Press Release No. 14/401 — Executive Board conclusions (September 2, 2014)
- Overall assessment:
  - Slovak economy slowed in 2013 but gathering momentum as euro area and domestic demand recover; strong export sector continues to underpin growth.
  - Unemployment remains very high—around 14 percent—with about two-thirds long-term and youth unemployment around 33 percent.
  - Fiscal adjustment brought deficit to 2.8 percent of GDP in 2013, enabling exit from the EU’s Excessive Deficit Procedure.
  - Public debt is manageable and easily financed; private debt moderate; banking sector sound with strong capital and liquidity levels.
- Outlook:
  - Growth forecast: 2.4 percent for 2014 and 2.7 percent for 2015.
  - Risks: downside related to slow recovery in Europe and geopolitical tensions.
  - Inflation: turned negative in early 2014 but expected to return to moderately positive later in the year.
  - Trade and current account balances forecast to remain in surplus.
- Policy priorities discussed:
  - Support growth, reduce high unemployment, address regional disparities.
  - Need for high-quality, durable fiscal measures, especially revenue-side, to sustain fiscal progress, limit debt brake impacts, and make room for budget priorities.
  - Strengthen financial sector regulation prudently and encourage capital market development.

### Executive Board assessment — policy recommendations and priorities
- Growth and labor market:
  - Implement wide-ranging policies to promote investment and job creation, particularly in lagging regions.
  - Focus on strengthening infrastructure, including better use of EU funds.
  - Create a more favorable business environment by improving contract enforcement, public procurement, the legal system, and addressing corruption.
  - Enhance labor market functioning by reducing the tax wedge, reforming the benefit structure to make work more attractive, strengthening education and training, and bolstering public employment services.
- Fiscal policy:
  - Additional durable fiscal measures needed to sustain progress and put debt on a declining path while protecting growth.
  - Strengthening revenue collection (reducing evasion and fraud) is crucial.
  - Welcome recent progress in strengthening VAT efficiency and decision to maintain the VAT rate.
  - Consider a property tax based on market values as more equitable and less distortive.
  - Privatization of state assets encouraged to reduce debt in a growth-friendly way.
  - Consider streamlining the combination of domestic and EU fiscal rules over time to reduce pro-cyclicality and expenditure focus.
- Financial sector:
  - Commend continued prudent supervision.
  - Note risks: increasing loan-to-value ratios for mortgages and sustained growth of other housing loans warrant attention.
  - Welcome efforts to encourage domestic capital market development to support non-bank finance and credit to SMEs.

### Selected economic indicators and projections (2011–15)
- Real GDP:
  - 2011: 3.0
  - 2012: 1.8
  - 2013: 0.9
  - 2014 (projection): 2.4
  - 2015 (projection): 2.7
- Inflation (HICP):
  - 2011: 4.1
  - 2012: 3.7
  - 2013: 1.5
  - 2014 (projection): 0.4
  - 2015 (projection): 1.5
- Inflation (HICP, end of period):
  - 2011: 4.6
  - 2012: 3.4
  - 2013: 0.4
  - 2014 (projection): 1.5
  - 2015 (projection): 1.5
- Unemployment rate (percent):
  - 2011: 13.7
  - 2012: 14.0
  - 2013: 14.2
  - 2014 (projection): 14.0
  - 2015 (projection): 13.7
- Public Finance, General Government (In percent of GDP):
  - Revenue:
    - 2011: 34.1
    - 2012: 33.7
    - 2013: 35.9
    - 2014 (projection): 35.4
    - 2015 (projection): 34.1
  - Expenditure:
    - 2011: 38.9
    - 2012: 38.2
    - 2013: 38.7
    - 2014 (projection): 38.3
    - 2015 (projection): 36.3
  - Overall balance:
    - 2011: -4.8
    - 2012: -4.5
    - 2013: -2.8
    - 2014 (projection): -2.9
    - 2015 (projection): -2.2
  - General government debt:
    - 2011: 43.6
    - 2012: 52.7
    - 2013: 55.4
    - 2014 (projection): 55.4
    - 2015 (projection): 55.3
- Monetary and financial indicators:
  - Bank credit to private sector (growth rate): 2011: 8.6; 2012: 2.8; 2013: 5.6.
  - Lending rates 2/: 2011: 4.7; 2012: 4.4; 2013: 4.1.
  - Deposit rates 3/: 2011: 1.6; 2012: 1.4; 2013: 1.0.
  - Government 10-year bond yield: 2011: 4.4; 2012: 3.3; 2013: 3.2.
- Balance of payments:
  - Trade balance (goods): 2011: 1.5; 2012: 5.0; 2013: 5.9; 2014 (projection): 6.1; 2015 (projection): 6.4.
  - Current account balance: 2011: -3.8; 2012: 2.2; 2013: 2.1; 2014 (projection): 2.2; 2015 (projection): 2.4.
  - Gross external debt: 2011: 75.3; 2012: 76.0; 2013: 83.3; 2014 (projection): 84.9; 2015 (projection): 83.8.

*Source: IMF staff report materials and associated tables as provided in the content unit.*

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