## 1. External Assessment

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### Recent developments and outlook
- Growth and demand
  - Growth is strengthening, driven by domestic demand.
  - Slovakia was one of the fastest growing economies in Europe after the crisis due to a dynamic export sector; domestic demand has now picked up.
  - A concerted push to spend expiring EU funds boosted public investment; accommodative ECB policies and improving lending conditions supported a recovery in private investment.
  - Job creation and real wage growth have fueled private consumption.
  - Export growth remains strong, but imports have risen even faster.
- Labor market
  - Job creation has accelerated and unemployment has fallen; regional disparities remain large, and skills shortages are starting to put pressure on wages.
  - Youth and long-term unemployment, albeit declining, remain high, and women’s labor force participation continues to be low.
- Inflation
  - Headline inflation has been marginally negative, reflecting weak food prices and declining administered energy prices.
  - Core inflation has hovered just below 0.5 percent.
  - Inflation expectations remain well-anchored; prices are forecast to rise as the output gap closes.
  - Risks from deflation remain low due to robust wage growth and limited leverage.
- Fiscal developments
  - The 2015 fiscal target is likely to be missed by a small amount.
  - The 2015 budget deficit target: 2.5 percent of GDP; expected overshoot: 0.2 percent of GDP.
  - Revenue was boosted by solid GDP growth and tax administration improvements; interest costs remain low amid ECB QE.
  - Spending overruns: wages, intermediate consumption, and healthcare; sizeable EU funds corrections.
  - Sale of state shares in Slovak Telekom in May: about 1 percent of GDP.
  - Government debt is expected to decline to around 53 percent of GDP, keeping it just below strict Fiscal Responsibility Act (FRA) debt brakes.
  - Authorities lengthened the maturity of public debt; share of non-resident holdings remains relatively high.
- External sector and debt
  - External position broadly in line with fundamentals.
  - Solid export performance and rising market shares; buoyant domestic demand boosted imports.
  - Narrowing of the trade surplus moved the current account into a small deficit.
  - External debt rose in recent years partly due to increases in non-resident holdings of government debt, but has stabilized.
  - Real exchange rate assessed to be broadly in line with fundamentals.
- Financial sector and credit
  - Household credit growth expanding by about 12 percent year-on-year despite macroprudential recommendations.
  - Household debt remains low compared to peers.
  - Corporate loans have picked up as lending standards and interest rates eased.
  - Non-performing loans (NPLs) have increased in line with total loan growth; low NPL ratio roughly stable; impaired assets are well-provisioned on average.
  - Bank profitability and capital buffers remain sound.
- Migration
  - Recent migration crisis had limited impact on Slovakia; relatively few refugees passed through or stayed in the country.
  - Authorities objected to the EU quota system (would place around 1,000 migrants in the country); allocated resources to help secure the EU’s external border and provide aid to refugees abroad.
- Outlook and key risks
  - Growth projections:
    - Growth expected to accelerate from 3.4 percent this year to 3.6 percent in 2016 (closing the output gap).
    - Growth over the longer term expected to be a little more than 3 percent, generally in line with potential growth.
  - Drivers:
    - Despite lower public investment as EU funds drawings normalize, accommodative monetary and credit conditions, weaker oil prices, and tightening capacity utilization should support private investment.
    - A fourth carmaker (Jaguar Land Rover) plans to invest almost 2 percent of GDP over 2016–17 in a new plant that would raise car production by one-third, boosting net exports from 2018.
    - Improving labor market conditions and real wage growth likely to foster private consumption.
  - Buffers and vulnerabilities:
    - Buffers: sound and liquid banking sector, low private sector leverage, limited public debt.
    - External shock risk: slowdown in key trading partners (e.g., Germany) or in the euro area, slowdown in China or other emerging markets, or tensions in Russia and Ukraine would affect Slovakia’s export sector, lower growth, and increase public debt ratio.
    - Domestic risks: rapid household credit growth could lead to financial sector risks; high long-term unemployment could erode human capital and undermine growth.
    - Volkswagen emissions scandal: uncertain consequences but an important downside risk given substantial operations in Slovakia.

### External assessment (Box 1)
- Real exchange rate and current account
  - EBA-Lite current account model suggests a marginal undervaluation of the REER: 4 percent.
  - EBA-Lite REER model panel estimations indicate a large overvaluation (about 30 percent), but the panel may poorly fit a catching-up economy.
  - Tailored REER analysis using a panel of peer transition economies confirms limited undervaluation: 7 percent.
  - Small policy gap from the EBA-Lite model: 0.7 percent indicates fiscal, external, and financial policies are close to equilibrium.
  - Model estimates a current account norm of negative 2.5 percent of GDP.
  - Actual current account is broadly in balance; large negative errors and omissions may blur the picture.
- Capital and financial account
  - Downward trend in FDI inflows estimated to have bottomed out in 2015; recovery projected in 2016–17 reflecting planned investment of a fourth car maker.
  - After exceptionally large inflows, portfolio investment declined in 2014–15 partly due to lower net borrowing from abroad by the government.
  - Net flows projected to gradually converge to balance.
- Foreign asset and liability positions
  - External debt forecast to reach 93 percent of GDP in 2015.
  - Net international investment position would stabilize at negative 70 percent.
  - External vulnerabilities mitigated by long maturities of external debt and large share of FDI among liabilities.
  - Small current account surpluses are nonetheless appropriate in the medium term given the negative net international investment position.

### Slovakia’s automotive sector and trade profile (Box 2)
- Automotive sector importance
  - Automotive industry accounts for 43 percent of Slovakia’s total industrial production.
  - Three car producers (Volkswagen, PSA Peugeot-Citroën, and Kia) employ 80,000 workers; including suppliers boosts auto industry employment to 200,000 (about 9 percent of total employment).
  - In 2014, car production was just under 1 million vehicles, making Slovakia the world’s largest per capita car producer.
  - Volkswagen accounts for about 40 percent of automobile production; PSA Peugeot-Citroën and Kia have a share of 30 percent each.
  - Core automotive industry generates 17 percent of Slovakia’s gross value added; suppliers account for an additional 22 percent.
- Trade concentration and GVC participation
  - Five countries account for about 50 percent of total nominal exports: Germany (22 percent), Czech Republic (13 percent), Poland (8 percent), Austria (6 percent), and Hungary (6 percent).
  - Imports concentration: Germany (15 percent), Czech Republic (10 percent), China (8 percent).
  - Car industry exports are almost entirely shipped to Europe, with some re-routing to Asia and other markets via Germany.
  - Slovakia’s share of domestic value added consumed by China remains relatively low (around 2 percent).
- Risks from specialization
  - Participation in global value chains (GVCs) has fostered convergence but increases vulnerability due to specialization in downstream stages and a few industries.
  - Estimated impact: a 10 percent fall in car exports would shave 0.3-0.7 percentage points from GDP growth.
  - Strong cost competition from neighboring countries adds challenges.
- Policy directions to reduce risks and diversify
  - Move up GVCs and diversify production and trade partners by encouraging FDI from other countries and in other sectors.
  - Key measures: improving the business environment; fostering R&D through greater development of clusters; upgrading skills and physical infrastructure; improving labor market efficiency (flexibility and mobility).

### Labor market, regional disparities, and policy recommendations
- Labor market challenges
  - Despite rapid convergence, regional disparities in income and employment remain among the largest in the EU.
  - Jobs are mainly created in wealthiest regions, especially in or near Bratislava where unemployment is low.
  - Poor infrastructure discourages investment and job creation in less dynamic areas.
  - Low labor mobility due in part to high home-ownership and underdeveloped rental markets.
  - About two-thirds of the jobless are long-term unemployed, with a large share concentrated in eastern and southern regions.
  - Youth unemployment remains near 25 percent.
  - Slovakia compares unfavorably with European peers in women’s labor force participation and the gender pay gap.
  - Disproportionate unemployment/inactivity among the Roma community.
- Policy package to spur job-rich growth and address demographic challenges
  - Enhance transportation infrastructure and strengthen the business climate (including improvements to the legal and procurement systems to address governance weaknesses) to encourage investment in weaker regions.
  - Promote rental housing reforms:
    - Phase out support for home ownership.
    - Expand means-tested rental housing allowances.
    - Ease regulations that discourage property owners from renting.
  - Promote labor mobility through housing and infrastructure reforms.
  - Orient education toward workforce requirements, strengthen active labor market policies (ALMPs), and improve the business climate to foster inclusive, job-rich growth.

### Box 3 — Tackling High Youth Unemployment in Slovakia
- Key findings and context
  - Youth unemployment remains a key concern amidst improving labor market conditions.
  - More than two-thirds of the young population remains excluded from the job market.
  - The share of young people not in education, employment, or training is high relative to EU peers.
  - Poor school-to-work transition and skill mismatches may exacerbate broader labor market challenges (e.g., a high tax wedge).
- Drivers and empirical evidence
  - Panel-based and country-specific analysis highlight the labor tax wedge, which has increased over the past ten years, as an important factor contributing to youth unemployment in Slovakia.
  - The gross replacement rate (GRR) also stands out and may reflect similar effects insofar as high social contributions push up the GRR.
  - These results reinforce arguments for reducing the relatively high tax wedge for low-income and low-skill workers.
- Programs and recent reforms
  - A dual system for vocational education and practical training was launched in September 2015.
  - Legislation has sought to improve exchanges between schools and employers.
  - EU-funded schemes have helped create temporarily subsidized jobs for 700 young job-seekers (slightly more than 1.2 percent of total youth unemployment).
  - A reduction in the health contribution allowance to offset the impact of the minimum wage increase in early 2015 was adopted.
- Policy recommendations
  - Lower the labor tax wedge, especially for low-wage or part-time workers.
  - Strengthen education and training and scale up the dual vocational education system.
  - Raise and sustain ALMP spending, and complete planned evaluations of ALMPs.
  - Provide additional and more affordable childcare to improve female labor force participation.
  - Target improvements in elementary and secondary education, particularly for marginalized populations such as Roma.
- Authorities’ views and planned actions
  - Authorities agree regional disparities, skill mismatches, and especially high long-term unemployment are key challenges.
  - Infrastructure and regional disparities: stepped-up use of EU Funds; incentives for investment in weaker regions; rental housing initiatives may be considered in a third social package.
  - Education and training: financial incentives to align education with labor market needs; scale-up dual vocational education; new curricula; temporary subsidies for youth jobs.
  - PES and ALMPs: commit to reform PES and improve ALMP effectiveness; centralization and reallocation of employees toward high-need areas; reforms to be implemented by 2020.
  - Labor taxes: measures in November 2013 and January 2015 (exemptions and health contribution reductions) seen as supportive.
  - Female labor force participation: expand kindergarten capacity and modestly increase childcare allowance.
  - Authorities caution cultural and non-economic factors limit near-term progress in labor mobility, female participation, and integration of marginalized groups.

### Budget, tax compliance, and FRA reform
- Fiscal targets and measures
  - Authorities confident that improvements in tax compliance and expenditure savings, mainly in healthcare and public administration, will achieve the 2016 fiscal target.
  - Government plans a major spending review program early next year based on value-for-money analysis.
  - Results achieved in fighting tax evasion and fraud, especially regarding the VAT.
  - In 2016 the reverse-charge mechanism will be introduced for the construction sector to improve VAT collection efficiency.
  - The government added 30 measures to its action plan to combat tax fraud.
- Market-based real estate tax
  - Implementing a market-based real estate tax will take time; reforms to upgrade the cadastre and collect property transaction prices are being prepared.
- FRA reform considerations
  - Amending the FRA is unlikely in the near term.
  - Possible modifications discussed: more gradual adjustment when debt brakes are crossed; more realistic escape clauses; netting out cash balances; less bias toward expenditure cuts; keeping current debt brake levels (50–60 percent of GDP) rather than allowing them to progressively fall starting in 2018.

### Financial soundness amid high credit growth — metrics and recommendations
- Banking sector metrics and buffers
  - Tier 1 capital ratio at 16 percent.
  - Leverage at a moderate 7.8 percent.
  - Capital add-on of 2–3 percent for domestically systemically important banks will be phased in during 2016–18.
  - Loan loss provisions cover almost 70 percent of all impaired loans despite a recent slowdown in provisioning.
  - Loan-to-deposit ratio marginally above 90 percent.
  - Liquid assets are high at 30 percent of total assets.
  - Household debt increase is among the largest in the EU (from a low base); credit to non-financial corporates only recently turned positive year-on-year.
- Macroprudential recommendations
  - Lower the LTV limit from 90 to 85 percent with planned transposition of macroprudential recommendations into law.
  - Introduce a debt-to-income ratio (DTI); NBS should issue clear guidance on a maximum overall debt-to-income ratio for borrowers.
  - Apply a counter-cyclical capital buffer (CCB) of at least 0.5 percent if above-trend credit growth continues and broadens to the corporate sector.
  - Supply-side measures for real-estate exposures:
    - Raise credit risk weights and impose stricter loss-given-default assumptions on real estate-related exposures.
    - Implement new European standards for loan classification.
    - Mandate verification of external appraisals by lenders to avoid inflated collateral valuations.
- Bank resolution readiness
  - Tests of feasibility of resolution tools and cross-border coordination would facilitate readiness under the new European framework.
  - Allocation of proceeds from the bank levy to a dedicated resolution fund would help finance the national contribution to the EU’s Single Resolution Fund (SRF).
  - Staff recommends testing resolution tools and placing bank levy proceeds in a dedicated resolution fund.
- Non-bank financial institutions and insurance sector
  - Low interest rates make asset-liability matching for life insurers more difficult.
  - Authorities should facilitate transition towards unit-linked insurance products and explore development of an industry-funded policyholder protection scheme.
  - Staff reiterates exploration of an industry-funded policyholder protection scheme.
- Capital market development and access to finance
  - Better functioning capital markets could provide alternative finance and investment options.
  - A more stable approach to the second pension pillar and regulations encouraging diversified investment strategies could foster institutional investors.
  - Targeted efforts to promote financing for small and innovative firms are welcome and could be supported by an EU Capital Markets Union.
  - Government plans to reduce capital gains taxes and transaction fees, including through establishment of a new central depository.

### Staff appraisal — summary of priorities
- Growth and inflation
  - Growth is picking up as domestic demand strengthens; rising investment (notably stepped-up use of EU funds) and strong private consumption are driving domestic demand.
  - Inflation expected to remain slightly negative this year due to falling energy costs, with prices rising in 2016 as the output gap closes.
- Key risks
  - External factors present the greatest risks to Slovakia’s outlook; shocks to key trading partners could affect the important export sector.
  - Domestic risks include rapid household credit growth and high long-term unemployment.
- Policy priorities
  - Enhance transportation infrastructure and business climate to encourage investment in weaker regions.
  - Reform rental housing to facilitate labor mobility.
  - Reduce labor tax wedge, especially for low-wage or part-time workers.
  - Enhance education and training and strengthen ALMPs to address skill shortages.
  - Improve childcare options to facilitate greater workforce participation by women.
  - Implement high-quality fiscal measures:
    - Moderate pace of further fiscal adjustment to ensure headroom under domestic debt rules and address population aging.
    - Enhance revenue collection and broaden tax base, including via a market value-based real estate tax.
    - Achieve spending efficiencies, especially in the health sector and through a review of social benefits.
    - Reduce sizeable state shareholdings to enable growth-friendly debt reduction.

### Macroeconomic tables, projections, and fiscal outlook (selected exact figures)
- Output and demand (annual percent change):
  - Real GDP: 2012: 1.5; 2013: 1.4; 2014: 2.5; 2015: 3.4; 2016: 3.6; 2017: 3.5; 2018: 3.4; 2019: 3.3; 2020: 3.2
  - Domestic demand: 2012: -4.2; 2013: 0.3; 2014: 3.1; 2015: 4.1; 2016: 3.3; 2017: 3.8; 2018: 3.2; 2019: 2.9; 2020: 2.6
  - Exports of goods and services: 2012: 9.3; 2013: 6.2; 2014: 3.6; 2015: 6.5; 2016: 5.6; 2017: 5.6; 2018: 6.0; 2019: 6.0; 2020: 6.1
- Inflation (HICP):
  - 2012: 3.7; 2013: 1.5; 2014: -0.1; 2015: -0.3; 2016: 0.7; 2017: 1.6; 2018: 1.8; 2019: 1.9; 2020: 2.0
- Potential growth and output gap:
  - Potential Growth: 2012: 2.3; 2013: 1.9; 2014: 2.4; 2015: 2.7; 2016: 3.1; 2017: 3.2; 2018: 3.4; 2019: 3.4; 2020: 3.3
  - Output Gap: 2012: -0.9; 2013: -1.4; 2014: -1.2; 2015: -0.5; 2016: 0.0; 2017: 0.2; 2018: 0.2; 2019: 0.2; 2020: 0.1
- Labor market (selected):
  - Employment growth: 2012: 0.1; 2013: -0.8; 2014: 1.4; 2015: 2.0; 2016: 1.7; 2017: 1.3; 2018: 1.0; 2019: 0.8; 2020: 0.8
  - Unemployment rate (percent): 2012: 14.0; 2013: 14.3; 2014: 13.2; 2015: 11.6; 2016: 10.4; 2017: 9.7; 2018: 9.3; 2019: 9.3; 2020: 9.3
- Fiscal aggregates (percent of GDP):
  - Revenue: 2012: 36.0; 2013: 38.4; 2014: 38.9; 2015: 40.1; 2016: 38.3; 2017: 38.2; 2018: 38.0; 2019: 37.9; 2020: 37.8
  - Expenditure: 2012: 40.1; 2013: 41.0; 2014: 41.6; 2015: 42.8; 2016: 40.5; 2017: 40.2; 2018: 39.8; 2019: 39.7; 2020: 39.6
  - Overall balance: 2012: -4.2; 2013: -2.6; 2014: -2.8; 2015: -2.7; 2016: -2.2; 2017: -2.0; 2018: -1.8; 2019: -1.8; 2020: -1.8
  - Gross public debt: 2012: 51.9; 2013: 54.6; 2014: 53.5; 2015: 52.8; 2016: 52.1; 2017: 51.6; 2018: 51.0; 2019: 50.3; 2020: 49.7
- External sector (selected)
  - Current account balance (millions of euros): 2012: 684; 2013: 1,119; 2014: 38; 2015: -405; 2016: -380; 2017: -458; 2018: -333; 2019: -286; 2020: 57
  - Current account (% of GDP): 2012: 0.9; 2013: 1.5; 2014: 0.1; 2015: -0.5; 2016: -0.5; 2017: -0.5; 2018: -0.4; 2019: 0.0; 2020: 0.7
  - Net International Investment Position (millions of euros): 2012: -46,978; 2013: -52,825; 2014: -54,147; 2015: -53,476; 2016: -52,848; 2017: -52,157; 2018: -51,205; 2019: -49,520
  - External Debt (millions of euros): 2012: 60,445; 2013: 67,776; 2014: 72,388; 2015: 74,619; 2016: 76,805; 2017: 78,696; 2018: 80,535; 2019: 82,375
- Banking sector indicators (selected)
  - Regulatory capital to risk-weighted assets: 2010: 12.7; 2011: 13.4; 2012: 15.7; 2013: 16.5; 2014: 17.3; 2015Q2: 17.5
  - Capital to assets: 2010: 9.7; 2011: 10.8; 2012: 11.7; 2013: 12.1; 2014: 11.9; 2015Q2: 11.3
  - Nonperforming loans to gross loans: 2010: 5.8; 2011: 5.6; 2012: 5.2; 2013: 5.1; 2014: 5.3; 2015Q2: 5.3
  - Return on assets (after tax): 2010: 1.2; 2011: 0.7; 2012: 1.0; 2013: 1.3; 2014: 1.2; 2015Q2: 1.5
  - Customer deposits to total loans around 109.4 (2015Q2)
- Selected medium-term projections (Table 1)
  - Real GDP projection for 2016–2020: 2016: 3.6; 2017: 3.5; 2018: 3.4; 2019: 3.3; 2020: 3.2
  - General government debt (% of GDP): 2016: 52.1; 2017: 51.6; 2018: 51.0; 2019: 50.3; 2020: 49.7
  - Current account (% of GDP) projected 2016: -0.5; 2017: -0.5; 2018: -0.4; 2019: 0.0; 2020: 0.7

### Risk Assessment Matrix — selected entries
- External risks (examples)
  - Tighter or more volatile global financial conditions
    - Relative likelihood: Low
    - Impact if realized: High
    - Policy responses: draw on cash balances if needed; persevere on fiscal adjustment; improve labor market and business climate.
  - Structurally weak growth in key advanced and emerging economies
    - Relative likelihood: High (euro area); Medium (EMs incl. China)
    - Impact if realized: High
    - Noted effect: "a 1 percent fall in euro area GDP could lower Slovak industrial production by 7 percent within a year."
- Domestic risks
  - Prolonged high unemployment
    - Relative likelihood: Medium
    - Impact if realized: Medium
    - Policy response: improve labor market and strengthen business climate; invest in weaker regions; active labor market policies.
  - Deterioration in loan quality due to rapid household credit growth
    - Relative likelihood: Medium
    - Impact if realized: Medium
    - Policy response: strengthen macroprudential measures such as loan-to-value requirements and accompany with debt-to-income ratios; further build capital buffers.

### Debt Sustainability Analysis — baseline and stress scenarios (selected numeric highlights)
- Public debt (nominal gross, percent of GDP): 2013: 37.3; 2014: 54.6; 2015: 53.5; 2016: 52.8; 2017: 52.1; 2018: 51.6; 2019: 51.0; 2020: 50.3; Projection: 49.7
- Public gross financing needs (percent of GDP): 2013: 11.1; 2014: 10.6; 2015: 10.1; 2016: 7.4; 2017: 7.8; 2018: 8.6; 2019: 4.9; 2020: 4.5; Projection: 6.1
- Baseline scenario key macro assumptions (selected):
  - Real GDP growth: 3.4 (2015), 3.6 (2016), 3.5 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
  - Inflation (GDP deflator): -0.2 (2015), 0.6 (2016), 1.4 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020)
  - Primary Balance: -1.2 (2015), -0.8 (2016), -0.7 (2017), -0.7 (2018), -0.7 (2019), -0.7 (2020)
- DSA stress-test scenarios (selected outcomes)
  - Real GDP Growth Shock example:
    - Real GDP growth: 3.4 (2015), -0.9 (2016), -1.0 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
    - Primary balance: -1.2 (2015), -3.0 (2016), -5.3 (2017), -0.7 (2018), -0.7 (2019), -0.7 (2020)
  - Combined Shock example:
    - Real GDP growth: 3.4 (2015), -0.9 (2016), -1.0 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
    - Effective interest rate: 3.2 (2015), 3.1 (2016), 3.5 (2017), 3.8 (2018), 4.1 (2019), 4.3 (2020)

*Source: Excerpt from IMF staff report — "1. External Assessment" (content unit _cr1613).*

### 1. External Assessment ____________________________________________________________________________ 6

### 1. External Assessment

### Recent developments and outlook
- Growth and demand
  - Growth is strengthening, driven by domestic demand.
  - Slovakia was one of the fastest growing economies in Europe after the crisis due to a dynamic export sector; domestic demand has now picked up.
  - A concerted push to spend expiring EU funds boosted public investment; accommodative ECB policies and improving lending conditions supported a recovery in private investment.
  - Job creation and real wage growth have fueled private consumption.
  - Export growth remains strong, but imports have risen even faster.

- Labor market
  - Job creation has accelerated and unemployment has fallen; regional disparities remain large, and skills shortages are starting to put pressure on wages.
  - Youth and long-term unemployment, albeit declining, remain high, and women’s labor force participation continues to be low.

- Inflation
  - Headline inflation has been marginally negative, reflecting weak food prices and declining administered energy prices.
  - Core inflation has hovered just below 0.5 percent.
  - Inflation expectations remain well-anchored; prices are forecast to rise as the output gap closes.
  - Risks from deflation remain low due to robust wage growth and limited leverage.

- Fiscal developments
  - The 2015 fiscal target is likely to be missed by a small amount.
  - The 2015 budget deficit target: 2.5 percent of GDP; expected overshoot: 0.2 percent of GDP.
  - Revenue was boosted by solid GDP growth and tax administration improvements; interest costs remain low amid ECB QE.
  - Spending overruns: wages, intermediate consumption, and healthcare; sizeable EU funds corrections.
  - Sale of state shares in Slovak Telekom in May: about 1 percent of GDP.
  - Government debt is expected to decline to around 53 percent of GDP, keeping it just below strict Fiscal Responsibility Act (FRA) debt brakes.
  - Authorities lengthened the maturity of public debt; share of non-resident holdings remains relatively high.

- External sector and debt
  - External position broadly in line with fundamentals.
  - Solid export performance and rising market shares; buoyant domestic demand boosted imports.
  - Narrowing of the trade surplus moved the current account into a small deficit.
  - External debt rose in recent years partly due to increases in non-resident holdings of government debt, but has stabilized.
  - Real exchange rate assessed to be broadly in line with fundamentals.

- Financial sector and credit
  - Household credit growth expanding by about 12 percent year-on-year despite macroprudential recommendations.
  - Household debt remains low compared to peers.
  - Corporate loans have picked up as lending standards and interest rates eased.
  - Non-performing loans (NPLs) have increased in line with total loan growth; low NPL ratio roughly stable; impaired assets are well-provisioned on average.
  - Bank profitability and capital buffers remain sound.

- Migration
  - Recent migration crisis had limited impact on Slovakia; relatively few refugees passed through or stayed in the country.
  - Authorities objected to the EU quota system (would place around 1,000 migrants in the country); allocated resources to help secure the EU’s external border and provide aid to refugees abroad.

- Outlook and key risks
  - Growth projections:
    - Growth expected to accelerate from 3.4 percent this year to 3.6 percent in 2016 (closing the output gap).
    - Growth over the longer term expected to be a little more than 3 percent, generally in line with potential growth.
  - Drivers:
    - Despite lower public investment as EU funds drawings normalize, accommodative monetary and credit conditions, weaker oil prices, and tightening capacity utilization should support private investment.
    - A fourth carmaker (Jaguar Land Rover) plans to invest almost 2 percent of GDP over 2016–17 in a new plant that would raise car production by one-third, boosting net exports from 2018.
    - Improving labor market conditions and real wage growth likely to foster private consumption.
  - Buffers and vulnerabilities:
    - Buffers: sound and liquid banking sector, low private sector leverage, limited public debt.
    - External shock risk: slowdown in key trading partners (e.g., Germany) or in the euro area, slowdown in China or other emerging markets, or tensions in Russia and Ukraine would affect Slovakia’s export sector, lower growth, and increase public debt ratio.
    - Domestic risks: rapid household credit growth could lead to financial sector risks; high long-term unemployment could erode human capital and undermine growth.
    - Volkswagen emissions scandal: uncertain consequences but an important downside risk given substantial operations in Slovakia.

### External assessment (Box 1)
- Real exchange rate and current account
  - EBA-Lite current account model suggests a marginal undervaluation of the REER: 4 percent.
  - EBA-Lite REER model panel estimations indicate a large overvaluation (about 30 percent), but the panel may poorly fit a catching-up economy.
  - Tailored REER analysis using a panel of peer transition economies confirms limited undervaluation: 7 percent.
  - Small policy gap from the EBA-Lite model: 0.7 percent indicates fiscal, external, and financial policies are close to equilibrium.
  - Model estimates a current account norm of negative 2.5 percent of GDP.
  - Actual current account is broadly in balance; large negative errors and omissions may blur the picture.

- Capital and financial account
  - Downward trend in FDI inflows estimated to have bottomed out in 2015; recovery projected in 2016–17 reflecting planned investment of a fourth car maker.
  - After exceptionally large inflows, portfolio investment declined in 2014–15 partly due to lower net borrowing from abroad by the government.
  - Net flows projected to gradually converge to balance.

- Foreign asset and liability positions
  - External debt forecast to reach 93 percent of GDP in 2015.
  - Net international investment position would stabilize at negative 70 percent.
  - External vulnerabilities mitigated by long maturities of external debt and large share of FDI among liabilities.
  - Small current account surpluses are nonetheless appropriate in the medium term given the negative net international investment position.

### Slovakia’s automotive sector and trade profile (Box 2)
- Automotive sector importance
  - Automotive industry accounts for 43 percent of Slovakia’s total industrial production.
  - Three car producers (Volkswagen, PSA Peugeot-Citroën, and Kia) employ 80,000 workers; including suppliers boosts auto industry employment to 200,000 (about 9 percent of total employment).
  - In 2014, car production was just under 1 million vehicles, making Slovakia the world’s largest per capita car producer.
  - Volkswagen accounts for about 40 percent of automobile production; PSA Peugeot-Citroën and Kia have a share of 30 percent each.
  - Core automotive industry generates 17 percent of Slovakia’s gross value added; suppliers account for an additional 22 percent.

- Trade concentration and GVC participation
  - Five countries account for about 50 percent of total nominal exports: Germany (22 percent), Czech Republic (13 percent), Poland (8 percent), Austria (6 percent), and Hungary (6 percent).
  - Imports concentration: Germany (15 percent), Czech Republic (10 percent), China (8 percent).
  - Car industry exports are almost entirely shipped to Europe, with some re-routing to Asia and other markets via Germany.
  - Slovakia’s share of domestic value added consumed by China remains relatively low (around 2 percent).

- Risks from specialization
  - Participation in global value chains (GVCs) has fostered convergence but increases vulnerability due to specialization in downstream stages and a few industries.
  - Estimated impact: a 10 percent fall in car exports would shave 0.3-0.7 percentage points from GDP growth.
  - Strong cost competition from neighboring countries adds challenges.

- Policy directions to reduce risks and diversify
  - Move up GVCs and diversify production and trade partners by encouraging FDI from other countries and in other sectors.
  - Key measures: improving the business environment; fostering R&D through greater development of clusters; upgrading skills and physical infrastructure; improving labor market efficiency (flexibility and mobility).

### Labor market, regional disparities, and policy recommendations
- Labor market challenges
  - Despite rapid convergence, regional disparities in income and employment remain among the largest in the EU.
  - Jobs are mainly created in wealthiest regions, especially in or near Bratislava where unemployment is low.
  - Poor infrastructure discourages investment and job creation in less dynamic areas.
  - Low labor mobility due in part to high home-ownership and underdeveloped rental markets.
  - About two-thirds of the jobless are long-term unemployed, with a large share concentrated in eastern and southern regions.
  - Youth unemployment remains near 25 percent (Box 3 reference).
  - Slovakia compares unfavorably with European peers in women’s labor force participation and the gender pay gap.
  - Disproportionate unemployment/inactivity among the Roma community.

- Policy package to spur job-rich growth and address demographic challenges
  - Enhance transportation infrastructure and strengthen the business climate (including improvements to the legal and procurement systems to address governance weaknesses) to encourage investment in weaker regions.
  - Promote rental housing reforms:
    - Phase out support for home ownership.
    - Expand means-tested rental housing allowances.
    - Ease regulations that discourage property owners from renting.
  - Promote labor mobility through housing and infrastructure reforms.
  - Orient education toward workforce requirements, strengthen active labor market policies (ALMPs), and improve the business climate to foster inclusive, job-rich growth.

*Source: Excerpt from IMF staff report — "1. External Assessment" (content unit _cr1613).*

### Box 3. Tackling High Youth Unemployment in Slovakia

### Box 3. Tackling High Youth Unemployment in Slovakia

### Key findings and context
- Youth unemployment remains a key concern amidst improving labor market conditions.
- More than two-thirds of the young population remains excluded from the job market.
- The share of young people not in education, employment, or training is high relative to EU peers.
- Poor school-to-work transition and skill mismatches may exacerbate broader labor market challenges (e.g., a high tax wedge).
- Not getting off to a good career start can have lasting impacts on individuals (e.g., diminished skills and attachment to the workforce) and on potential growth of the economy.

### Drivers and empirical evidence
- Economic growth has reduced youth unemployment recently, but other factors are important.
- Panel-based and country-specific analysis highlight the labor tax wedge, which has increased over the past ten years, as an important factor contributing to youth unemployment in Slovakia.
- The gross replacement rate (GRR) also stands out and may reflect similar effects insofar as high social contributions push up the GRR.
- These results reinforce arguments for reducing the relatively high tax wedge for low-income and low-skill workers.

### Programs and recent reforms
- A dual system for vocational education and practical training was launched in September 2015.
- Legislation has sought to improve exchanges between schools and employers to better tailor curricula and vocational training to business needs.
- EU-funded schemes have helped create temporarily subsidized jobs for 700 young job-seekers (slightly more than 1.2 percent of total youth unemployment).
- A reduction in the health contribution allowance to offset the impact of the minimum wage increase in early 2015 was adopted.

### Policy recommendations
- Lower the labor tax wedge, especially for low-wage or part-time workers, to foster labor force participation and reduce disincentives to hiring.
- Strengthen education and training to address skill shortages; ensure effective implementation and scale-up of the dual vocational education system.
- Raise and sustain active labor market policy (ALMP) spending, and complete the planned evaluation of various ALMPs to maximize effectiveness.
- Provide additional and more affordable childcare to improve female labor force participation.
- Target efforts to improve elementary and secondary education, particularly for marginalized populations such as Roma.

### Authorities’ views and planned actions
- The authorities agree regional disparities, skill mismatches, and especially high long-term unemployment are key challenges.
- Infrastructure and regional disparities: stepped-up use of EU Funds is helping improve infrastructure; incentives are offered for investment in weaker regions; initiatives to promote rental housing may be considered in a third social package.
- Education and training: financial incentives are used to better align education and training with labor market needs; the dual vocational education system will be scaled up; new curricula relevant to potential jobs are being prepared; temporary subsidies are provided for jobs for unemployed young people; efforts to support integration of marginalized communities continue.
- Public Employment Service (PES) and ALMPs: the government is committed to reform the PES and improve ALMP effectiveness; centralization of PES activities and reallocation of employees toward high-need areas; reforms to be implemented by 2020.
- Labor taxes: in November 2013, a twelve month exemption from social security contributions for long-term unemployed returning to work was introduced; in January 2015, a reduction in health contributions for low-paid workers was adopted. Authorities believe both measures supported the recent labor market upswing.
- Female labor force participation: kindergarten capacity is being expanded and the childcare allowance has been increased modestly.
- The authorities caution that cultural and other non-economic factors mean near-term progress is likely to be limited in areas such as labor mobility, female labor force participation, and integration of marginalized groups.

*Source: IMF staff (Box 3, "Tackling High Youth Unemployment in Slovakia").*

### 20. The authorities reaffirmed their commitment to sustainable public finances while

### 20. The authorities reaffirmed their commitment to sustainable public finances while

### Budget, tax compliance, and spending review
- Authorities confident that improvements in tax compliance and expenditure savings, mainly in healthcare and public administration, will achieve the 2016 fiscal target.
- Government plans a major spending review program early next year based on value-for-money analysis.
- Results achieved in fighting tax evasion and fraud, especially regarding the VAT, were underscored.
- In 2016 the so-called reverse-charge mechanism will be introduced for the construction sector to improve VAT collection efficiency.
- The government added 30 measures to its action plan to combat tax fraud aimed at enhancing collection.

### Market-based real estate tax
- Implementing a market-based real estate tax will take time.
- Government preparing reforms to upgrade the cadastre and to collect property transaction prices, which have not been available since the transaction tax was abolished in 2004.

### FRA reform
- Benefits of reforms such as netting out cash balances were acknowledged.
- Amending the FRA is unlikely in the near term.
- Possible modifications discussed in staff appraisal to lessen negative effects while maintaining fiscal discipline:
  - More gradual pace of adjustment when debt brakes are crossed.
  - More realistic escape clauses.
  - Netting out cash balances.
  - Less bias toward expenditure cuts.
  - Keeping current debt brake levels (50–60 percent of GDP) rather than allowing them to progressively fall starting in 2018 as stipulated under the FRA.

### Financial soundness amid high credit growth — overview
- Despite macroprudential measures, bank lending to households is growing briskly.
- Low private sector debt and high banking sector capital buffers limit vulnerabilities, but a stronger macroprudential stance could be warranted.
- Low interest rate environment associated with ECB QE calls for closer monitoring of non-bank financial institutions.
- Steps needed to deepen capital markets and improve access to finance.

### Banking sector metrics and buffers
- Tier 1 capital ratio at 16 percent.
- Leverage at a moderate 7.8 percent.
- Capital add-on of 2–3 percent for domestically systemically important banks will be phased in during 2016–18.
- Loan loss provisions cover almost 70 percent of all impaired loans despite a recent slowdown in provisioning.
- Loan-to-deposit ratio marginally above 90 percent.
- Liquid assets are high at 30 percent of total assets.
- Household debt increase is among the largest in the EU (from a low base); credit to non-financial corporates only recently turned positive year-on-year.

### Macroprudential recommendations to limit credit risk buildup
- Lower the LTV limit from 90 to 85 percent with planned transposition of macroprudential recommendations into law to better align housing loan regulation with peers.
- Introduce a debt-to-income ratio (DTI); NBS should use authority under the planned law to issue clear guidance on a maximum overall debt-to-income ratio for borrowers.
- Apply a counter-cyclical capital buffer (CCB) of at least 0.5 percent if above-trend credit growth continues and broadens to the corporate sector.
- Adopt more tailored supply-side measures to address real-estate-related exposures:
  - Raise credit risk weights and impose stricter loss-given-default assumptions on real estate-related exposures to raise the cost of mortgage loans without affecting non-financial corporate borrowing.
  - Implement new European standards for loan classification.
  - Mandate verification of external appraisals by lenders to avoid inflated collateral valuations.

### Bank resolution readiness
- Tests of the feasibility of resolution tools and cross-border coordination would facilitate readiness under the new European framework, given large deposit base and role of foreign-owned banks.
- Allocation of proceeds from the bank levy to a dedicated resolution fund would help finance the national contribution to the EU’s Single Resolution Fund (SRF).
- Staff recommends that bank resolution tools should be tested and bank levy proceeds should be placed in a dedicated resolution fund.

### Non-bank financial institutions and insurance sector
- Low interest rates make asset-liability matching for life insurance companies more difficult, potentially undermining guarantee-based products.
- Authorities should:
  - Facilitate transition towards unit-linked insurance products.
  - Explore development of an industry-funded policyholder protection scheme, especially in absence of a resolution mechanism for non-bank financial institutions.
- Staff appraisal reiterates exploration of an industry-funded policyholder protection scheme.

### Capital market development and access to finance
- Better functioning capital markets could provide firms alternative finance, additional investment options for savers, and enable banks to issue more long-term debt such as covered bonds.
- A more stable approach to the second pension pillar and regulations encouraging diversified investment strategies could foster institutional investors.
- Targeted efforts to promote financing for small and innovative firms are welcome and could be supported by an EU Capital Markets Union.
- Links to other stock exchanges in the region should be explored to promote market access.
- Government plans to reduce capital gains taxes and transaction fees, including through establishment of a new central depository, to support domestic capital market development.

### Authorities’ views (National Bank of Slovakia — NBS)
- NBS views the macro-prudential policy stance as appropriate but is ready to act if needed.
- Direct impact on credit growth of current measures has been limited, but recommendations have improved lending standards.
- NBS reviewing possibility of introducing a CCB but has deferred action until more conclusive evidence of excessive credit growth, including broadening to corporate borrowing.
- NBS considers macro-financial vulnerabilities from low-interest rates limited since most insurance companies have started offering non-guaranteed products.
- Government plans to reduce capital gains taxes and transaction fees to support capital market development.

### Staff appraisal — key points and risks
- Growth is picking up as domestic demand strengthens; rising investment (notably stepped-up use of EU funds) and strong private consumption are driving domestic demand.
- Inflation expected to remain slightly negative this year due to falling energy costs, with prices rising in 2016 as the output gap closes.
- External factors present the greatest risks to Slovakia’s outlook; shocks to key trading partners could affect the important export sector.
- Domestic risks include rapid household credit growth and high long-term unemployment.
- High unemployment, inactivity, and regional disparities warrant comprehensive policies:
  - Enhance transportation infrastructure and business climate to encourage investment in weaker regions.
  - Reform rental housing to facilitate labor mobility.
  - Reduce labor tax wedge, especially for low-wage or part-time workers.
  - Enhance education and training and strengthen ALMPs to address skill shortages.
  - Improve childcare options to facilitate greater workforce participation by women.
- High-quality fiscal measures are needed to ensure room for policy maneuver while advancing priorities:
  - Moderate pace of further fiscal adjustment to ensure headroom under domestic debt rules and address population aging.
  - Enhance revenue collection and broaden tax base, including via a market value-based real estate tax.
  - Achieve spending efficiencies, especially in the health sector and through a review of social benefits.
  - Reduce sizeable state shareholdings to enable growth-friendly debt reduction.

*Source: IMF staff report excerpt.*

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

### _cr1613 - 37. It is proposed that the next Article IV consultation with the Slovak Republic take place on the

### Main economic developments and growth
- Real GDP growth (annual contributions and components shown in figures): Real GDP accelerated in 2014–15 with domestic demand driving growth; capacity utilization tightened.
- Output and demand (Table 1, annual percent change unless noted):
  - Real GDP: 2012: 1.5; 2013: 1.4; 2014: 2.5; 2015: 3.4; 2016: 3.6; 2017: 3.5; 2018: 3.4; 2019: 3.3; 2020: 3.2
  - Domestic demand: 2012: -4.2; 2013: 0.3; 2014: 3.1; 2015: 4.1; 2016: 3.3; 2017: 3.8; 2018: 3.2; 2019: 2.9; 2020: 2.6
  - Exports of goods and services: 2012: 9.3; 2013: 6.2; 2014: 3.6; 2015: 6.5; 2016: 5.6; 2017: 5.6; 2018: 6.0; 2019: 6.0; 2020: 6.1
- Inflation (HICP, Table 1):
  - 2012: 3.7; 2013: 1.5; 2014: -0.1; 2015: -0.3; 2016: 0.7; 2017: 1.6; 2018: 1.8; 2019: 1.9; 2020: 2.0
- Potential growth and output gap (Table 1):
  - Potential Growth: 2012: 2.3; 2013: 1.9; 2014: 2.4; 2015: 2.7; 2016: 3.1; 2017: 3.2; 2018: 3.4; 2019: 3.4; 2020: 3.3
  - Output Gap: 2012: -0.9; 2013: -1.4; 2014: -1.2; 2015: -0.5; 2016: 0.0; 2017: 0.2; 2018: 0.2; 2019: 0.2; 2020: 0.1

### Labor market developments
- Employment, unemployment, and participation (figures and Table 1):
  - Employment growth (Table 1): 2012: 0.1; 2013: -0.8; 2014: 1.4; 2015: 2.0; 2016: 1.7; 2017: 1.3; 2018: 1.0; 2019: 0.8; 2020: 0.8
  - Unemployment rate (percent, Table 1): 2012: 14.0; 2013: 14.3; 2014: 13.2; 2015: 11.6; 2016: 10.4; 2017: 9.7; 2018: 9.3; 2019: 9.3; 2020: 9.3
  - Youth unemployment and participation: figures indicate youth unemployment declined but remained elevated relative to some peers.
- Structural issues and policy settings (figures):
  - Structural unemployment (NAIRU) and long-term unemployment are noted as high in comparisons.
  - Public expenditure on active labor market policies (percent of GDP) shows limited spending (Slovakia positioned low among peers in 2008 vs 2013).

### Fiscal developments and public finances
- General government aggregates (Table 2B, percent of GDP):
  - Revenue: 2012: 36.0; 2013: 38.4; 2014: 38.9; 2015: 40.1; 2016: 38.3; 2017: 38.2; 2018: 38.0; 2019: 37.9; 2020: 37.8
  - Expenditure: 2012: 40.1; 2013: 41.0; 2014: 41.6; 2015: 42.8; 2016: 40.5; 2017: 40.2; 2018: 39.8; 2019: 39.7; 2020: 39.6
  - Overall balance (net lending/borrowing, percent of GDP, Table 2B): 2012: -4.2; 2013: -2.6; 2014: -2.8; 2015: -2.7; 2016: -2.2; 2017: -2.0; 2018: -1.8; 2019: -1.8; 2020: -1.8
  - Gross public debt (percent of GDP, Table 2B): 2012: 51.9; 2013: 54.6; 2014: 53.5; 2015: 52.8; 2016: 52.1; 2017: 51.6; 2018: 51.0; 2019: 50.3; 2020: 49.7
- Fiscal balance sheet (Table 2A, millions of euros):
  - Revenue (2015): 31,302; Expenditure (2015): 33,387; Net lending/borrowing (overall balance, 2015): -2,085
  - Gross public debt (2015): 41,191 (millions of euros)
- Fiscal stance (figure captions):
  - Revenue has risen slightly as a share of GDP while expenditure remained broadly stable; the fiscal impulse is close to neutral.

### External sector and balance of payments
- Current account and trade (Table 4, millions of euros and percent of GDP):
  - Current account balance (millions of euros): 2012: 684; 2013: 1,119; 2014: 38; 2015: -405; 2016: -380; 2017: -458; 2018: -333; 2019: -286; 2020: 57
  - Current account (% of GDP): 2012: 0.9; 2013: 1.5; 2014: 0.1; 2015: -0.5; 2016: -0.5; 2017: -0.5; 2018: -0.4; 2019: 0.0; 2020: 0.7
  - Trade balance (goods, % of GDP): 2012: 3.5; 2013: 4.6; 2014: 4.4; 2015: 3.8; 2016: 4.0; 2017: 3.8; 2018: 4.0; 2019: 4.3; 2020: 4.8
- External liabilities and NIIP (Table 4):
  - Net International Investment Position, millions of euros: 2012: -46,978; 2013: -52,825; 2014: -54,147; 2015: -53,476; 2016: -52,848; 2017: -52,157; 2018: -51,205; 2019: -49,520
  - External Debt (millions of euros): 2012: 60,445; 2013: 67,776; 2014: 72,388; 2015: 74,619; 2016: 76,805; 2017: 78,696; 2018: 80,535; 2019: 82,375
- Observations from figures:
  - Dynamic imports have reduced the current account surplus; errors and omissions remain large; financial account components recorded large swings.
  - Although negative, the NIIP is relatively limited but has deteriorated slightly, as has external debt.

### Competitiveness and structural indicators
- Real GDP, exports, imports (Figure 5 captions):
  - Export growth remains solid and market shares have continued to increase.
- Real and nominal effective exchange rates (Figure 5):
  - The real exchange rate has largely stabilized.
- Labor productivity and wages (Figure 5):
  - Wages remain low relative to productivity; unit labor costs have trended upwards.
- Structural indicators (Figure 6 captions and charts):
  - Employment protection legislation and product market regulation compare reasonably well with peers, but margins exist to reduce state control and administrative burdens on start-ups; competition in the retail sector could be improved and professional services liberalized further.
- Global Competitiveness Index and Unit Labor Cost (Figure 5):
  - Unit Labor Cost (2010=100) trends upward for Slovakia relative to peers (series shown in figure).

### Monetary and banking sector soundness
- Banking sector indicators (Table 5 and figures):
  - Regulatory capital to risk-weighted assets: 2010: 12.7; 2011: 13.4; 2012: 15.7; 2013: 16.5; 2014: 17.3; 2015Q2: 17.5
  - Capital to assets: 2010: 9.7; 2011: 10.8; 2012: 11.7; 2013: 12.1; 2014: 11.9; 2015Q2: 11.3
  - Nonperforming loans to gross loans: 2010: 5.8; 2011: 5.6; 2012: 5.2; 2013: 5.1; 2014: 5.3; 2015Q2: 5.3
  - Return on assets (after tax): 2010: 1.2; 2011: 0.7; 2012: 1.0; 2013: 1.3; 2014: 1.2; 2015Q2: 1.5
  - Liquidity and funding: customer deposits to total loans around 109.4 (2015Q2); limited ECB borrowing and deposit rates very low (figures).
- Financial stability observations (figure captions):
  - Credit has grown amid stable funding conditions; share of non-performing loans remains broadly stable; capital buffers and profitability are sound; high provisioning rates and very limited ECB borrowing.

### Key summary indicators and projections (from tables)
- Selected medium-term projections (Table 1):
  - Real GDP projection for 2016–2020: 2016: 3.6; 2017: 3.5; 2018: 3.4; 2019: 3.3; 2020: 3.2
  - General government debt (% of GDP): trend from 2016: 52.1 to 2020: 49.7
  - Current account (% of GDP) projected 2016: -0.5; 2017: -0.5; 2018: -0.4; 2019: 0.0; 2020: 0.7

### Noted strengths and vulnerabilities (as presented)
- Strengths:
  - Solid export growth and rising market shares.
  - Employment gains coupled with productivity growth.
  - Sound bank capital buffers and profitability; low default risk and compressed bond yields.
- Vulnerabilities / challenges:
  - Structural unemployment remains high; low public spending on active labor market policies.
  - External position weakened by dynamic imports and large errors and omissions; NIIP negative and has deteriorated.
  - Unit labor costs trending up and business environment indicators show scope for reform (state control, start-up burdens, retail and professional services).

*Sources: Eurostat; Haver Analytics; and IMF staff calculations.*

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

### _cr1613 - Annex I. Slovak Republic: Risk Assessment Matrix

### External risks: key events, likelihood, impact, and policy responses
- Tighter or more volatile global financial conditions (short term)
  - Relative likelihood: Low
  - Impact if realized: High
  - Risk description:
    - Sharp asset price adjustment and decompression of credit spreads; investors reassess risk and respond to unanticipated changes in growth prospects, Fed policy rate path, and increases in U.S. term premia, with poor market liquidity amplifying volatility.
    - Euro area bond market contagion: sovereign and financial sector stress re-emerges across the Euro area due to protracted policy uncertainty, delays in debt servicing by Greece, faltering reforms, and political and social upheaval.
  - Policy response / consequences:
    - Interest costs could rise, but from very low levels.
    - External borrowing might become more difficult. Non-residents hold about two-thirds of government debt, but the stock is relatively low and in euro or hedged, and financing needs are declining.
    - Slovak banking sector is deposit-funded and enjoys robust capitalization.
    - Lower exports and growth if trading partners are substantially affected.
    - Draw on cash balances if needed.
    - Slow diversification of holders of government debt and turn to domestic banking sector as a backstop.
    - Persevere on fiscal adjustment.
    - Improve labor market and business climate to boost growth, including through stronger domestic demand.

- Structurally weak growth in key advanced and emerging economies (the “new mediocre”)
  - Relative likelihood: High (euro area); Medium (EMs incl. China)
  - Impact if realized: High
  - Risk description:
    - Euro area: Weak demand and persistently low inflation from failure to fully address crisis legacies and undertake structural reforms (medium term).
    - Emerging markets, including China: maturing cycle, misallocation, excess corporate leverage, and insufficient reforms leading to significant medium-term slowdown (medium term).
    - Sharp China slowdown in 2015-16: growth falls significantly below target, possibly due to severe housing downturn or shock in the shadow banking sector (short term).
  - Policy response / consequences:
    - Strong trade links to Europe, especially Germany, would hit exports and growth; e.g., "a 1 percent fall in euro area GDP could lower Slovak industrial production by 7 percent within a year."
    - Weaker EM/China growth would be felt primarily indirectly through affected trading partners.
    - 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.
    - Over long-term: diversify exports and FDI.
    - Improve labor market and business climate to attract FDI and boost growth, including through stronger domestic demand.
    - Implement high-quality fiscal measures to avoid debt ceilings.
    - Draw on strong provision and capital buffers.

- Political fragmentation erodes globalization and fosters inefficiency (short term)
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Risk description:
    - Russia/Ukraine conflict depresses business confidence and heightens risk aversion, with disturbances in global financial, trade and commodity markets.
  - Policy response / consequences:
    - Trade and financial links with Ukraine are limited; 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.
    - Over long-term: diversify energy supply.
    - Improve labor market and business climate to boost growth, including through stronger domestic demand.

Notes on RAM interpretation:
- "low" indicates a probability below 10 percent, "medium" between 10 and 30 percent, and "high" 30 percent or more. Non-mutually exclusive risks may interact and materialize jointly.

### Domestic risks: likelihood, impact, and policy responses
- Prolonged high unemployment (medium term)
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Consequences:
    - Sustained high unemployment could inhibit recovery in domestic demand and lower growth.
    - Hysteresis effects could exacerbate unfavorable demographics and lower potential growth.
    - Public debt is especially sensitive to growth shocks.
  - Policy response:
    - Improve labor market and strengthen business climate through investment in weaker regions, active labor market policies, and better education and training.
    - Persevere on fiscal adjustment.

- Deterioration in loan quality due to rapid household credit growth (medium term)
  - Relative likelihood: Medium
  - Impact if realized: Medium
  - Consequences:
    - Increase in non-performing loans would require higher provisioning, eroding bank profits and capital with negative implications for lending and growth; however, capital and liquidity levels are currently strong, and private debt is low.
    - The real estate market would be negatively affected.
  - Policy response:
    - Strengthen macroprudential measures such as loan-to-value requirements and accompany with debt-to-income ratios.
    - Further build capital buffers.

### Annex II — Authorities’ response to IMF 2014 Article IV recommendations (summary)
- Achieving high-quality fiscal consolidation
  - IMF recommendations included: improve VAT collection efficiency and reduce tax evasion; introduce property value-based real estate tax; move more quickly to a higher retirement age; lower debt through sale of state shares; improve spending efficiency (especially in healthcare).
  - Authorities’ response:
    - Reducing tax evasion and VAT efficiency are top priorities; an ambitious action plan to combat tax fraud is being implemented.
    - Work on a property value-based real estate tax is underway, but implementation is unlikely before 2016.
    - Raising the retirement age is not desirable due to low life expectancy and small expected savings.
    - State shares in Slovak Telekom were sold and proceeds used to reduce outstanding debt.
    - Efforts to improve spending efficiency noted.

- Boosting growth and reducing unemployment
  - IMF recommendations included: lower labor taxes, strengthen ALMPs, improve education/training, use EU Funds effectively, improve investment climate.
  - Authorities’ response:
    - Government committed to reducing unemployment; steps taken to streamline and improve ALMPs.
    - Health insurance contributions reduced; benefits can be claimed concurrent with work to encourage hiring among low-income labor force.
    - Education and training initiatives, including a dual vocational education and training system, are underway.
    - Efforts to improve government efficiency and facilitate SME financing are underway.
    - Labor Code changes to allow extension of collective bargaining agreements are unlikely to affect unemployment.

- Preserving financial stability
  - IMF recommendations included: lower the bank levy and allocate proceeds to a special resolution fund; enhance supervisory and resolution framework; adopt loan-to-value and debt-to-income regulations.
  - Authorities’ response:
    - Proceeds of the bank levy are available for resolution if needed and the levy rate will gradually decline with accumulation of resources.
    - EU directives (CRD IV, etc.) transposed into national legislation; risks are low and closely tracked by the NBS.
    - NBS introduced recommendations on loan-to-value ratios, real estate collateral values, and customer repayment ability.

### Public Sector Debt Sustainability Analysis (DSA) — baseline and key indicators
- As of November 23, 2015 (public sector = general government)
- Nominal gross public debt (percent of GDP): 
  - 2013: 37.3
  - 2014: 54.6
  - 2015: 53.5
  - 2016: 52.8
  - 2017: 52.1
  - 2018: 51.6
  - 2019: 51.0
  - 2020: 50.3
  - Projection: 49.7
- Public gross financing needs (percent of GDP):
  - 2013: 11.1
  - 2014: 10.6
  - 2015: 10.1
  - 2016: 7.4
  - 2017: 7.8
  - 2018: 8.6
  - 2019: 4.9
  - 2020: 4.5
  - Projection: 6.1
- Public debt (in percent of potential GDP) mirrors nominal series: 37.2 (2013), 53.8 (2014), 52.8 (2015), 52.6 (2016), 52.0 (2017), 51.8 (2018), 51.1 (2019), 50.4 (2020), 49.7 (projection).
- Real GDP growth (percent): 4.5 (2013), 1.4 (2014), 2.5 (2015), 3.4 (2016), 3.6 (2017), 3.5 (2018), 3.4 (2019), 3.3 (2020), 3.2 (projection).
- Inflation (GDP deflator, percent): 1.9 (2013), 0.5 (2014), -0.2 (2015), -0.2 (2016), 0.6 (2017), 1.4 (2018), 1.6 (2019), 1.8 (2020), 1.9 (projection).
- Nominal GDP growth (percent): 6.6 (2013), 2.0 (2014), 2.3 (2015), 3.2 (2016), 4.2 (2017), 4.9 (2018), 5.1 (2019), 5.1 (2020), 5.1 (projection).
- Effective interest rate (percent): 4.6 (2013), 3.7 (2014), 3.6 (2015), 3.2 (2016), 3.0 (2017), 2.8 (2018), 2.4 (2019), 2.3 (2020), 2.2 (projection).
- Change in gross public sector debt (cumulative percent of GDP): 1.1 (2013), 2.6 (2014), -1.1 (2015), -0.6 (2016), -0.8 (2017), -0.4 (2018), -0.7 (2019), -0.6 (2020), -0.7 (projection), cumulative -3.8.
- Identified debt-creating flows (cumulative): 1.9 (2013), 2.1 (2014), 2.3 (2015), -0.5 (2016), -0.7 (2017), -0.3 (2018), -0.6 (2019), -0.7 (2020), -0.7 (projection), cumulative -3.5.
- Primary deficit (percent of GDP): 2.9 (2013), 1.0 (2014), 1.1 (2015), 1.2 (2016), 0.8 (2017), 0.7 (2018), 0.7 (2019), 0.7 (2020), 0.7 (projection), cumulative 4.8.
- Primary (noninterest) revenue and grants (percent of GDP): 35.0 (2013), 38.2 (2014), 38.6 (2015), 40.0 (2016), 38.1 (2017), 38.0 (2018), 37.8 (2019), 37.7 (2020), 37.6 (projection); cumulative 29.2.
- Primary (noninterest) expenditure (percent of GDP): 37.9 (2013), 39.1 (2014), 39.7 (2015), 41.2 (2016), 38.9 (2017), 38.7 (2018), 38.5 (2019), 38.4 (2020), 38.3 (projection); cumulative 34.0.
- Automatic debt dynamics (contribution, cumulative): -1.0 (2013), 0.7 (2014), 1.0 (2015), 0.0 (2016), -0.6 (2017), -1.0 (2018), -1.3 (2019), -1.4 (2020), -1.4 (projection); cumulative -5.7.
  - Interest rate/growth differential: -0.6 (2013), 0.9 (2014), 0.5 (2015), 0.0 (2016), -0.6 (2017), -1.0 (2018), -1.3 (2019), -1.4 (2020), -1.4 (projection); cumulative -5.7.
  - Real interest rate contribution: 0.8 (2013), 1.6 (2014), 1.9 (2015), 1.7 (2016), 1.2 (2017), 0.7 (2018), 0.3 (2019), 0.2 (2020), 0.1 (projection); cumulative 4.4.
  - Real GDP growth contribution: -1.5 (2013), -0.7 (2014), -1.3 (2015), -1.7 (2016), -1.8 (2017), -1.7 (2018), -1.7 (2019), -1.6 (2020), -1.5 (projection); cumulative -10.1.
- Other identified debt-creating flows (cumulative): 0.0 (2013), 0.4 (2014), 0.2 (2015), -1.7 (2016), -0.9 (2017), 0.0 (2018), 0.0 (2019), 0.0 (2020), 0.0 (projection); cumulative -2.6.
  - Net privatization proceeds (negative): 0.0 (2013), 0.0 (2014), 0.0 (2015), -1.2 (2016), 0.0 (2017), 0.0 (2018), 0.0 (2019), 0.0 (2020), 0.0 (projection); cumulative -1.2.
  - Accumulation of deposits and ESM contribution: 0.0 (2013), 0.4 (2014), 0.2 (2015), -0.5 (2016), -0.9 (2017), 0.0 (2018), 0.0 (2019), 0.0 (2020), 0.0 (projection); cumulative -1.3.
- Residual, including asset changes (cumulative): -0.7 (2013), 0.5 (2014), -3.3 (2015), -0.2 (2016), -0.1 (2017), -0.1 (2018), 0.0 (2019), 0.0 (2020), 0.1 (projection); cumulative -0.3.

### DSA alternative scenarios and assumptions
- Baseline scenario key assumptions (selected):
  - Real GDP growth: 3.4 (2015), 3.6 (2016), 3.5 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
  - Inflation: -0.2 (2015), 0.6 (2016), 1.4 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020)
  - Primary Balance: -1.2 (2015), -0.8 (2016), -0.7 (2017), -0.7 (2018), -0.7 (2019), -0.7 (2020)
  - Effective interest rate: 3.2 (2015), 3.0 (2016), 2.8 (2017), 2.4 (2018), 2.3 (2019), 2.2 (2020)
- Historical scenario (selected differences):
  - Real GDP growth under Historical: 3.4 (2015), 3.9 (2016), 3.9 (2017), 3.9 (2018), 3.9 (2019), 3.9 (2020)
  - Primary Balance under Historical: -1.2 (2015), -2.8 (2016), -2.8 (2017), -2.8 (2018), -2.8 (2019), -2.8 (2020)
- Constant Primary Balance scenario: Primary Balance held at -1.2 for 2015–2020; other assumptions same as baseline.

### Composition of public debt and financing needs (high-level)
- Historical and projected indicators shown in charts for:
  - Gross nominal public debt (percent of GDP) 2013–2020.
  - Public gross financing needs (percent of GDP) 2013–2020.
  - By maturity: share medium and long-term vs short-term.
  - By currency: local currency-denominated vs foreign currency-denominated.

### DSA stress tests (selected scenario outcomes)
- Primary Balance Shock (selected values):
  - Real GDP growth: 3.4 (2015), 3.6 (2016), 3.5 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
  - Inflation: -0.2 (2015), 0.6 (2016), 1.4 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020)
  - Primary balance: -1.2 (2015), -1.9 (2016), -1.8 (2017), -0.7 (2018), -0.7 (2019), -0.7 (2020)
  - Effective interest rate: 3.2 (2015), 3.0 (2016), 2.9 (2017), 2.5 (2018), 2.4 (2019), 2.3 (2020)

- Real GDP Growth Shock:
  - Real GDP growth: 3.4 (2015), -0.9 (2016), -1.0 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
  - Inflation: -0.2 (2015), -0.6 (2016), 0.3 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020)
  - Primary balance: -1.2 (2015), -3.0 (2016), -5.3 (2017), -0.7 (2018), -0.7 (2019), -0.7 (2020)
  - Effective interest rate: 3.2 (2015), 3.0 (2016), 2.9 (2017), 2.9 (2018), 2.8 (2019), 2.6 (2020)

- Real Interest Rate Shock:
  - Effective interest rate: 3.2 (2015), 3.0 (2016), 3.4 (2017), 3.7 (2018), 4.0 (2019), 4.2 (2020)

- Real Exchange Rate Shock:
  - Inflation path modified (example): -0.2 (2015), 1.1 (2016), 1.4 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020)

- Combined Shock (selected):
  - Real GDP growth: 3.4 (2015), -0.9 (2016), -1.0 (2017), 3.4 (2018), 3.3 (2019), 3.2 (2020)
  - Inflation: -0.2 (2015), -0.6 (2016), 0.3 (2017), 1.6 (2018), 1.8 (2019), 1.9 (2020)
  - Primary balance: -1.2 (2015), -3.0 (2016), -5.3 (2017), -0.7 (2018), -0.7 (2019), -0.7 (2020)
  - Effective interest rate: 3.2 (2015), 3.1 (2016), 3.5 (2017), 3.8 (2018), 4.1 (2019), 4.3 (2020)

- Stress-test outputs shown as projected gross nominal public debt (percent of GDP) and public gross financing needs (percent of GDP) under baseline and shocks for 2015–2020.

### DSA risk assessment, market perception, and early-warning indicators (selected numeric benchmarks)
- Market perception metrics (as listed):
  - Bond spread (EMBIG / long-term bond spread over German bonds, 25-Aug-15 through 23-Nov-15): 19 bp
  - Y CDS (bp): 49
  - External Financing Requirement benchmarks: lower and upper risk-assessment benchmarks 17 and 25 (percent of GDP)
  - Public debt held by non-residents: 71 percent of total (as a listed figure)
  - Other benchmarks referenced: 400 and 600 basis points for bond spreads; 1 and 1.5 percent for change in the share of short-term debt; 30 and 45 percent for public debt held by non-residents.

*Source: Annex I. Slovak Republic: Risk Assessment Matrix (IMF staff content provided).*

### Annex IV. External Debt Sustainability Analysis

### Annex IV. External Debt Sustainability Analysis

### Bound tests and scenario shocks (2010–20)
- Interest rate shock: baseline value shown as 83; scenario path plotted 60, 65, 70, 75, 80, 85, 90, 95, 100 for 2010–2020. Individual shocks are permanent one-half standard deviation shocks.
- Growth shock: baseline value 83; scenario and historical values shown with baseline/Scenario/Historical averages: Baseline: 2.4; Scenario: 3.2; Historical: 3.9. Growth shock (in percent per year) historical/baseline/scenario: Baseline: 3.4; Scenario: 1.1; Historical: 3.9. Another baseline/scenario/historical set: Baseline: 1.9; Scenario: 0.3; Historical: -1.3.
- Non-interest current account (CA) shock (in percent of GDP): baseline value 83; scenario paths and averages shown (example figure in boxes: CA shock 91, Baseline 83).
- Combined shock: combined shock value shown as 94; combined shock with 30% depreciation: 87.
- Real depreciation shock: one-time real depreciation of 30 percent occurs in 2010 (noted in shock definitions).
- Notes on shocks and plots:
  - Shaded areas represent actual data.
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - For historical scenarios, historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.
  - Gross financing need under baseline is shown on the right scale in figures.

### External debt projections and debt dynamics (2010–20)
- Baseline external debt path (external debt-to-GDP or index values shown): 2010: 77.5; 2011: 78.5; 2012: 75.8; 2013: 81.9; 2014: 89.7; 2015: 92.8; 2016: 91.9; 2017: 90.1; 2018: 87.9; 2019: 85.5; 2020: 83.2.
- Change in external debt by year: -1.0, 1.0, -2.7, 6.1, 7.8, 3.1, -1.0, -1.8, -2.3, -2.3, -2.3.
- Identified external debt-creating flows (aggregate of items 4+8+9): 3.4, 4.7, 11.2, 7.4, 2.9, 0.5, 0.0, -0.2, -1.2, -1.7, -2.4.
- Current account deficit, excluding interest payments (percent of GDP): 3.0, 3.3, -3.1, -3.4, -2.6, -1.9, -1.9, -1.7, -1.6, -1.9, -2.5.
- Deficit in balance of goods and services (percent of GDP): 1.1, 0.5, -3.9, -5.0, -5.0, -4.0, -4.1, -3.8, -4.1, -4.4, -4.9.
- Exports (US$ levels or index shown): 76.5, 89.8, 89.1, 90.8, 98.6, 95.8, 94.2, 96.7, 98.7, 100.3, 102.2.
- Imports (US$ levels or index shown): 77.6, 90.2, 85.2, 85.8, 93.6, 91.8, 90.1, 92.9, 94.6, 95.9, 97.3.
- Net non-debt creating capital inflows (negative, percent of GDP): -2.8, -2.8, -14.2, -10.4, -4.4, -5.0, 5.0, -3.3, -2.7, -2.4, -1.3, -1.0, -0.9 (noting series extends).
- Automatic debt dynamics contribution (formula-based, percent of GDP): -2.3, -1.4, 0.0, 0.4, 1.0, -1.0, -0.8, -0.8, -1.0, -0.8, -0.7.
  - Contribution from nominal interest rate: 1.8, 1.9, 2.2, 1.9, 2.5, 2.4, 2.4, 2.3, 1.9, 1.9, 1.9.
  - Contribution from real GDP growth: -4.2, -2.1, -1.2, -1.0, -2.2, -3.4, -3.2, -3.1, -2.9, -2.7, -2.6.
  - Contribution from price and exchange rate changes: 0.1, -1.3, -1.0, -0.5, 0.8, 1.4, -0.6, -1.3, -1.5, -1.5, -1.6.
- Residual, including change in gross foreign assets (2-3): -4.5, -3.7, -13.9, -1.3, 5.0, 1.3, -0.4, -0.3, 0.4, 1.0, 1.7.
- External debt-to-exports ratio (in percent): 101.4, 87.5, 85.0, 90.2, 91.0, 96.9, 97.6, 93.2, 89.0, 85.3, 81.4.
- Gross external financing need (in billions of US dollars): 22.9, 25.0, 20.4, 20.6, 21.4, 19.6, 21.7, 22.5, 22.8, 22.9, 22.5.
- Gross external financing need (in percent of GDP): 25.7, 26.9, 21.3, 20.3, 23.0, 10-Year, 10-Year, 23.4, 24.7, 24.3, 23.4, 22.3, 20.7 (table shows mix of labels and numbers; numbers preserved as shown).
- Scenario with key variables at their historical averages yields external debt values: 92.8, 96.3, 99.1, 102.6, 106.9, 111.8, 1.9 (as presented in table).

### Key macroeconomic assumptions underlying the baseline
- Real GDP growth (in percent): 5.1, 2.8, 1.5, 1.4, 2.5, 3.9, 4.5, 3.4, 3.6, 3.5, 3.4, 3.3, 3.2 (series across historical and projection years).
- GDP deflator in US dollars (change in percent): -9.0, 1.3, 1.4, 4.4, -10.2, 3.5, 11.0, -13.0, 1.3, 1.5, 1.9, 2.4, 2.6.
- Nominal external interest rate (in percent): 2.2, 2.6, 2.8, 2.7, 2.8, 3.9, 1.5, 2.4, 2.7, 2.6, 2.3, 2.3, 2.3.
- Growth of exports (US dollar terms, in percent): 13.6, 22.3, 2.2, 7.9, 0.0, 13.4, 17.4, -12.7, 3.2, 7.9, 7.5, 7.5, 7.9.
- Growth of imports (US dollar terms, in percent): 13.4, 21.2, -2.8, 6.7, 0.5, 12.4, 17.4, -11.9, 3.0, 8.3, 7.4, 7.2, 7.4.
- Current account balance, excluding interest payments (percent of GDP): -3.0, -3.3, 3.1, 3.4, 2.6, -1.3, 3.3, 1.9, 1.9, 1.7, 1.6, 1.9, 2.5.
- Net non-debt creating capital inflows (percent of GDP): -2.8, -2.8, -14.2, -10.4, -4.4, -5.0, 5.0, -3.3, -2.7, -2.4, -1.3, -1.0, -0.9.
- Long-run debt-stabilizing non-interest current account (percent of GDP): reported in table as a reference (footnote 6 explains definition).

### Definitions, formulas, and methodological notes
- Automatic debt dynamics derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms; g = real GDP growth rate; e = nominal appreciation (increase in dollar value of domestic currency); a = share of domestic-currency denominated debt in total external debt.
- Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).
- Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- Key variables for historical-average scenario: real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
- Long-run, constant balance that stabilizes the debt ratio assumes key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

### Statistical and data quality notes relevant for external sector analysis
- Coverage, periodicity, and timeliness of data provided to the Fund are adequate for surveillance purposes.
- Adoption of ESA 2010 in September 2014 resolved past discrepancies between the supply and demand sides of GDP; weaknesses in prices and volumes of imports and exports have been addressed.
- Errors and omissions in balance of payments statistics remain large and reported financial account flows are subject to large volatility; authorities are working to address these issues.
- The Slovak Republic started submitting data following BPM6 in September 2014 and provided data back to 2004.
- The Slovak Republic has subscribed to the Special Data Dissemination Standard (SDDS) since 1996 and observes or exceeds all related standards.
- Timeliness of public access: specific reporting lags noted (e.g., 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).

*Source: Annex IV. External Debt Sustainability Analysis, Slovak Republic — staff report excerpts.*

### 0.8 percent in 2015, should decline to 0.4 percent in 2016 and be closed in 2017. The risks to the

### _cr1613 - 0.8 percent in 2015, should decline to 0.4 percent in 2016 and be closed in 2017. The risks to the

### Economic outlook
- Growth outlook: government GDP growth projections are described as conservative because they do not include the envisaged positive impact of the now confirmed investment of the fourth car manufacturer (Jaguar-Land Rover), which presents an upside risk to actual growth and should also lift potential growth currently estimated by the Ministry of Finance at 2.6 percent.
- Risks: The risks to the outlook primarily stem from the external environment.

### Fiscal Policy
- Revenues and deficit:
  - Tax revenues rose above budgeted levels in both 2014 and 2015.
  - Higher revenues did not fully offset increases in investment spending, healthcare outlays and the negative effect of the correction of EU funds in 2015.
  - Expected end-2015 general government deficit: 2.7 percent of GDP (slightly higher than the budgeted 2.5 percent of GDP).
- Budget path and targets:
  - Approved 2016-18 general government budget targets headline deficit reduction to 1.9 percent of GDP in 2016, to 0.4 percent in 2017 and to zero in 2018.
  - Structural deficit: should decline from 2.1 percent in 2015 to no more than 0.5 percent of GDP in 2017, meeting Slovakia’s medium-term objective (MTO).
  - General government debt: expected to decline from 52.8 percent of GDP at the end of 2014 to 48.9 percent of GDP in 2018.
- Adjustment composition and reforms:
  - Envisaged adjustment relies primarily on the spending side, with intermediate consumption accounting for the bulk of the adjustment.
  - The ongoing “ESO” reform aims for more efficient public administration and improvements in public procurement as key sources of savings.
- Social and labor measures:
  - Measures in several “social packages”, including the reduction of the VAT from 20 to 10 percent on selected staple foods in effect since January 1, aim to spread benefits to lower-income groups and lagging regions.
  - Measures such as higher day care allowances and investments in public day care capacities are expected to support female labor market participation.
- Revenue-side measures and tax administration:
  - Government committed to continued improvement of tax collection efficiency and tax compliance.
  - FAD technical assistance in 2012: assessment on the VAT Gap and design of an action plan of 50 measures to mitigate tax evasion, particularly in VAT.
  - 2015: government approved an amended action plan with further 30 measures.
  - Recognition of substantial fraud linked to cross-border activities and the need for effective international cooperation and exchange of information.
  - Tax policy measures to improve business environment: introduction of a reverse charge for VAT payments in construction; cash accounting scheme for small enterprises; shortening of VAT refund periods.
- Expenditure management:
  - Commitment to comprehensive and regular expenditure reviews to promote value-for-money across all budgetary chapters.
  - Pilot expenditure reviews launched, with FAD support for the Ministry of Education and the Ministry of Finance.

### Financial Sector
- Banking sector resilience:
  - Slovak banking sector remains healthy and resilient with solid levels of capital, liquidity, asset quality and profitability.
- Credit growth and vulnerabilities:
  - Household credit grew over 13 percent in the first three quarters of 2015.
  - Corporate credit started to pick up modestly in mid-2015 after a three-year stagnation.
- Prudential framework and supervisory stance:
  - National Bank of Slovakia (NBS), within the Single Supervisory Mechanism (SSM), regards existing prudential rules and recommendations (maximum loan-to-value (LTV) on new housing loans, limits on new loans with very long maturity, stress-testing housing loan portfolios to interest-rate increases and macroeconomic deterioration) as sufficient at the current juncture.
  - New act on housing loans coming into effect in March 2016 tightens lending standards by mandating banks to assess borrowers’ repayment capacity including at the time of significant loan top-up, disregarding the value of collateral.
  - NBS intends to incorporate recommendations into binding legislation and possibly tighten prudential limits in 2016 should strong growth continue; such legislation would enable introduction of debt-to-income (DTI) limits if needed.
  - NBS recognizes the rising need to increase the counter-cyclical capital buffer from its current zero level, particularly if corporate credit growth shows signs of excessive growth.
- Insurance sector:
  - Despite adverse impacts from a protracted period of low interest rates, the insurance sector remains relatively stable.
  - NBS does not currently see the need for macroprudential measures for insurance companies but stresses prudent behavior, particularly regarding dividend payments in cases of weakening solvency.

### Structural Issues
- Labor market challenges and measures:
  - Significant structural challenges noted: high long-term and youth unemployment rates and low labor participation of women.
  - Measures adopted to improve incentives on demand and supply sides: health contribution allowance for low-income workers, subsidies for creation of jobs for the youth, and re-training programs.
  - Internal staff reallocation in labor offices led to improved ratio of clients to contact point employees.
  - Government plans a comprehensive assessment of the efficiency of all active labor market policies.
  - Dual education scheme to better match vocational education with business needs has started well; participation of businesses and students is expected to gradually increase.
- Investment, infrastructure, and business environment:
  - Authorities emphasize private sector investment and economic activity as central to employment creation.
  - Strong emphasis on enhancement of transport infrastructure, particularly completion of the motorway and expressway network.
  - Measures to improve business environment include lowering administrative burden on entrepreneurs and support to start-ups and research activities.

*Source: Excerpt from the provided IMF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1613.pdf_