IMF Executive Board Concludes Article IV Consultation with Slovak Republic

IMF News, March 23, 2017

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On March 17, 2017, the Executive Board concluded the Article IV consultation with Slovak Republic and considered and endorsed the staff appraisal without a meeting.
Slovakia is described as an economic success story with sustained convergence since 1995 and post-crisis recovery among the most robust in Europe.
Real per capita GDP is now "over 70 percent of the European Union average."
The output gap is now closed.
Public debt is low and sustainable but "not far below domestic debt brake thresholds."
Banking sector is "stable and profitable"; private sector credit growth remains among the highest in the EU.

2016 estimated real GDP growth: 3.3 percent.
Growth drivers cited: improving labor market, low inflation, strong household credit growth, and exceptionally high absorption of EU funds at end of 2007–2013 programming period.
Projected growth:
- Growth expected to peak at 3.9 percent in 2019.
- Growth expected to "settle around 3.5 percent thereafter."
- 2017 projection (table): 3.7
- 2018 projection (table): 3.7
Current account surplus expected to rise; main external risks are developments in Europe and key export markets.

Primary risks are external:
- The United Kingdom’s planned exit from the European Union.
- Elections in Europe’s larger economies creating uncertainty for Slovak trade partners.
Domestic risks:
- Continued rapid growth in credit to households after several years of double-digit increases.
Structural risks:
- Drastic slowdown in productivity growth since the global financial crisis; "productivity growth has nearly halved since 2008."
- Slovakia has "experienced the fastest aging" population in Europe, amplifying long-term challenges.

2016 fiscal consolidation resumed; fiscal deficit estimated to have narrowed to 2 percent of GDP.
Executive Directors view the authorities’ planned fiscal consolidation as appropriate and capable of creating space to address regional inequities and aging-related spending.
On current policies, fiscal deficit likely to be 0.7 percent of GDP in 2019.
Recommended fiscal actions to close the gap and create space:
- Save in whole or in part expenditure reductions identified in current spending reviews.
- Increase VAT and corporate tax efficiency by implementing a compliance strategy targeting tax evaders.
- Raise property and environmental tax collections to preserve public investment.
Recommendations on fiscal framework and debt rules:
- Debt rules and brakes (the FRA fiscal anchor) should not be modified to favor specific investments.
- Consider modifications to allow government cash balances to be netted out from gross debt when assessing performance relative to the debt ceiling.
- Avoid introduction of any escape clause for investment spending.
- Staff recommends keeping debt limits and brakes at current levels.

Unwavering implementation of approved pension reforms is imperative to contain age-related spending.
- Pension reforms undertaken in 2012, including indexing benefits to inflation, must be implemented in full.
- Re-opening Pillar II should be avoided.
- Other measures that would yield savings: indexing accrued pension benefits to inflation; broadening the social contribution base.
Health sector:
- Advance current efforts to centralize procurement and restructure the hospital network.

Banks are profitable, well-capitalized, and have healthy balance sheets.
Profit pressures from tight interest margins and the burden of the special levy on bank profits.
Rapid growth in household exposure; Slovak households are "among the most indebted in central and eastern Europe."
Authorities have implemented micro- and macro-prudential measures:
- Introduction of tighter loan-to-value (LTV) ratios.
- Introduction of a systemic risk buffer in 2017.
Additional recommended measures:
- Consider imposing higher risk weights on riskier mortgage loans.
- Consider lowering the maximum LTV ratio.
- Consider reducing the bank tax as originally planned.

Labor market:
- Shift in active labor market policies (ALMP) toward moving the long-term unemployed into the labor market is welcome.
- Successful implementation of recommendations from the ongoing expenditure review of ALMP is important.
- Near-term: review and possible relaxation of the work permit process for foreign workers to ease growing skills mismatch.
Education and skills:
- Long-run: revamp education policies to strengthen vocational training to better match labor supply and demand.
Governance and corruption:
- Tackling widespread perception of corruption requires steps to improve judicial transparency and independence and assiduous implementation of recent measures to curb unethical behavior in government.

Slovakia faces acute regional disparities and severe aging pressures.
Economic gains concentrated in the Bratislava region—unemployment lower and per capita income much higher there.
Causes of disparities: lower education levels and underdeveloped infrastructure outside Bratislava; limited labor mobility.
Productivity slowdown partly due to aging workforce.
Recommended strategy for underdeveloped regions:
- Effective and timely absorption of EU funds.
- Identify priority infrastructure projects to facilitate investment and labor mobility in underdeveloped regions.
- Establish clear selection criteria and follow competitive procurement.
- Authorities’ recent integrated approach to create jobs in lagging regions (working with local businesses, communities and government) is welcome.

Real GDP:
- 2015: 3.8
- 2016: 3.3
- 2017: 3.7
- 2018: 3.7
Inflation (HICP, annual change):
- 2015: -0.3
- 2016: -0.5
- 2017: 1.2
- 2018: 1.5
Inflation (HICP, end of period):
- 2015: 0.2
- 2016: 1.6
Employment:
- 2015: 2.0
- 2016: 2.5
- 2017: 3.0
- 2018: 1.1
Public finance (Percent of GDP):
- Revenue:
- 2015: 42.6
- 2016: 39.8
- 2017: 39.9
- 2018: 40.1
- Expenditure:
- 2015: 45.3
- 2016: 41.8
- 2017: 41.7
- 2018: 41.2
- Overall balance:
- 2015: -2.7
- 2016: -2.0
- 2017: -1.8
- 2018: -1.1
- General government debt:
- 2015: 52.5
- 2016: 52.2
- 2017: 51.1
Monetary and financial indicators:
- Credit to private sector (Growth rate):
- 2015: 12.3
- 2016: 9.1
- 2017: 7.5
- 2018: 6.5
- Lending rates1:
- 2015: 3.1
- 2016: 2.6
- Deposit rates2:
- 2015: 1.0
- 2016: 0.6
- Government 10-year bond yield:
- 2015: 0.9
- 2016: 0.5
- 2017: 0.8
Balance of payments (Percent of GDP):
- Trade balance (Goods):
- 2015: 2.7
- 2016: 4.3
- 2017: 3.6
- Current account balance:
- 2015: 0.7
Gross external debt:
- 2015: 85.4
- 2016: 84.9
- 2017: 84.8
- 2018: 82.7
Notes in original table:
- 1 Average of interest rates on new housing loans to households and loans of less than EUR 1 million to nonfinancial corporations (all maturities).
- 2 Average of interest rates on new deposits with agreed maturity (up to 1 year) from households and nonfinancial corporations.

Source: IMF Communications Department, March 23, 2017.