IMF Executive Board Concludes 2019 Article IV Consultation with the Slovak Republic
IMF News, July 12, 2019
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- Published: July 12, 2019
Macroeconomic outlook and growth
- Real GDP growth:
- 2018: 4.1 percent
- 2019 (projection): 3.5 percent
- 2020 (projection): 3.1 percent
- Medium-term: gradual convergence to potential
- Drivers and composition:
- Strong domestic demand fueled by double-digit household credit growth, robust job creation, and rising wages.
- Capacity expansions in the automotive industry boosted growth; one-off effects are tapering off.
- Private consumption expected to remain the main propeller of economic activity supported by continued credit and wage growth.
- Exports on the back of automotive capacity expansions expected to contribute to growth and narrow the current account deficit toward a balanced position in the medium term.
- Risks and uncertainties:
- Continued international trade tensions and a hard Brexit pose major downside risks to Slovakia’s export-led economy.
- Heavy dependence on exports and a concentrated export structure increase sensitivity to global shocks.
- Rising automation challenges comparative advantages from low-cost skilled workers.
Labor market, wages, and demographics
- Labor market indicators:
- Unemployment rate: 2016: 9.7 percent; 2017: 8.1 percent; 2018: 6.6 percent; 2019 (est.): 6.0 percent; 2020 (proj.): 5.8 percent; 2021 (proj.): 5.7 percent.
- Employment growth: 2016: 0.5 percent (other years listed in table).
- Wages and productivity:
- Rapid wage growth has been outpacing productivity.
- Nominal wages: 2018: 6.4 percent; 2019 (est.): 5.1 percent.
- Demographic challenge:
- Population set to experience fast ageing; policies to ensure optimal use of the domestic labor force are appropriate.
- Inclusion and participation:
- Insufficiently inclusive education and lack of affordable early childcare contribute to a still-high gender gap and regional disparities in labor market participation.
- Legislative proposal to make schooling mandatory starting at age 5, reintegration efforts for the long-term unemployed, and increasing availability of affordable childcare are welcomed.
Structural reforms and competitiveness
- Education and innovation:
- Recent policy efforts: ensure adequate supply of qualified teachers; strengthen dual-track vocational training.
- Recommended complements: improve quality of tertiary education; align higher education with technical skills needs; improve coordination of public research; strengthen linkages between businesses and universities; ensure full use of EU funds for R&D.
- Business environment and public institutions:
- Reforms needed: more predictable and enabling business environment; competitive and transparent public procurement system; independent judiciary; well-developed infrastructure and logistics networks.
- Public investment and EU funds:
- Need for a more robust public investment framework to improve efficiency of public investment and absorption of EU funds, including better project selection and prioritization at the national level.
Fiscal policy and public finances
- Recent performance:
- Fiscal deficit lowered to below 1 percent of GDP in 2018.
- Public debt below the lowest limit prescribed by the national Fiscal Responsibility Act.
- Fiscal projections and indicators (selected):
- Revenue (percent of GDP): 2016: 39.2; 2017: 39.4; 2018: 39.9; 2019 (proj.): 39.1; 2020 (proj.): 38.1.
- Expenditure (percent of GDP): 2016: 41.5; 2017: 40.2; 2018: 40.6; 2019 (proj.): 39.7; 2020 (proj.): 39.5.
- Overall balance (percent of GDP): 2016: -2.2; 2017: -0.8; 2018: -0.7; 2019 (proj.): -0.3; 2020 (proj.): -0.4.
- General government debt (percent of GDP): 2016: 51.8; 2017: 50.9; 2018: 48.9; 2019 (proj.): 47.3; 2020 (proj.): 45.8; 2021 (proj.): 44.3; 2022 (proj.): 42.9; 2023 (proj.): 41.7; 2024 (proj.): 40.4.
- Policy guidance:
- With above-potential growth, a balanced budget target for 2019 and 2020 is appropriate but will require additional efforts.
- Proposal to introduce multi-year expenditure ceilings to anchor budget planning and execution is recommended.
- Overly strict escape clauses in the national FRA may need to be revisited to avoid pro-cyclical fiscal tightening.
- Higher revenue and spending efficiency needed to create resources for growth-enhancing social and infrastructure investment.
- Planned measures to improve tax compliance through online electronic cashiers and electronic taxpayer services should be sustained and complemented by strengthening audit capacity in all core tax areas.
- Strengthen mandate of the implementation unit and incorporate actionable measures in the medium-term budget to actualize savings.
Financial sector and household indebtedness
- Banking system:
- Banking sector remains stable and well-capitalized, although profitability is under pressure.
- Prolonged low interest rates, benign credit risk assessments, regulatory cap on mortgage refinancing fees, and strong market intermediation role of mortgage brokers have compressed lending margins.
- Credit and household vulnerabilities:
- A decade of strong credit growth has significantly raised household indebtedness.
- Credit to private sector (growth rate): 2016: 9.2; 2017: 8.9; 2018: 8.3; 2019 (proj.): 6.5; 2020 (proj.): 6.1.
- Household debt nearly doubled relative to disposable income (qualitative statement in text).
- Rapidly rising flat prices in urban areas and appreciating house price-to-income ratio indicate growing vulnerabilities, especially for smaller banks with less capital buffers.
- Macroprudential and policy recommendations:
- Incremental use of CCyB and supervisory capital requirements appropriate to ensure adequate capital buffers.
- Strong vigilance of smaller banks, including through reduction of NPLs; further increase in capital buffers may be needed.
- Allowing the bank levy to expire as scheduled in 2021 should help smaller banks build more capital buffers.
- Consider imposing add-on risk weights on mortgage loans to better internalize credit risks.
- Consider reducing preferential tax treatments for housing investment and removing obstacles to develop the rental housing market.
Balance of payments and external position
- Current account and external debt:
- Current account balance: 2016: -2.0 (percent of GDP); 2017: -2.5; 2018: -1.7; 2019 (proj.): -1.0.
- Gross external debt (percent of GDP): 2016: 92.2; 2017: 111.0; 2018: 113.3; 2019 (proj.): 113.7; 2020 (proj.): 114.3; 2021 (proj.): 114.9; 2022 (proj.): 115.3; 2023 (proj.): 114.8.
- Gross national savings (percent of GDP): 2016: 20.8; 2017: 20.6; 2018: 21.1; 2019 (proj.): 21.9; 2020 (proj.): 22.8; 2021 (proj.): 23.7; 2022 (proj.): 25.0; 2023 (proj.): 25.9; 2024 (proj.): 26.6.
- Trade and investment:
- Exports of goods and services (growth): 2016: 5.5; 2017: 5.9; 2018: 4.8; 2019 (proj.): 5.4; 2020 (proj.): 5.2; 2021 (proj.): 4.5; 2022 (proj.): 4.4.
- Imports of goods and services (growth): 2016: 5.3; 2017: 4.7; 2018: 3.6.
Executive Board assessment and recommendations (summary)
- Growth outlook:
- Growth is projected to decelerate with one-off automotive investments tapering off and to gradually converge to potential.
- Vulnerabilities:
- High credit growth makes households and banks vulnerable to labor and property market downturns.
- Structural agenda to sustain export-led growth:
- Capture higher-value activities through education, R&D, business-university linkages, and full use of EU funds for R&D.
- Improve business environment, public procurement, judiciary independence, and infrastructure.
- Fiscal policy:
- Maintain balanced budget target for 2019 and 2020; introduce multi-year expenditure ceilings; revisit overly strict escape clauses; improve revenue and spending efficiency.
- Financial stability:
- Continue macro- and micro-prudential measures, increase capital buffers for vulnerable banks, allow bank levy to expire in 2021, consider mortgage risk-weight add-ons, and reform housing tax/treatment to develop rental market.
Source: IMF Executive Board press release, July 12, 2019.
