## IMF Executive Board Concludes 2019 Article IV Consultation with the Slovak Republic _IMF News, July 12, 2019_ ## Source details **Canonical URL:** [IMF Executive Board Concludes 2019 Article IV Consultation with the Slovak Republic](https://www.imf.org/en/news/articles/2019/07/11/pr19272-slovak-republic-imf-executive-board-concludes-2019-article-iv-consultation) ## Other formats - [Markdown version](/en/news/articles/2019/07/11/pr19272-slovak-republic-imf-executive-board-concludes-2019-article-iv-consultation/index.md) - [Structured JSON version](/en/news/articles/2019/07/11/pr19272-slovak-republic-imf-executive-board-concludes-2019-article-iv-consultation/index.json) - [Bundle manifest](/en/news/articles/2019/07/11/pr19272-slovak-republic-imf-executive-board-concludes-2019-article-iv-consultation/bundle-manifest.json) ## Bibliographic details - 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.* --- ## References - [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg) - [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx) - [Slovak Republic and the IMF](http://www.imf.org/external/country/SVK/index.htm) - [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance) - [Press Releases](https://www.imf.org/en/news/searchnews) - [PRESS CENTER](http://presscenter.imf.org/) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2019/07/11/pr19272-slovak-republic-imf-executive-board-concludes-2019-article-iv-consultation_