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Slovak Republic - Economy

Whitaker's Almanack Version
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Economy and Trade

Located in Central Europe, Slovakia was part of Czechoslovakia until the “velvet divorce” in January 1993. Slovakia has escaped the shackles of its Communist past, embracing the market economy and the West. It joined both the European Union and NATO in 2004. In January 2009, it was also among the first of the former Eastern Bloc nations to join the Eurozone. Around 86% of the country’s exports are now directed towards the European Union, and more than half go to countries using the single European currency.

Slovakia has felt the impact of the global financial crisis. However, thanks largely to the efforts of a centre-right government led by Prime Minister Mikulas Dzurinda, which ruled the country from 1998 to 2006, and carried out most of the painful and unpopular fiscal surgery necessary for euro adoption, the country now boasts a huge amount of foreign investment, and is better placed than many other Eastern European countries to withstand the financial maelstrom that swept across the globe in 2008 and 2009.

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Economic Policy over 12 Months

Slovakia has undergone a remarkable economic transformation over the past 10 years. The centre-right coalition that ruled the country under Prime Minister Dzurinda between 1998 and 2006 introduced sweeping reforms to nurture the economy, and the business environment. In 2004, the government replaced its income, corporate, and sales taxes with a 19% flat rate tax. The government also reformed Slovakia’s labor laws to make them more flexible than those of Western Europe, and it sold off inefficient state industries to the private sector.

As a result, foreign firms, especially in the car industry, flooded in. Slovakia’s EU accession in 2004, and entry into the Eurozone in 2009, further heightened its appeal to potential investors. The country is a magnet for multinationals, which use it to produce and distribute goods cheaply and efficiently to the vast European market. The centre-left coalition that won the June 2006 general elections slowed the reform momentum, and adopted some less business-friendly changes in labor, pension, and social-insurance legislation. However, the government’s commitment to the goal of adopting the euro (which the country adopted in January 2009), tempered proposals to overhaul the previous reforms, and contributed to stable macroeconomic policies.

The government has attempted to lessen the impact on Slovakia of the global economic crisis that developed in September 2008. By March 2009, the authorities had launched three stimulation packages aimed at keeping businesses afloat, helping employers maintain jobs, and giving a boost to the slowing economy. But Prime Minister Fico has insisted that the government wants to keep public spending under control, despite its crisis packages. By March 2009, the cabinet had allocated €332 million to cover the measures, a small sum in comparison with the fiscal packages being adopted by other countries. In March 2009, Fico was quoted as saying: “We want to keep the deficit under control in order to prevent it from reaching 8, 9, or even 10%, as you can see in other countries.”

The European Central Bank (ECB) has determined monetary policy in Slovakia since the country joined the Eurozone on January 1, 2009. The ECB was slower than other central banks to loosen monetary policy amid the global financial crisis of 2008 and 2009. In March 2009, the ECB cut its key interest rate from 2.0% to 1.5%, the lowest since it started setting euro rates in January 1999. However, US and Japanese rates were, in effect, already at zero by March 2009.

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Economic Performance over 12 Months

Slovakia has enjoyed robust levels of growth for much of the current decade, and has certainly been among central Europe’s strongest performers. In 2007, the economy expanded by 10.4%, the highest rate in Central and Eastern Europe. The economy grew by a further 6.6% in 2008, but growth decelerated dramatically in the final quarter, reflecting the impact of the global financial crisis. Initial estimates indicate that the economy contracted by 1.8% quarter-on-quarter, taking the real GDP growth rate to 2.7% on an annual basis. By comparison, the economy expanded by 9.4% and 7.8% on a quarterly basis in the second and third quarters, respectively.

The outlook for 2009 also appears weak. Key export markets such as Germany, Italy, and Hungary are mired in recession, which will inevitably affect production in Slovakia’s export-oriented industrial sector. In March 2009, the Slovak Statistics Office forecast that the economy would grow by just 0.8% in the first half of the year. The organization also anticipated that the unemployment rate would rise to 10.04% during the period. Unemployment averaged 9.6% in 2008, down from 19.3% in 2001.

Slovakia’s impressive economic performance of recent years was partly due to the construction of new factories by major car producers. KIA, Peugeot-Citroën, and Volkswagen were attracted by Slovakia’s central location, low wages, and attractive tax rate, and they have turned the country into the world’s largest per capita producer of cars. The car industry was, to a great extent, responsible for Slovakia’s strong growth figures, and the sharp reduction in its unemployment rate. However, the country that became known as the “Detroit of the East” has been affected by the global crisis that the car industry experienced in 2008 and 2009. In March 2009, the Slovak Spectator reported that the major car manufacturers in the country had admitted that they expected production to drop in 2009 by between 10% and 25%. The manufacturers have laid off workers, cut production, or offered severance payments to employees who agree to leave. The newspaper added that several automotive-industry suppliers had closed their factories, contributing to Slovakia’s rising unemployment figures.

However, the slowdown in the Slovak economy will be accompanied by lower inflation. According to the Statistics Office, inflation should stand at 3.4% at the end of June 2009. Slovakia’s annual inflation rate slowed for the fourth month in a row, and hit a 13-month low in January 2009 as the global economic downturn countered the risk of price hikes following euro adoption at the start of the year. Consumer prices rose by 2.7% during the month.

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Support for Inward Investment and Imports

Slovakia is very keen to attract foreign investment, and has had great success in doing so. A cheap and skilled labor force, low taxes (including a 19% flat rate tax for corporations and individuals), no dividend taxes, a relatively liberal labor code, and a favorable geographical location are Slovakia’s main advantages for foreign investors. Foreign direct investment inflow (FDI) grew more than 600% from 2000, and cumulatively reached US$17.3 billion in 2006, or around US$18,000 per capita. A government agency, the Slovak Investment and Trade Development Agency (SARIO), provides assistance to foreign investors.

Slovakia is part of the EU customs union. Decisions regarding quotas or customs suspensions to be applied to goods imported into Slovakia are currently taken at the Community level. Information on the EU’s trade policies can be found on its website.

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Tax Exemptions

Slovakia’s flat rate tax has no special rates, no exemptions, no exceptions, and almost no deductions. For more information on the tax regime in the country, a guide to the country’s taxes is published on the Ministry of Finance website.

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GDP growth: 6.6% (2008, government figures)

GDP per capita: US$22,600 (2008, est.)

CPI: 2.7% (January 2009, government figures)

Key interest rate: 1.5% (March 2009)

Exchange rate versus dollar: euros per US dollar—0.6734 (2008, est.)

Unemployment: 9.6% (2008 average, government figures)

FDI: US$47.68 billion (2008, est.)

Current-account deficit/surplus −US$5.359 billion (2008, est.)

Population: 5,455,407 (July 2008, est.)

Source: CIA World Factbook except where stated

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Further reading on Slovak Republic


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