The Slovak Republic’s Spark Sputters
Non-residents owning almost half of Slovak Republic local bonds, three times the corresponding Czech Republic share, turned wary ahead of elections in top trade and auto manufacturing partner Germany to push yields toward 3 percent as the IMF also lamented “lost momentum” in its Article IV update. The net international investment position in negative terms almost equals external debt at 70 percent of GDP, and economic growth will be under 1 percent this year under flat exports and domestic consumption, the latter due to bank and fiscal retrenchment and double-digit unemployment. FDI has tied car production in particular closely to European and global supply chains with plants concentrated in the higher-income western region. Labor mobility is hampered by steep taxes and poor training reflected in low scores relative to other EU members on the World Bank’s Doing Business rankings. The 2013 fiscal deficit target is 2.9 percent of GDP to escape from the “excess” monitoring procedure as bank and corporate income levies were raised and local authority spending was trimmed. Gross government debt approaches the 57 percent of output which triggers automatic large budget adjustments as with Poland’s constitutional provision. The Fund recommends better VAT and customs collection and pension changes extending the retirement age to avoid this outcome. Foreign bank subsidiaries dominate as elsewhere in the region but are funded from local deposits rather than riskier parent lines. Two-thirds of the ECB’s long term facilities were repaid in Q1 and capital adequacy and nonperforming loan ratios are solid. Household credit continues to expand but corporate portfolios have shrunk as falling real estate values dampen mortgage activity. As the single supervisory mechanism goes into place most of the system will be overseen from Frankfurt but the national regulator still lacks desired intervention powers, according to the annual report. Political controversy dogged the new entrant’s mandatory contribution to the ESM sovereign rescue fund but has paled against the recent government resignations and scandals next door in Prague. Foreign investors with a 15 percent domestic debt stake remain underweight with the constant reshuffling and criminal investigations despite official end to recession.
In Central Europe Romania, after joining the JP Morgan index, has jumped to third place at over 20 percent after Hungary and Poland. Its stock market has been the lone positive performer in the group after a new precautionary standby accord was reached with the IMF. Central bank currency intervention has been more restrained and long-delayed infrastructure and utility privatizations may be imminent. The private pension pillar could be strengthened there at the same time Warsaw intends to follow Budapest in reverting to state social security control and eroding the internal institutional investor base. Money may also be diverted from Turkey as it experiences the worst Emerging Europe securities exit after alleged military coup plotters were next in receiving Erdogan administration wrath with extended jail sentences further choking the allocation engine.
