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Slovakia Country Risk Report Q2 2016

Slovakia Country Risk Report Q2 2016

Core Views

A fragmented opposition, strong economy, increased social spendingand perceived security threats stemming from the EU migrant crisishave all boosted the electoral chances of the governing Smer-SDparty, which stands a good chance of retaining its absolute parliamentarymajority following the March 2016 general election.

Although the government will have to maintain a relatively tight fiscalstance in light of looming constitutional debt brakes, we believeSlovakia is on a sustainable fiscal trajectory with few risks to its solidsovereign credit profile.

The short-term economic outlook has brightened as the exportledgrowth of previous years has translated to a visible pick-up indomestic demand. We expect domestic demand growth to remainrobust, driving growth in the coming years.

The current account will return to deficit, but eurozone membershipand a stable, long-term external funding structure minimise associatedrisks and ensure a stable balance of payments position.

Major Forecast Changes

No major forecast changes


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Bullish Autos Outlook Underpins Solid Growth Trajectory
Stronger EU car sales, as well as planned investments and capacity expansions within Slovakia's autos industry, underpin a healthy
outlook for Slovakian exports and fixed investment. Private consumption will be the largest contributor to headline GDP growth,
however, with a strong labour market and rising disposable incomes supporting household spending. We forecast real GDP growth of
3.3% in both 2016 and 2017.
GDP By Expenditure Outlook
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: PUBLIC CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECAST
TABLE: NET EXPORT FORECASTS
Fiscal Policy And Public Debt Outlook
Spending Pledges Won't Derail Public Finances
Strong growth and record low borrowing costs will enable modest deficit and debt consolidation in the coming years even as the
government meets various social spending pledges made ahead of the March 2016 general election.
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
External Trade and Investment Outlook
Auto Investments Boosting Export Outlook
Slovakia's current account will remain in deficit in the coming years on the back of strong domestic demand growth, but a bullish outlook
for automotives production and exports will keep the deficit at small, manageable levels. Eurozone membership and foreign direct
investment into the auto sector will ensure a stable funding structure and overall balance of payments position.
Outlook on External Position
TABLE: TOP 5 GOODS IMPORTS IN 2014
TABLE: TOP 5 GOODS EXPORTS IN 2014
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Regional Monetary Policy
ECB: Underwhelming But Still Substantial Easing
The European Central Bank's monetary policy easing on December 3 2015 disappointed markets in terms of its depth and breadth.
However, strengthening economic and inflation conditions in the eurozone suggest that the ECB may be better off holding fire, and in
our view, the easing is still fairly significant despite disappointment on the headline figures. We continue to forecast a weaker euro in
Chapter 2: 10-Year Forecast
The Slovak Economy To 2025
Growth Outpacing Eurozone Averages
Macroeconomic stability and institutional convergence with Western norms will be bolstered in the long term by Slovakia's eurozone
membership. However, we believe the drawbacks of having the euro will outweigh the benefits, limiting potential growth in the next
decade. Nevertheless, we expect real GDP to average 2.7% over our 10-year forecast period, well above eurozone averages.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Majority In Reach For Smer-SD After March Elections
Slovakia's fragmented opposition, strong economy, increased social spending and perceived security threats stemming from the EU
migrant crisis have all boosted the electoral chances of the governing Smer-SD party, which stands a good chance of retaining its
absolute parliamentary majority following the March 2016 general election.
TABLE: POLITICAL OVERVIEW
Regional Political Outlook
What Would The End Of Schengen Mean?
While the collapse of the passport-less Schengen zone would mark a major step backwards for EU integration, it would not necessarily
portend the end of the EU, and could in fact alleviate growing public concerns surrounding security and the impact of mass immigration.
While cross-border trade, tourism and the establishment of 'eurodistricts' would be impeded in the short term, the continent's security
outlook would improve markedly at a period of heightened risk.
Long-Term Political Outlook
Slow Convergence With West Remains Core View
We expect Slovakia to continue to converge with Western European policies and standards of living over the next ten years as the
small economy has benefitted greatly from inclusion in the bloc. However, we stress that the country will face a number of challenges to
political stability including corruption, relations with the eurozone, ethnic tensions and population decline.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISKS
TABLE: HIGH LEVELS OF BUREAUCRACY DELAY TRADE
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: SLOVAKIA – MACROECONOMIC DATA & FORECASTS

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