What is the politics of Slovakia and the Euro as well as the eurozone/EU

Sovereign euro Risk of Slovakia according to the rating agencies

September 2011 Sovereign risk Currency risk Banking sector risk Political risk Economic structure risk Country risk


Sovereign risk
Stable: The commitment to fiscal consolidation will remain strong, and debt levels should remain well below EU thresholds. 

Currency risk
Stable: Growing concerns regarding the solvency and competitiveness of some euro area members are potentially negative for the single currency. However, interest rate differentials should favour the euro in the short term.

Banking sector risk
Stable: Slovakia's banking sector is very conservative and very profitable but also very conservative in its asset allocation. The banking sector has been resilient to the aftermath of the global crisis of 2008-09. However, some foreign banks with branches in Slovakia could face distress because of the euro area crisis.

The Slovak capital Bratislava, the economic hub of the country

Political risk
The centre-right government looks less stable than its predecessor, but it is more investor-friendly. None of the parties likely to make it into parliament in a general election threatens Slovakia's international creditworthiness.

Economic structure risk
The economy's dependence on exports of automotives, machinery and electronics weighs heavily on the outlook for the economy, and could make medium-term growth more volatile.

Slovakia is led by a four-party, right-wing coalition, in which the largest party is the Slovak Democratic and Christian Union-Democratic Party (SDKU-DS the political party that brought about the 19% flat tax). The government has delivered pro-business changes that dilute workers' rights in the hope that will reduce the disincentives to hire people. This has dismayed many given widespread reform fatigue. Fiscal consolidation will be the main economic policy issue in the coming years.

The chances of the current coalition surviving until the election scheduled for 2014 are fair given that the overcast global environment does not favour major changes. But personal and programmatic clashes could bring it down before then. Real GDP growth is slowing in 2011 as the government is performing fiscal consolidation with a view to put aside funds in case there is a global crisis. Growth until 2015 will be slower than in the boom years but fairly fast in the chastened environment but at least this is not over levaraged unstable growth. Inflation is settling around 2.5% in 2012-15. The current account is expected to register deficits averaging around 3.4% in 2011-15.

Political outlook The centre-right ruling coalition turned one year old in July. Coalition parties have shown resilience despite frequent disputes. Disagreements between ruling parties could spill over in late 2011 when parliament debates the government's recent decision to sanction Slovakia's financial contribution to the European Stability Mechanism (ESM) from 2013.

Economic policy outlook
Slovakia's fiscal consolidation effort has been progressing in line with plans in 2011. At end-July the state budget posted a deficit of €1.67bn (US$2.3bn), 30.4% smaller year on year.

Economic forecast
In June seasonally adjusted industrial output fell by 2.2% month on month. The economic sentiment indicator (ESI; 2005=100), which had moved lower in the second quarter, after climbing in the first quarter, edged down further in July, dropping by 1.6 points month on month, to 93.9. This reflected weaker confidence in the industrial sector, owing to weakening demand of trade partners in the EU.

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