经济研究
Slovakia

Slovakia

Population 5.5 million
GDP 21,053 US$
A4
Country risk assessment
A2
Business Climate
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Synthesis

major macro economic indicators

  2020 2021 2022 (e) 2023 (p)
GDP growth (%) -4.4 3.0 1.6 0.3
Inflation (yearly average, %) 1.9 3.2 12.8 13.5
Budget balance (% GDP) -5.4 -5.5 -4.3 -6.2
Current account balance (% GDP) -0.3 -2.0 -6.1 -5.3
Public debt (% GDP) 59.8 63.1 60.7 61.0

(e): Estimate (f): Forecast

STRENGTHS

  • Eurozone membership
  • Production platform for the European automotive and electronics industries
  • Satisfactory public and external accounts
  • Robust financial system dominated by foreign groups

WEAKNESSES

  • Small and open economy dependent on European investment and markets
  • Strong sectorial concentration of exports: automotive and consumer electronics
  • Regional development inequalities: the east is lagging behind (infrastructure and training)
  • Insufficient research and development, exports relying on assembly activities (low value-added)
  • Shortage of skilled labour and high long-term unemployment

RISK ASSESSMENT

High dependence on Russian energy is the sword of Damocles hanging over the economic outlook

The Russian invasion into Ukraine and the ensuing EU sanctions and counter sanctions have drastically changed Slovakia’s economic perspective. Slovakia’s energy mix consists for a large part of natural gas (27% in 2021) and oil (25%). In 2021, 87% of this natural gas and all of Slovakia’s oil was imported from Russia. Given the fact that Slovakia is heavily supporting Ukraine, with which it shares a 97km-long border, an imminent threat exists that Russia could stop its energy exports. With relatively full gas storage (in mid-January 2023 storage space was still 73% full), the country still had enough reserves to get through the 2022-2023 winter without imports from Russia. For 2023, alternative sources will be the new gas interconnector between Poland and Slovakia that can supply Slovakia with LNG from the terminals on the Baltic Sea. The Baltic Pipe connecting the Danish and Polish gas systems could even bring Norwegian gas to Slovakia. Nevertheless, it is unlikely that these sources could balance out the deliveries from Russia. For its oil supply, Slovakia could receive oil from Saudi Arabia and other Middle Eastern countries through the Adria pipeline, but the Slovak refineries have to be re-configured, as they are currently unable to process this “light” crude oil. Even though the energy supply, at least for the very short-term, is secured, high European energy prices have had a direct impact on the inflation rate in Slovakia. Inflation shot up immediately after the war started and hovered between 13% and 15% from June 2022, i.e., its highest level since 1999. Price pressure is expected to edge down only minimally towards the end of 2023, as regulated household energy prices increased sharply in January 2023. Although the minimum wage was increased by 8.4% to €700 per month that same month, real wages will still fall noticeably and reduce consumer purchasing power. The outlook for corporate investments is very uncertain and depends on the strategy of companies, which may decide to postpone their investments due to rising interest rates. The investment outlook also depends on the outlook for the automotive sector, which accounts for 36% of the country’s exports and 13.9% of GDP. The sector has suffered from supply-chain disruptions related both to semi-conductors and the war in Ukraine last year. Some of these shortages were partly resolved during 2022. However, despite some improvement in the Western European automotive market, it is far from its 2019 level and could slip from stagnation to mild recession in many countries, where the inflation has eroded demand for new cars as well. This will also have an impact on Slovakia’s total exports. The slump in net exports’ contribution to GDP growth will however be limited by lower import demand due to the large share of imported intermediate inputs in exports. Some support for growth will come from the government. Funds to vulnerable groups and business support (€1.2bn, 1% of GDP) should boost consumption and investment. In addition, Slovakia will receive €6.3bn in grants (5% of GDP) in EU structural funds for climate-related projects and the digital transition between 2021 and 2027. Disbursement is nonetheless dependent on the conduct of government agencies, which have recently been accused of mismanaging EU funds. The ECB will act as a brake pad on economic growth in 2023. It already hiked interest rates by a record 250 basis points in 2022, and further, smaller and gradual interest rate hikes are in the pipeline for 2023 that are expected to bring the main refinancing rate to between 3.5% and 4.0%. In addition, the ECB will start trimming its balance sheet in March 2023 to the tune of €15 billion per month, with the amount likely to increase over the year.

 

Public deficit set to widen again

The government deficit narrowed somewhat in 2022. Although expenses were high, especially support for Ukraine with more than €200 million (0.2% of GDP) worth of humanitarian and military aid, rounded off by aid for around 700,000 refugees, as well as measures to help households and companies cope with high energy prices, the decrease in the pandemic-related expenditure was even larger. In addition, tax revenues increased thanks to the upturn in the economy. In 2023, with a mild recession expected during the winter of 2022-2023 following by only very modest recovery in the following quarters, tax revenue is likely to be lower. Persistently high expenditure will deepen the deficit and increase public debt.

The current account balance will remain firmly in deficit in 2023. While supply chain issues should ease, the value of imports will remain higher than that of exports due to high global inflation. Moreover, support from tourism should remain low with the unresolved war in Ukraine.

 

Fluid political scene

Eduard Heger from the anti-corruption party, Ordinary People and Independent Personalities (OL’aNO), became Slovakia’s Prime Minister in April 2021 after his predecessor Igor Matovic from the same party stepped down after a political scandal triggered by a secret deal to buy Russia's Sputnik V coronavirus vaccine despite disagreement from coalition allies.

Heger began office with a coalition comprising OL’aNO (53 out of 150 seats in the parliament following the 2020 elections), the right-wing populist “We are Family” party (17 seats), the liberal “Freedom and Solidarity” party (13 seats) and the center-right “For the people” party (12 seats). The coalition’s structure, however, was unstable from the beginning. Political tension rose especially in May 2022 after another corruption scandal. After that, the Freedom and Solidarity (SAS) left the government coalition, which was then down to a minority government of 68 seats, but supported by independent as well as Christian-democratic members of Parliament. After months of high inflation topped off by chaotic governance by the minority government, the SAS called for a vote of no confidence in Parliament in mid-December 2022, which was successful with a simple majority of 78 members out of 150. Snap elections are rare in Slovakia as they require the support of two-thirds of the Members of Parliament. Nevertheless, President Čaputová asked political parties to support a snap election. In the meantime, the Heber cabinet remains in office as a caretaker government.

 

Last updated: April 2023

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