Slovak economy grew by a staggering 9.8% in the 3rd quarter of 2006 – faster than China! Last year Slovakia’s economy is expected to have grown by 8.2% and 8% growth is predicted for 2007 (according to the latest OECD report).
Figures from Eurostat (Nov 2006) show unemployment rate in Slovakia at just 12.3%, down by 3.9% y/o/y and at the lowest level since 1998.
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The Slovak crown has gained more than 5% since October 2006 and in last week of December reached a new all time high of 34.060 SKK/EUR, prompting the National Bank of Slovakia (the country’s central bank) to intervene to bring the rate down. (By July 2006 the rate was at 38.7.) Guesses for a probable Euro/SKK conversion rate for late 2008 are anywhere between 30 and 35.
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Last December the Korean car maker KIA announced plans to increase production at its new Zilina plant. KIA will now produce 300,000 cars as well as 300,000 car engines a year. To increase capacity KIA plans to start building a second plant in Zilina this year; production should start in late 2008. KIA’s existing plant went into full production in December 2006.
From this month on Slovakia is the world’s leader in car production per capita, with approx. 100 cars per 1,000 inhabitants.
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Out of the many fears regarding Slovakia’s new leftist government under PM Fico (in power since July 2006), very few have materialized. A proof that the pre-election propaganda was, luckily, more aggressive and far more populist than the post-election actions so far.
The 2007 budget was passed with a 2.9% deficit, well on target for 2009 euro adoption. The pre-election plans to revoke the celebrated flat tax resulted in merely introducing a lower VAT rate (10%) for medicine and lowering the non-taxable minimum for higher earners, while the flat 19% tax rate remains unchanged.
Some risks still remain due to Fico’s plans to undo resp. postpone reforms in the healthcare and pension systems, and introduce changes in the labour code to increase employee protection (resulting in a likely decrease of labour market flexibility).
In spite of stopping the remaining privatizations of strategic enterprises (incl. the BA airport and the rail cargo company) the new government is dedicated to keep attracting foreign direct investment to Slovakia, including using state aid.
2006 saw a number of significant investments, expected to create a total of 9,000 new jobs (direct & indirect). The IT sector, followed by automotive and electrical engineering industries have attracted the largest number of investors last year.
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Slovakia seems well on target for a January 2009 euro adoption. The inflation estimate for 2008 fell to 2.5% (from previously forecasted 2.8%) and public finance deficit is expected to stay below the necessary 3% in 2007 and 2008. These are two of the Maastricht criteria that have ruined the hopes of Slovakia’s CEE neighbours for a euro adoption this decade.
Indeed, the Czech republic and Poland are expected to have the earliest chance to join euro by 2012 (although even this date is still questionable) and Hungary is not forecast to meet the Maastricht criteria before 2014 at earliest. The Baltic countries, previously looking at a 2007-8 single currency adoption, will not be in the position to join before 2009-2010+.