Slovak Republic. A Capital Destination. May 2004

Transcription

1 Slovak Republic A Capital Destination May 2004

2 The Team Mr Vladimir Tvaroška State Secretary, Ministry of Finance Mr Martin Bruncko Chief Economic Adviser Mr Daniel Bytčánek Director, Debt and Liquidity Management Agency Mr Tomáš Kapusta Head of Debt Management Department, Debt and Liquidity Management Agency 2

3 A Political Sea-Change Initiated by 1998 Parliamentary Elections Beginning of a new political era and reinsertion into the global economy: EU membership (2004) NATO membership (2004) OECD membership (2000) WTO membership (1995) 3

4 An Economic Success Story : Successful macro-economic stablisation launched by 1999 Austerity Package & subsequent reforms: Radical improvement in all key fundamentals including fiscal deficit and current account Sustained growth rebound 2002 onward: Series of deep structural reforms, which distinguish it not only from Central European peers but also put it ahead of traditional EU members A successful privatisation program of the banking sector and utilities Deep reform of the pension system, introducing a funded pillar alongside the payas-you-go regime Innovative tax reform, introducing a single flat tax and radically simplifying the tax system Continued reform drive to address health care system, labour market, education and public administration 4

5 Robust Economic Growth Sustained solid growth despite weak external demand 5.0% Real GDP Export driven growth in 2003 increasingly replaced by strenghening domestic demand % 4.0% 3.0% 2.0% 1.0% Declining unemployment since % Highest growth performance in Central Europe Real GDP (2003) Source: Ministry of Finance, SUSR 5.0% 4.0% 3.0% % 2.0% 1.0% 0.0% Czech Republic Hungary Poland Slovakia Source: Ministry of Finance, SUSR 5

6 Sustained Fiscal Adjustment Share of public expenditures in GDP is being reduced dramatically from 49.0% of GDP in 2002 to 40.8% in % -1.0% General Government Balance Deficit to be reduced to 3.0% of GDP by 2006, complying with the fiscal Maastricht criterion Continuous drive towards increased transparency and fiscal consolidation Extra-budgetary funds incorporated into budget in 2001 Strongest position amongst Central European peers % of GDP % of GDP -2.0% -3.0% -4.0% -5.0% Note: Data for 2003 is based on ESA95 methodology, previous years on national accounting standard 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% Maastricht Criterion General Government Balance (2003) Source: Ministry of Finance Slovakia Poland Hungary Czech Republic Source: Eurostat 6

7 Prudent Debt Management Fiscal adjustment and prudent debt management stabilised public indebtedness 75% 60% Public Debt Maastricht Criterion Maastricht criterion (60% of GDP) easily met % of GDP 45% 30% 15% Since 2003, specialised Debt and Liquidity Management Agency in place 0% Source: European Commission Successive reduction of state guarantees 60% Public Debt (2003) One of the lowest debt burdens in the region % of GDP 50% 40% 30% 20% 10% 0% Czech Republic Slovakia Poland Hungary Source: European Commission 7

8 Monetary Policy on Course Inflation on track with central bank targets 10 % CPI and Targets CPI to fall-off sharply as effect of regulated price adjustments fades and to converge to Core CPI Free float of the Koruna introduced in 1998 % yoy 8 6 % % 4% 2% 0 % Jan-01 Dec-01 Nov-02 Oct-03 Sep-04 CPI Core CPI Source: SUSR, NBS Successive liberalisation of financial transactions since % CPI (2003) Continued real and nominal exchange rate appreciation % yoy 8% 5% 3% 0% Slovakia Hungary Poland Czech Republic Source: SUSR, NBS 8

9 Balance of Payments Improvement 1999 Austerity Package reined in the current account deficit 5000 Balance of Payments Components Sharp current account adjustment to virtual balance in 2003 on the back of 25% export growth USD mn % of total exports go to the EU15 and 85% to the EU25 Imports largely driven by export growth due to high import component Financing needs more than covered by FDI Lowest foreign financing need in the region % of GDP 0 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% Current account deficit FDI Source: NBS Current Account (2003) Hungary Czech Republic Poland Slovakia Source: NBS 9

10 EMU in Sight EMU participation provides incentive for final reform push 16% Fulfillment of Maastricht Criteria 70% Price liberalisation and adjustment is mostly complete 14% 12% 65% 60% Inflation falling off sharply, en route 10% 55% towards meeting the Maastricht criterion % 8% 50% Fiscal criterion to be met by 2006/07 6% 45% Public debt level already below Maastricht threshold 4% 2% 40% 35% Expectation to enter EMU by 2008/2009 0% 30% Inflation Fiscal deficit Interest rate FX volatility Public debt Maastricht Slovakia Source: Ministry of Finance, European Commission, NBS, SUSR Note: FX volatility is defined as the monthly deviation from a 2-yr moving average of the SKK/ rate as a proxy 10

11 Well Positioned Ahead of EMU General Government Deficit Public Debt 10% 125% 8% 100% % of GDP 6% 4% 2% % of GDP 75% 50% 25% 0% Slovakia (2003) Portugal Spain Greece (1996) Italy Source: Eurostat, Ministry of Finance 0% Slovakia (2003) Portugal Spain Greece (1996) Italy Source: Eurostat, European Commission CPI Long Term Interest Rate 12% 16% 8% 12% % yoy 4% % 8% 4% 0% Slovakia (2003) Portugal Spain Greece (1996) Italy 0% Slovakia (2003) Portugal Spain Greece (1996) Italy Source: Eurostat, SUSR Source: Eurostat, Ministry of Finance Note: Figures indicate a country s position 5 years ahead of actual or expected EMU entry 11

12 Since 2001: Forging Ahead with Structural Reforms

13 Successful Privatisation Privatisation proceeded in two stages: Privatisation Receipts (Cumulative) : Banking sector privatisation 2002: Sale of minority (but with management control) stakes in utilities (energy, gas) Proceeds used to finance costs of pension reform and repayment of state debt Left to privatise: Book value of SKK79bn for sale 60% of book value in SE (electricity) and SPP (gas) % of GDP 25% 20% 15% 10% 5% 0% Source: NBS 13

14 Pension Reform: Well-funded Key reforms recommended by European Commission to relieve pressures on public financing: Provide economic incentives to prolong working lives Limit access to early retirement schemes Strengthen the link between contributions and entitlements Curtail future public spending requirements by instituting more appropriate pension indexation mechanism Spread future pensions-related risks across several pension pillars SLOVAK REFORM IMPLEMENTS ALL THESE RECOMMENDATIONS Through radical reform of 1 st pillar (pay-as-you-go pillar) Through introduction of the 2 nd pillar (private pension accounts invested in capital markets) Through improving the regulatory environment for efficient functioning of the 3 rd pillar 14

15 Tax Reform: Simple and Flat Created a transparent, efficient and non-distortionary tax system: Introduced 19% flat tax on all direct income: Unified five personal income tax rates (previously 10, 20, 28, 35 and 38%) Lowered the corporate tax rate from 25% Unified VAT rates into a single 19% rate Eliminated virtually all exceptions, exemptions and special regimes Eliminated double taxation of income: inheritance, dividend, gift and real estate transfer tax abolished 15

16 Tax Rates Faced by Investors Slovakia Estonia Finland Hungary Poland Czech Republic Germany Japan UK Ireland France USA (New York) 0% 10% 20% 30% 40% 50% 60% Corporate tax rate Effective tax rate on investment income faced by a private investor (combined corporate tax and dividend tax) Source: Ministry of Finance, NBS, SUSR 16

17 Further Key Structural Reforms Labour Market and Social Security: Dramatically increased labour market flexibility Increased employment through incentives that reward activity Reduced space for abuse of social benefits schemes Health-Care Education Made the system financially self-sustainable Improving the quality of services provided Increased responsiveness of school supply to local demand for schooling and labour market situation Increased financial flows into system to expand capacity and improve quality Public Administration Improved the quality of public services Continued the de-centralisation of public administration 17

18 Competitive Industrial Location Favorable geographical position Labour Cost-adjusted Productivity Highly open and deregulated economy Well-educated and highly skilled labour force High level of productivity Strongly competitive labour costs Low degree of labour unrest % of EU 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% EU15 Czech Republic Slovakia Hungary Poland Source: Market Sources 18

19 Steadily Growing FDI Slovakia the location of choice for productive investment: 700 FDI per capita ( avg) One of the highest direct investment ratios in the region A well-diversified investor base Peugeot Citroen and Hyundai/Kia are to triple car production in years to come, investing in excess of a combined 1.5 bn USD Czech Republic Slovakia Hungary Poland Source: Ministry of Finance 19

20 Upward Rating Trajectory Slovakia s reform efforts have been recognised by the rating agencies through a series of upgrades A Credit Rating Dynamics Slovakia first regained its investment grade rating in 2001 Further upgrades have followed, with Moody s rating Slovakia A3 and S&P BBB+ Credit Ratings A- BBB+ BBB BBB- BB+ BB May-95 Sep-96 Feb-98 Jun-99 Nov-00 Mar-02 Aug-03 Moodys S&P Source: Standard & Poor s, Moody s 20

21 Debt Performance Market Ratification 10-year Local Market Spread to Bunds Portugal, 10 yr Ireland, 10 yr Italy, 10 yr Spain, 10 yr bps Slovak Republic Current 10 year Years to EMU membership Note: Local Currency Market Source: Bloomberg 21

22 Debt and Liquidity Management Agency Established as part of the reforms aimed at creating a state-of-the-art platform for debt and liquidity management, based on the best international practices The role of the Debt and Liquidity Management Agency: Provide professional debt and liquidity management for cost optimisation Separate operational debt and liquidity management from policy formulation and regulatory controls Maintain permanent dialogue with financial intermediaries and investors Develop a flexible approach to debt management Support the integration of Slovak financial markets and the management of Slovak public finance within the European Union 22