COUNTRY ESSENTIALS. The Coface Country Essentials offer a concise and clearly structured

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1 COUNTRY ESSENTIALS SLOVAKIA Summer 2015 TABLE OF CONTENTS / 02 / 03 / 05 / 05 General Information Risk Assessment Foreign Trade Economic Key Data / 06 Insolvency / 08 / 09 Checklist for Business Operations Contacts Coface / 10 References Overview The Coface Country Essentials offer a concise and clearly structured overview of country economic facts. The most important facts for 18 countries in Central and Eastern Europe include the most recent risk overview and our Coface country risk assessment. You receive a general information on the country ranging from major cities to natural resources and most important sectors. This is followed by our risk assessment giving a general overview on the economic and political situation and the strength and weaknesses of the country. The next chapter focuses on the key facts: top trading partners and economic data like GDP growth, inflation or public debt. The insolvency part shows you the top and flop sectors, information on the development of insolvencies and the procedure. Last but not least we provide you with a checklist for business operations and the latest corruption and doing business index data. If you need further information your will find a list of our contacts in the region.

2 GENERAL INFORMATION The peaceful and amicable separation of Czechoslovakia on 1 January 1993 led to the creation of two independent successor states: the Slovak Republic and the Czech Republic. Slovakia borders Austria, the Czech Republic, Poland, Ukraine and Hungary. The country has been a member of NATO since 29 March 2004 and joined the European Union on 1 May On 1 January 2009, Slovakia introduced the euro as its official currency. Form of government: Democratic Republic Administrative organisation: 8 regions and 79 districts Area: 49,036 km² Population: 5,421,349; density: 110 inhabitants / km² Official language: Slovak, Hungarian (regionally) Local currency: 1 euro (EUR) = 100 cent Capital: Bratislava: 417,389 inhabitants Major cities and population: Košice Prešov Žilina Nitra Trnava Trenčín 240,688 inhabitants 91,638 inhabitants 81,515 inhabitants 78,875 inhabitants 66,219 inhabitants 55,832 inhabitants Ethnic groups: 80.7% Slovak, 8.5% Hungarian, 2% Roma, 1% Czech Religion: Natural resources: Most important sectors: 62% Roman-Catholic, 5.9% Protestans, 3.8% Greek-Chatolic Brown coal, dolomite, iron, salt, calcite, mica, stone, wood, mineral water Agriculture, automotive, machinery construction, steel Membership in international organisations: Member of 60 organizations: EU, V4, CEFTA, OECD, OBSE, OSN, RE, NATO, WTO, Schengen, a.o. / 2

3 RISK ASSESSMENT Coface Country Assessment A3 Activity sustained by domestic and European demand Activity will still be supported in 2015 by domestic demand. Employment will continue to grow and the low debt levels will encourage households to increase their consumption and buy housing. Public works will benefit from an influx of European structural funds, due to the fact that a sizeable balance from the period must be used by the end of June Exports of automobiles made by the three manufacturers present in the country (PSA, VW and KIA) will benefit from a better European market. Sales of electronic products, the other sector preferred by foreign investors, are also expected to benefit from the upturn in Europe. This favourable demand trend, both domestic and foreign, will encourage businesses to invest. The banks, mostly subsidiaries of foreign groups, particularly Italian and Austrian, have suffered little from the crisis and have sufficient capacity of their own to respond to the demand for credit. Correct budgetary situation The public deficit and debt are below the warning thresholds. This enables the country to fund itself at very low interest rates. However, if the economic situation should deteriorate, the authorities would have little margin for manoeuvre, especially since a constitutional provision states that savings must be made if the debt reaches 55% of GDP. Thus budgetary consolidation is set to continue. This will focus on improving tax collection: tax revenues represent only 16% of GDP, of which only 6% is for VAT. Combatting tax evasion will therefore be on the agenda with, for example, more widespread use of cash registers. The effort is not expected to affect spending, the investment component of which has suffered greatly. On the contrary, a boost is expected for research and development, the computerisation of administrative procedures as well as for teachers salaries. A reduction in social security contributions (14% of GDP) is expected to be adopted for those on low wages. Finally, the use of European funds will be accelerated in order to address the low geographic mobility of labour, especially in the centre and the east, where transport infrastructures are still inadequate. These measures are aimed at combatting high unemployment (13%) particularly among the young (33%), increasing locally added value to exported products (currently 55%), as well as improving the efficiency of public administration. The sale of publicly owned enterprises, which make up 22% of the non-financial sector, could help to reduce debt, half of which is held by non-resident investors. A trade surplus linked to inclusion in the European production chain The balance of trade was in surplus at 4.3% of GDP in This performance is explained by the export competitiveness of the many foreign businesses (half of the non-financial businesses) which have made this country a production base for the European market. This is because labour productivity has grown more quickly than wages, which has made it possible to win market share. To address the emergence on regional industrial scene of countries with lower labour costs, Slovak businesses will need to go upmarket and establish themselves outside Bratislava and its region, which implies greater state involvement in research, training and infrastructure development. The trade surplus and European funds cover the revenue deficit linked to the foreign investors repatriation of dividends and interest, as well as the net capital outflows due to private sector s foreign debt deleveraging. A well-established government Robert Fico, President of the Social Democratic Party and already Prime Minister from 2006 to 2010 in a disparate coalition including the nationalists and the populists, has, since 2012, led a single-party government without the support of other parties, for the first time in 20 years. He has a comfortable majority (83 seats out of 150), which should enable him to continue budgetary consolidation. Despite the occasional political and administrative corruption scandal, sometimes linked to calls to tender or the use of European funds, the government will approach the 2016 elections in favourable conditions. / 3

4 RISK ASSESSMENT Strength Membership of the Eurozone Production platform for the European automotive and electronics industry Satisfactory public and external accounts Robust financial system Weaknesses Small economy dependent on European investments and markets Heavy concentration of exports on certain sectors: automotives and consumer electronics Dependence on Russia for 69% of its energy (gas, oil, uranium) Regional development inequalities - the centre and the east lagging behind Deficiencies in education and professional training, especially among the Roma / 4

5 FOREIGN TRADE & ECONOMIC KEY DATA Slovakia s Top Trading Partners Imports in MEUR EU 27 35,055 37,261 37,604 38,319 Germany 8,869 9,850 9,337 8,947 Czech republic 6,184 5,933 6,148 6,285 Russian Federation 5,706 5,724 6,225 4,913 Republic of Korea 3,450 5,600 5,157 4,379 Exports in MEUR EU 27 47,695 51,989 53,295 54,493 Germany 11,494 13,273 13,577 14,332 Cech republic 7,996 8,706 8,752 8,294 Poland 4,104 5,003 5,313 5,200 Hungary 3,992 4,342 4,020 3,955 Source: Eurostat Economic Key Data Key Data (e) 2015 (f) GDP growth (%) Inflation (yearly average) (%) Budget balance (in % of GDP) Current account (in % of GDP) Public debt (in % of GDP) (e) estimate (f) forecast Source: Coface / 5

6 INSOLVENCY Top 5 sectors Mining and quarrying Education Arts, entertainment and recreation Health and social work Financial and insurance activities Flop 5 sectors Electricity, gas, steam and airconditioning supply Wholesale and retail trade, repair of motor vehicles and motorcycles Accomodation and food service activities Administrative and support service activities Manufacturing Slovakia s Biggest Insolvencies in 2014 Company Name Sector Total liabilities in euro 1. Doprastav, a.s. construction of roads and motorways 189,000,000 Bratislava 2. VÁHOSTAV - SK, a.s. construction of roads and motorways 112,000,000 Bratislava 3. Dubnický Metalurgický Kombinát, s. r. o. manufacture of basic iron and steel and of ferro-alloys 33,000,000 Town Dubnica nad Váhom 4. Kúpele Brusno, a.s. other human health activities 31,000,000 Brusno 5. ASTRUM Laus, s.r.o. artistic creation 20,000,000 Levice Insolvencies in 2014 Although the pace of GDP growth in Slovakia more than doubled between 2013 and 2014, up from 0.9% to 2.4%, companies suffered from a rising number of insolvencies during the same period. However improved economic conditions are already starting to be experienced on the microeconomic side and the increase of insolvencies was relatively moderate (3%). As previously mentioned, construction output is suffering from the sector s long-term deterioration. The turbulent and challenging conditions resulted in the insolvencies of two leading construction companies last year - Doprastav and Vahostav - with aggregated liabilities exceeding EUR 300 million. Factors triggering construction insolvencies are the consequences of past managerial decisions, such as inadequate quoting of contracts which did not reflect changes in cost levels and made many contracts unprofitable. Despite increasing consumer spending, the share of insolvencies from retail and wholesale companies increased from 25% to 32%. Insolvency procedures Slovak insolvency law is governed by Act No. 7/2005 Coll, Bankruptcy and Restructuring Act, as amended (Bankruptcy Act) and two implementing decrees. The Bankruptcy Act has been materially amended with the effect as of 1 January 2012, with certain changes taking effect only in The Bankruptcy Act provides two main types of insolvency proceedings, which are separate proceedings with limited options of conversion from one to another and only a limited number of common rules: Bankruptcy liquidation proceedings (konkurz): The debtor s management is severely limited in its powers by the filing of the petition for bankruptcy liquidation. The court s decision on commencement of the proceedings results in a prohibition on any actions out of the ordinary course of trading. On declaration of a bankruptcy liquidation, the trustee takes over the power of management with respect to the debtor s operations and assets and acts in the name and on behalf of the debtor. The former management technically stays in its position but loses almost all powers (except for certain procedural rights within the proceedings and, especially for individual debtors, the power to act in matters unrelated to the estate). Any debtor s claims must be paid to the trustee. / 6

7 INSOLVENCY Restructuring proceedings (reštrukturalizácia): After commencement of restructuring proceedings, the debtor s management is limited to actions within the ordinary course of trading and any other (non-ordinary) actions are subject to the trustee s approval. The trustee can only approve such actions if they increase the value of the debtor s assets or are necessary to achieve the purpose of the restructuring. When the court authorises restructuring, the decision must clearly specify the debtor s actions that are subject to the trustee s approval. The creditors committee can also request that the limitation on the debtor be extended. Unless the court orders otherwise, there are no specific rules for replacement of the statutory bodies/ management and the shareholders powers to elect or remove the management are therefore not normally limited. While both types of proceedings have the same aim, the satisfaction of creditors claims, they are pursued separately and by different means. While bankruptcy liquidation always leads to the windingup of a debtor as a corporate entity, restructuring may preserve the debtor s business and corporate existence. The law gives priority to restructuring, by automatic suspension of the pending bankruptcy liquidation proceedings once the restructuring proceedings are commenced or by giving an opportunity to the debtor to ask the court to suspend the bankruptcy liquidation proceedings pending the preparation of a restructuring. However, any significant breach of the restructuring rules may result in a conversion into bankruptcy liquidation. The Bankruptcy Act purports to provide for two theoretical tests of insolvency (úpadok): Cash flow insolvency (platobná neschopnos), which means the debtor is unable to pay at least two liabilities which are 30 days overdue to more than one creditor. In practice this is the only test that is currently used. Balance sheet insolvency (predĺženie), which is currently defined as an excess of due liabilities over the value of assets (at book value). The definition was changed from 1 January 2013 to include all the debtor s liabilities, not only due liabilities. The value of the assets, but also the value of the liabilities, are taken not only from the debtor s books, but primarily from an expert opinion (the value determined by the expert opinion having priority). The assets need to be valued in light of the potential for the future operation of the debtor s business, if it is reasonable to expect it to continue. The liabilities do not include subordinated liabilities. Only debtors obliged to maintain accounting books can be balance sheet insolvent. / 7

8 CHECKLIST FOR BUSINESS OPERATIONS The following table summarizes relevant information for investors and exporters. Corporate law Tax law Investments Minimum capital for a stock company: EUR Minimum capital for a limited liability company: EUR % corporate tax 20% VAT (reduced rate: 10%) 19% income tax from individuals by annual income EUR different excise tax Foreign corporations should be registred for VAT purposes Foreign investors are accorded equal treatment with domestic investors Foreign exchange Euro Labour law Customs Minimum wage 2014: EUR 352,- per month (1/2014) No permitions for EU citizen Governments grants for new companies or tax discounts for foreign investors Travel and residence No permitions for EU citizens Corruption Slovakia was 54 th in the International Corruption Perceptions Index In comparison, Germany was ranked 12 th and Austria was ranked 23 rd. The Corruption Perceptions Index is issued by Transparency International, and lists countries according to the perceived level of public sector corruption. This perception is based on surveys of managers and experts, and related solely to the public sector. Doing Business The Doing Business Index issued by the World Bank ( expresses the ease of doing business in a particular country. In this ranking, Slovakia was ranked 37 th in 2015 and gained 12 ranks compared to the previous year. Germany and Austria were rated 14 th and 21 st, respectively. This index consists of ten different sub-indexes that determine whether laws or other regulations exist in certain areas and whether or how they are applied. For example, the subcategories deal with the payment of taxes, hiring of staff and the founding and closing of companies. / 8

9 CONTACTS COFACE Coface Austria & Coface Central Europe Stubenring Vienna T. +43 (1) F. +43 (1) Coface Lithuania Vilniaus str Vilnius T (5) F (5) Coface Albania serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Macedonia serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Belarus serviced by Coface Russia 1st Tverskaya-Yamskaya str., 23, bld Moscow T. +7 (495) F. +7 (495) Coface Moldova serviced by Coface Romania 39 Calea Floreasca - Et District Bucharest T. +40 (21) F. +40 (21) Coface Bosnia & Herzegovina serviced by Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Montenegro serviced by Coface Serbia Bulevar Oslobodjenja Belgrade T (11) F (11) Coface Bulgaria 42 Petar Parchevich str Sofia T (2) F (2) Coface Poland Al. Jerozolimskie Warsaw T. +48 (22) F. +48 (22) Coface Croatia Avenija Dubrovnik 46/III Zagreb T (1) F (1) Coface Romania 39 Calea Floreasca - Et District Bucharest T. +40 (21) F. +40 (21) Coface Czech I.P. Pavlova Prague T F Coface Serbia Bulevar Oslobodenja Belgrade T (11) F (11) Coface Estonia serviced by Coface Latvia Berzaunes iela 11a Riga T (6) F (6) Coface Slovakia Soltésovej Bratislava T (2) F (2) Coface Hungary Tüzoltó utca Budapest T. +36 (1) F. +36 (1) Coface Slovenia Slovenceva ulica Ljubljana T (1) F (1) Coface Latvia Berzaunes iela 11a Riga T (6) F (6) Coface Ukraine 4 B. Gmyri Str., of Kyiv T (44) F (44) / 9

10 REFERENCES Internet >> Country Risk and Economic Research, CEE Insolvencies Panorama 2014, Coface, Niederlassung Austria, Vienna Print Handbuch Länderrisiken 2015, Coface, Niederlassung Austria, Vienna Imprint Media owner and production: Coface, Niederlassung Austria, Stubenring 24, 1010 Vienna, Austria; Editorial office: Susanne Krönes. Copyright and Liability Coface, Niederlassung Austria (Stubenring 24, 1010 Vienna, Austria) copyright, conditions of use: you may copy and publish the information on this site provided that you do not make commercial use of it and clearly indicate that it originates from Coface, Niederlassung Austria. This information is provided without guarantee and does not bind Coface, Niederlassung Austria in any way. The Coface Country Assessment was included in this country report as of May Coface, Niederlassung Austria cannot accept responsibility for changes made at a later date. / 10