Slovenia, Czech Republic, Slovakia

Twenty years after the fall of the Berlin Wall, Slovenia, the Czech Republic and Slovakia are the three richest countries of the former Eastern Bloc with regard to GDP per person. Yet, their living standars still fall behind their Western-European counterparts'. Whereas Slovenia reaches roughly 62% of the Western-European average, the Czech Republic and Slovakia are only at 41-42%, and the rest of the region lies further down the chart. The Economist reports.

Moving This Blog

As my employer finally managed to upgrade its website, I will be moving much of the future posts from this blog to www.trendanalyses.sk (all articles are also in English). See, for example, our recent texts (1, 2) on distorted inflation figures published by the Slovak Statistical Office. RSS channel will soon be available for the TREND Analyses' homepage. Occasionally, however, there might be issues, links, graphs etc. that appear only in this blog, so please remain subscribed.

Unemployment Increasing Despite Season

Despite little smaller GDP decline in the second quarter as well as favorable summer season, registered unemployment in Slovakia continues to grow. In July, it reached 12.1% of labor force, and is expected to grow in the coming months as well. Current unemployment rate increase (4.6 percentage points annually) is the largest ever, and joblessness is now reaching highest levels since 2004. Strained labor market, where supply of labor abundantly exceeds the demand for it, is caused by global economic crisis, which manifests itself particularly in shrunk foreign demand for local exports. Lower production thus requires considerably fewer workers compared to times of economic boom in 2006-7.

In this context, the proposal of trade unions for increasing the statutory minimum wage by 8.1%, when consumer inflation approaches zero, must be regarded as irresponsible. Considerably increasing the minimum wage in times when many companies operate without any profits could endanger thousands more jobs in the economy.

One Central-European Stock Market?

Corporate finance in Central Europe is dominated by bank lending. However, 94 IPOs on the Warsaw Stock Exchange last year, together with Prague and Ljubljana exchanges being recently acquired by Wiener Börse, point to interesting developments.
For this year, privatization of Warsaw Stock Exchange is planned. This way, the Vienna exchange could theoretically overtake its regional rival and form Europe's eight largest market for shares. Or the acquisition can happen the other way around, with the privatized Polish exchange acquiring Wiener Börse. Nevertheless, for now both exchanges deny the possibility of allowing one to buy the other.
Largest stock exchanges in Europe according to market capitalization are: Euronext, LSE, Spanish exchange, Deutsche Börse and the Swiss exchange.

Capital Bears More of the Crisis Burden than Labor

Share of corporate operating surplus on gross value added. Share of labor compensation is the complement to 100%. Source: Eurostat.

Fed's Exit Strategy

Fed's chairman Ben Bernanke published an article in WSJ explaining the central bank's financial exit strategy after it pumped billions into the economy in an attempt to fight the negative effects of the crisis.
The Fed will need "to tighten monetary policy to prevent the emergence of an inflation problem," Bernanke writes. This should be achieved by eliminating large reserve balances of banks. To do that, the Fed could increase its target for federal funds rate, attracting liquidity back into its own hands. Moreover, in case the federal funds rate does not react sufficiently to the rate Fed will pay on deposited reserves, the Reserve or the Treasury could arrange large-scale "reverse repurchase agreements" - that is, issuing their own securities and sterilizing thus gained liquidity.
The timing and pace of such instrument should best foster Fed's objectives of maximum employment and price stability, the chairman concludes.

NYT Coverage on Slovakia

"Neighbor’s Shadow Still Large in Slovakia". I am not sure the title is really capturing the main issue in the country, but the article provides ample important insights into the happenings in Slovakia.

Top 10 Slovak Companies in 2008

Rank, Name, Industry, Sales in 2008 (individual)

1. Volkswagen Slovakia, automotive, €5.37 billion
2. Slovnaft, oil refining, €4.03 billion
3. Samsung Electronics, electronics, €3.52 billion
4. U.S. Steel Košice, metallurgy, €2.93 billion
5. SPP, gas distribution, €2.90 billion
6. Kia Motors, automotive, €2.23 billion,
7. Slovenské elektrárne, energy, €1.96 billion
8. PCA Slovakia, automotive, €1.74 billion
9. Sony Slovakia, electronics, €1.40 billion
10. Západoslovenská energetika, energy, €1.11 billion

Source: TREND Top 200. Last year's results can be found in our earlier post.

V4 Wages Suffering from Currencies' Depreciation

Currency depreciations pulled down the Euro purchasing power of V4 wages in the first quarter of this year, with the exception of Slovakia, which had a fixed exchange rate to Euro de facto from May 28, 2008. For the first time, thus, average gross salary in Slovakia is not the lowest in Central Europe. Note: the 1q09 value for the Czech Republic is an estimate.

Higher Deficits Don't Help Much

A recent study of the National Bank of Slovakia (NBS) finds fiscal stimuli relatively ineffective.

"An increase of deficit by one percentage point of GDP permanently would increase GDP growth only in the short-term - by 0.4% in the first year, and 0.2% in the following periods. After six quarters, the GDP dynamic would return to its original level. The major effect of such permanent deficit increase would be lasting increase in real interest rates."

The paper by Michal Benčík can be found at the NBS's website (in Slovak).

V4 Currencies: SKK Gone Strong, PLN and HUF Down

This is a graph depicting the purchasing power of Visegrád Four currencies vis-à-vis Euro since November 2005, when Slovak Koruna entered the ERM II system. The figure shows that the Slovak currency has been fixed to Euro at the time when all V4 currencies registered their several-year highs (summer 2008). After criris-related depreciation of CZK, PLN and HUF, this strong conversion rate made Slovakia relatively more expensive to its neighbors, which hampers exports but tames inflation. More information can be found in TREND Analyses' macropresentation.

1Q 2009: Economies Shrank Considerably

Country 1Q real y/y GDP growth NSA / SA
Czech Republic -3.2% / -3.4%
Hungary -6.4% / -4.7%
Poland n.a.* / n.a.* (seen at 1.0-1.3% by MinFin, 1.0% by Bloomberg)
Slovakia -5.4% / -6.0%

NSA - non-seasonally adjusted, SA - seasonally adjusted
* - will be published on May 29

5 Years of Central Europe in the EU

The European Commission published a study summarizing the economic effects of the historic 2004 EU enlargement. The main findings say that:

• the accession process has contributed to significantly improve living standards in the new Member States, [...]
• rapid trade integration has fostered a more efficient division of labor and strengthened competitiveness in the EU
• investments from old Member States have been a key driver of economic transformation in the new Member States
• new investment opportunities created by enlargement helped enterprises in the old Member States to strengthen their global competitiveness [...]
  
• workers in the new Member States have profited from improved employment opportunities at home and abroad, [...]
  
• in old Member States, concerns raised about massive labor migration prior to enlargement have not materialized
  

During the five years, Central Europe has proceeded to gain freedom in labor movement, typical for full EU membership. Restrictions to free movement of labor now remain only in Germany and Austria. The countries acceded to the Schengen area of free borders and won visa waiver for traveling to the United States. In addition, Slovakia joined the Eurozone in January this year.
Local economies experienced a swift growth in 2004-8. Regional average GDP per capita increased from 61.5% of the EU average in 2004 to 67.7% four years later (arithmetic average of V4 countries). Population in V4 stayed stagnant - at 63.9-64.0 million. The number of inhabitants grew noticebly only in the Czech Republic (from 10.2 to current 10.5 million). The EU27's total population is expected to reach 500 million sometime later this year.

Bratislava Public Transportation in Three Countries

From September on, Bratislava system of public transportation will span three countries. Apart from Slovakia, local buses operate a line to Austrian town of Hainburg an der Donau and a border village Wolfsthal. Later this year, the EU funds will pay for most of the costs of another line to Hunagrian village of Rajka, where many Slovaks moved during the last year or two. This development owes to the Schengen system of free movement across most of EU borders. Apart from Bratislava, only Swiss Basel public transportation is known to the author to service two other countries (France and Germany) apart from its homeland.

Czecho-Slovakia's Revival at the IMF, WB

The Czech Republic and Slovakia signed an agreement on joint representation at the International Monetary Fund (IMF) and the World Bank. Sixteen years after the two republics peacefully split, the two states will have only one representative in the IMF (a Slovak), and one (a Czech) at the World Bank. After four years, this composition will switch. The agreement aiming at cost saving has been signed by the Czech and Slovak representatives in Washington, D.C. (read ČTK's report)

Falling By How Much?

Revisions of macroeconomic forecasts bring worse and worse predictions for the V4 economies. The latest prediction of the National Bank of Slovakia expects local GDP to shrink by 2.4%. Last year, Slovak economy expanded by 6.4%.
Hungarian authorities already calculate with a recession of 5.5-6.0% in this most-hit Central-European country (majority of analysts expected 4-5% decline).
An older (February) forecast of the Czech National Bank counts with an economic decline of only 0.3% in the Czech Republic. IMF expects -1.3%.
By the end of March, Polish central bank expected a 1.1% growth for Poland, which would make the country the only economy in the EU to grow. Similar estimate was released by The Economist Intelligence Unit (+0.9%).
A good portrayal of the current state in the local automotive sector, one of the leading and most-hit industries, can be found at businessnewseurope.

The Economist's Portrayal of CEE

(from The Economist print edition, February 12, 2009)

"A picture worth 163 words

SIR – Given your newspaper’s determination to accompany any article on social or political affairs in eastern Europe with a photograph of the apparently ubiquitous old lady with a shawl wrapped over her head, I was delighted to find that your recent piece on the gas crisis in the region (“Gasping for gas”, January 17th) carried a picture representative of another important demographic group: the dentally challenged villager. My excitement was short-lived, however, as just a week later it was back to the well-wrapped old lady (“To the barricades”, January 24th). One gets the impression from your coverage of elections that every polling station east of the Danube is populated solely by such characters.

To avoid creating any misleading stereotypes, may I suggest that you widen your range of imagery to better represent east Europeans. Roma using horse-drawn carts on main roads, elderly veterans in Soviet-style uniforms and furry hats and vodka-soaked vagrants would broaden the picture.

Daniel Tilles
Cracow, Poland"

Average Wages under Exchange Rate Pressure

Average monthly wages in Visegrád Four (V4) countries expressed in terms of Euro values suffered from exchange rate devaluation during the last quarter of 2008. Yet, only Polish wages decreased in Euro-terms compared to the previous quarter. Slovakia, a fresh member of the Eurozone, did not experience an exchange rate depreciation thanks to its set conversion rate. The country's average Euro wage has doubled during the last four years. (More information in updated TREND Analyses' macropresentation.)

CEE is not a Monolithic Region

Say the Czechs in The Prague Post. The article cites loan-to-deposit ratios, which are around 80% in the Czech Republic and Slovakia, but 130% in Romania and as much as 200% in Estonia. In addition, Erste group maintains that the region is less exposed to the credit crisis than the numbers of Bank for International Settlements say (BIS mentions Western exposure of $1.4 trillion).

New Research Papers by Ľuboš Pástor

Possibly the most prominent Slovak economic scholar, Prof. Ľuboš Pástor from the University of Chicago, is currently working on two projects included in recent NBER working papers. One of them deals with the process of learning in financial markets, and will be soon reviewed for this blog by our colleague František Lipták. The other tries to answer the question of whether stock prices are really less volatile in the long run.

Hungarian Pleas for Aid Went Unheard by the EU

Slovak cartoonist Martin Šútovec nicely immortalized the occasion in his recent caricature. Hungarian portal Magyar Hírlap took the picture and translated it to Hungarian. The cartoon stars Slovak Prime Minister Robert Fico, famous for stressing the value of solidarity, and Hungarian leader Ferenc Gyurcsány. Here it is:English translation: "Solidarity? Are you nuts?!?"

Source: http://www.magyarhirlap.hu/cikk.php?cikk=161632

Prague the 12th Most Productive Region in the EU

According to data for 2006 released by Eurostat today, Bratislava region was the nineteenth most productive of all 271 regions in the European Union. Its GDP per inhabitant in purchasing power standards amounted to 149% of the EU average. This has to do with many large companies having headquarters and major facilities in the capital city, such as automotive manufacturer Volkswagen or oil refinery Slovnaft. Czech capital Prague ranked even higher – at place number twelve – and it is the most productive region of whole Central and Eastern Europe. Other regions of Slovakia ranked much lower, since their productivity ranged from only 44% of the EU average in case of Eastern Slovakia to 63% in Western Slovakia. Regional differences in living standards are thus quite pronounced in the country. However, this is the case of many other EU member states as well, such as Italy, Germany, Spain or the UK. The poorest regions of the EU can be found in Romania, Bulgaria and Poland.

Best Economic News and Analyses on Slovakia in English...

...can be found in TREND Analyses' monthly TREND Monitor.
The product covers:

• key macroeconomic indicators with commentary, history and regularly updated prognoses
• concise analyses of recent development in selected industries, new investment intentions of foreign and domestic corporations, mergers and acquisitions, industrial statistics, financial results of major players, hot news and events
• selected industries - metallurgy, mechanical and electrical engineering, chemical industry, energy sector, foodstuff processing, construction, production of construction materials, financial sector and other corporate news

The latest issue of TREND Monitor can be retrieved for free by sending a request to analyses@trend.sk

Workshop on New Institutional Economics

Ronald Coase Institute is organizing a workshop devoted to institutional analysis on May 10-15 together with the University of Economics in Bratislava. The deadline for applications is February 16 (Monday). The institute involves three Nobel Prize winners: Ronald H. Coase, Kenneth J. Arrow as well as Douglass C. North.

Germany as the Major Destination for Exports

Germany is the major trade destination for exports from five CEE countries:

1. Czech Republic - 30.9% of exports (1-11/08)
2. Hungary - 28.4% (2007)
3. Poland - 25.0% (1-11/2008)
4. Slovakia - 20.3% (1-10/2008)
5. Slovenia - 19.8% (1-11/2008)

Since exports-to-GDP ratios in Central and Eastern Europe are very high (roughly from 50 to 100%), a two-percent decline in Germany's economy this year is felt considerably in orders decline in the rest of "Mitteleuropa" as well.

Note: Lithuania's major export market is Latvia. Latvia's statistical office does not provide the necessary data. Estonia's major export partner is Finland. Croatia's major partner is Italy.

Brokered FDI down by Nearly 60% in Slovakia

Slovak investment agency Sario brokered almost sixty percent less foreign direct investment (FDI) last year compared to 2007. The amount of negotiated investment decreased from €1.28 billion to only €538 million (0.8% of GDP). Official central bank statistics of FDI inflow indicate a similar decline – by almost a third for the first ten months of the last year. However, the central bank data is often revised and contains estimates, which makes the overall numbers less reliable.
The reason for FDI inflow decline is that many companies scaled back their expansion plans due to global financial crisis. Japanese electronics manufacturer Sony, for instance, has been one of those belonging to this group. Other projects have been put on hold by hesitant firms facing uncertain times. Yet, there were a few significant large investments announced. For example, Bratislava-based plant of Volkswagen announced expansion worth €300 million last year.
Sario officials say that 2009 could witness resumption in FDI flows thanks to the Slovak adoption of common currency Euro as of January 1 this year. The agency is currently working on 122 projects bringing potentially more than € 2 billion of capital into the country. Five of the projects exceed € 300 million in value.

Grim Outlook for CEE from Lombard Street Research

In its daily note of January 16, Lombard Street Reseach writes via its analyst Maya Bhandari:

"The unwinding Eurasian savings glut will dominate 2009 economic outcomes. Emerging Europe faces the heaviest adjustment. The CEE-4 are amongst the biggest "borrow and spend" economies in Europe, with large external financing needs. But they also share the Asian Tigers' dependence on foreign demand for domestic growth, with two nasty twists – many banking systems are directly tied to the global crunch, and scope for policy action, both monetary and fiscal, is restricted."

TREND Watch Monthly on Slovakia's Economy

Is available at the Ministry of Foreign Affairs' website (in English). Soon with the December issue. Note: Author of this blog is also the author and project manager of the above-mentioned product.

Hagara the New Chief Analyst of ING Slovakia

Since January 1, the new chief analyst of ING Slovakia is Eduard Hagara, aged 29. Hagara, born in Kežmarok, replaced Ján Tóth, the chairman of the Club of Economic Analysts, after almost ten years in this position. In 2003, Hagara co-authored a paper (in Slovak) on the similarity of demand and supply shocks in European countries with Jarko Fidrmuc. The study was published in Politická ekonomie in 2004. He obtained a degree in economic and financial mathematics from Comenius University in Bratislava, and worked for ING for almost five years. He is a four-time Slovak chess champion. E. Hagara this way joined the ranks of young economists in senior analyst positions in Slovakia, following Vladimír Vaňo (30), who became the chief analyst of Volksbank Slovakia in fall 2007.

Lipták on Sustainable Use of Natural Resources

An essay of one of our contributors, František Lipták, with which the author participated in the International Year of Planet Earth in Paris. The essay was presented at the National and Regional Economics conference in Herľany, Slovakia, held on October 1-3, 2008.
Abstract:

"In our paper, we analyze issues concerning sustainability of natural resource consumption involving contemporary problems emerging from their increasing scarcity. After brief historical outline, we discuss issue of natural resource use according to various policy approaches dealing with tax policy, externalities, institutions and technological progress."