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)

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).

Slovak Public Finance Not Consolidating Anymore

General government deficit in Slovakia should reach 2.2% of GDP this year according to the latest estimate of the Ministry of Finance. Vis-a-vis the 2008 budget, this is a small improvement of 0.1 percentage point. With respect to the last year's result (a 2.2% deficit), however, it is a stagnation in the process of public finance consolidation. The stagnation comes even after the private pension pillar was open for half a year in 2008 and thousands left for the state pay-as-you-go system, bringing their savings into the state Social Insurance Company. According to earlier statements of Prime Minister Robert Fico, this year's public finance deficit should have narrowed to below 2.0% of GDP.

In addition, for the first time in years, the actual collected end-year tax revenues might be smaller than projected. After seven months of the year, state budget revenues of SKK 186.6 billion have been collected, which is only 53.6% of projected end-year total. Last year at the end of July, the number stood at 59.7%, which is slightly more than 7/12 of the total. Cumulatively, as a result, the state budget ended up in a minute deficit of SKK 614 million (€ 20 mil), which is the worst result in four years, despite still booming economy. Last year at this time, the state budget recorded a surplus of almost SKK 4 billion.

Major factor to blame is the collection of VAT, the dominant source of public finance, which is frozen at last year’s levels, even though retail sales grew by an average of 14% in current prices during the first six months of the year. The fiscal trend, representing a negative change from previous years, should theoretically limit the government in its proposals for generous spending policies. As of now, the restricting effect cannot be observed however.

Slovakia with Best Ratings out of V4 Countries

After Slovakia's membership in the Eurozone as of January next year was approved, and the conversion rate between local currency and Euro was set, rating agencies Fitch and Moody’s raised their ratings of Slovakia’s long-term foreign currency debt. Fitch lifted its rating from “A” to “A+” with stable outlook. “As a member of the euro area, Slovakia will be sheltered from monetary shocks and the risks of a self-fulfilling currency crisis,” justified the upgrade David Heslam, director of Fitch’s sovereign rating team. Out of Visegrád Four countries, only the Czech Republic has A+ rating (see table below). Poland has A- and Hungary BBB+. Moody’s, similarly, increased its rating outlook for Slovakia – from stable to positive. Slovak Republic’s bonds in both foreign and domestic currency have now rating of A1. The rating agency also raised the country’s foreign currency debt and deposit ceilings to 'Aaa', putting Slovakia on par with the Eurozone. The last of the three major world’s rating agencies, S&P, expressed a relative reservedness towards Prime Minister Fico’s plans in social spending and kept its ratings stable.

Sovereign Ratings of V4 Countries (long-term, in foreign currency, with outlook):

------------------Moody's --S&P ---Fitch
Slovakia ----------A1p------Ap----- A+s
Czech Republic-- A1p-------As -----A+s
Poland------------ A2s----- A-p -----A-s
Hungary---------- A2s--- BBB+n --BBB+s

Top 10 Slovak Companies

Are not really that Slovak after all :)

Ranked according to sales in 2007:

1. Volkswagen Slovakia, automotive, € 5.73 billion

2. Slovnaft, oil refining, € 3.34 billion

3. Samsung Electronics, electronics, € 3.29 billion

4. U.S. Steel Košice, metallurgy, € 2.87 billion

5. SPP, gas distribution, € 2.17 billion

6. Kia Motors, automotive, € 1.60 billion

7. PCA Slovakia, automotive, € 1.54 billion

8. Slovenské elektrárne, energy production, € 1.38 billion

9. Tesco Stores, retail, € 927 million

10. Sony Slovakia, electronics, € 864 million

Note: Fortune's 500th world's largest corporation (Fluor) had revenues of € 12.19 billion last year.

Top 3 in Value Added:

1. U.S. Steel Košice, metallurgy, v.a. € 1.03 billion

2. Slovenské elektrárne, energy production, v.a. € 822 million

3. SPP, gas distribution, v.a. € 541 million

Top 3 in Employment:

1. Železnice SR, railways, 17 982 employees

2. Slovenská pošta, postal services, 15 849 employees

3. U.S. Steel Košice, metallurgy, 13 342 employees

Source: TREND Top 200

For top CEE companies in 2006, visit our earlier post.

Real and Nominal Convergence Go Hand in Hand

Hence, inflation in a fixed exchange rate regime in New Europe (e.g. in Slovakia after adopting euro) can be expected at levels up to real GDP per capita growth (5-7%).