Slovakia

Slovakia is a strong performer as compared to both Eurozone and emerging economies. However, a high dependence on exports, in particular on automotive shipments, causes above average cyclical fluctuations in growth. Real GDP expanded by an average +3.5% over the past 20 years (above the average of the Central and Eastern European EU member states and equal to the whole Emerging Europe average). As a consequence of the dependence on exports (amounting to almost 100% of GDP), Slovakia's economy was hit harder by the global Covid-19 crisis than others (-5.2% in 2020), despite sizeable economic policy support. Going forward, we expect a broad-based recovery, with annual growth in the range of +4% to +5% in 2021-2022, driven by a rebound in both domestic and external demand. However, sustained or renewed supply-chain disruptions pose downside risks to these forecasts.

Inflationary pressures are likely to be temporary. Slovakia has been a member of the Eurozone since 2009 and thus its monetary policy is conducted by the European Central Bank (ECB), which provides for low transfer and convertibility risk and has substantially decreased external vulnerabilities related to exchange rate risk. Strong credit expansion combined with rapid wage growth pushed consumer price inflation to above 2% y/y from the beginning of 2018 until April 2020, after which it eased to less than 2% for one year owing to declining domestic demand and falling energy prices in the wake of the Covid-19 crisis. Towards mid-2021, inflation picked up again to around 3% amid the recovery from the crisis and rebounding energy prices. However, we expect these upward pressures to be temporary and forecast that average annual inflation will remain below 2.5% in 2021-2022.

The Slovak business environment is well above average. The World Bank Institute’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are generally business-friendly while a certain level of corruption is still perceived as present. The Heritage Foundation’s Index of Economic Freedom survey 2021 assigns Slovakia rank 61 out of 184 economies, reflecting strong scores with regard to property rights, tax burden, trade freedom, investment freedom and financial freedom while weaknesses remain in the areas of judicial effectiveness and labor freedom. The 2020 World Bank Doing Business survey ranks the country 46th out of 190 countries with reference to resolving insolvencies. Meanwhile, our proprietary Environmental Sustainability Index puts Slovakia at rank 51 out of 210 economies, reflecting strengths in energy use and CO2 emissions per GDP, water stress and general vulnerability to climate change, though there are still weaknesses in renewable electricity output and the recycling rate.

Overall systemic political risk is relatively low. Slovakia is a stable democracy and has good international relations, reflected in its EU, NATO and OECD membership. Government stability has suffered somewhat since 2016 and could, if continued, result in ineffective policymaking and slow reform progress. Yet, broad policy continuation has been the rule after past government changes.