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Slovakia: As Elections Approach, Economic Advances Questioned

  • Breffni O'Rourke

Prague, 15 September 1998 (RFE/RL) -- Slovakia heads into parliamentary elections next week (Sept. 25 and 26) and most political analysts say it will be an open race. The opposition Democratic Coalition led by Mikulas Dzurinda appears to have the support of more than half the electorate, but it is a fragile grouping of very different political entities from across the political spectrum.

The ruling HZDS of Prime minister Vladimir Meciar, on the other hand, has minority support but is clearly the strongest single party. The Meciar government has long been criticized internationally for its failure to meet democratic norms and human rights standards, omissions which are slowing its drive for membership of institutions like the European Union and NATO.

Whoever wins the political stakes will have to deal with an unusual economic situation. Slovakia's economy, although still lagging in reforms, is characterized by one of the region's more vigorous growth rates. For instance growth in gross domestic product (GDP) last year was 6.5 percent, inflation was held to a moderate 6 percent, an unemployment to less than 13 percent.

How has this been achieved? Even experts sometimes wonder. Vladimir Sobell, senior emerging markets analyst with Daiwa Securities in London, says:

"It has always been a bit of a mystery, and some people actually suspect there is some statistical inconsistency. There are problems in the economy which really need to be looked at further. One of the reasons for the growth could be that Slovakia is a very small country where a few large companies dominate the scene, and if they do manage to find good export markets, especially in Western Europe, then this will have a disproportionate impact on the Gross Domestic Product (GDP)."

Sobell notes the predominance in the economy of a handful of large companies in the chemical, steel, automotive and defense sectors. He says that even if many of these companies remain inefficient by world norms, they still have a big cost advantage in selling their products, particularly to the EU. Slovakia is linked to EU countries by an association agreement.

But can the momentum be sustained? Experts are doubtful, among them analyst Charles Roberston of ING Barings in London:

"The trouble is that growth is pretty well unsustainable without an improvement politically, because the politics has ensured that there is virtually no foreign portfolio investment left in Slovakia. It has also ensured that foreign direct investment has been very limited".

He says that because of this, Slovakia's medium-term outlook appears shaky. Companies have not restructured as they were forced to do in Poland in the early 1990s, and as they have been doing in Hungary in the last few years. In addition privatization has proceeded in an opaque way, which is a disincentive to foreign investors.

"There is still much work to be done to sort out the fundamentals of the economy. They have managed superficially to have strong growth, low inflation, and all these positives. But underlying that are a great many problems that will be exposed, probably after the election".

A central issue is Slovakia's growing current account and fiscal deficits. The current account deficit was rated at nearly 7 percent of GDP last year, amounting to hundreds of millions of dollars. There is also a consistent state budget deficit, rated for instance in May at $70 million. In that same month, Slovak foreign debt reached an all-time high of over $11 billion.

Whatever government comes to power as a result of the election, analyst Sobell foresees a change of direction as necessary:

"The new government will have to revise economic policies quite substantially, and some of the tensions which have developed in recent years will have to be eased, particularly the current account imbalance and the perception that the Koruna currency is too strong."

Sobell says he supports the supposition that the Koruna should be devalued, so as to help the external balance of payments by promoting exports and making imports more expensive. He says that would ease one of the main macro-economic problems now facing the country.