Our experts analyzed the “Stability Program of the Slovak Republic for 2020 to 2023” (Program stability Slovenskej republiky na roky 2020 až 2023), which is the key medium-term document in the economic sphere of Slovakia. The document was developed by the Ministry of Finance of the Slovak Republic, approved at the meeting of the government of Slovakia on May 18, 2020 and should be supported by the parliament. The program defines the budget, fiscal and monetary policy of the state in the economic crisis, which is developing in the Slovak Republic against the general background of the global economic recession and the pandemic of the COVID-19 virus. The document also takes into account the economic component of the 4-year action program of the government of Prime Minister Igor Matovič, which was published on April 20, 2020.
The Stability Program of the Slovak Republic substantiates and determines macroeconomic benchmarks of economy of Slovakia for 2020-2023 according to the baseline and two alternative crisis scenarios and envisages governmental measures aimed at achieving them. Regardless of the specifics of each of the three scenarios, the document states that in 2020 the Slovak economy will experience the largest recession in its recent history.
It should be noted that the macroeconomic benchmarks set out in the government’s policy document confirm the previously published by Cepconsult forecasts of the development of crisis phenomena in the economy of Slovakia (COVID-19 vs economy of Slovakia, What awaits Slovakia during the economic crisis?, Can the budget of Slovakia ensure the implementation of the Prime Minister’s action program?).
The state budget of the Slovak Republic for 2020, adopted on December 3, 2019, provided for GDP growth at the level of 2.3%, unemployment rate at the level of 5.8%, inflation rate at the level of 2.1%, revenues amounting to EUR 38.9 billion, expenditures amounting to EUR 39,4 billion, the budget deficit at the level of 0.49% of GDP or EUR 480.4 million, external public debt amounting to 46.8% of GDP.
According to the results of 2019, the Slovak economy grew by 2.3%, GDP reached EUR 92.3 billion, the budget deficit amounted to 1.3% of GDP, and external public debt increased to EUR 45.2 billion or 48% of GDP.
According to the baseline government scenario, Slovakia’s GDP will shrink by 7.2% by 2020 (see Figure 1), the budget deficit could reach 8.4% of GDP, and public debt will exceed 60% of GDP. A significant economic downturn will lead to the loss of 88,000 jobs (even in the context of government measures supporting employers), and unemployment will rise to 9%.
Figure 1. Dynamics of Slovak GDP, according to the baseline scenario and contribution of various components to the formation of GDP
In such a scenario, the government, first of all, plans to implement measures to improve the efficiency of public finances. In particular, to ensure the long-term sustainability of public finances and stimulate the beginning of economic growth, measures that will focus on the main structural problems of the Slovak economy, namely the pension system, health care, education, labor market and more efficient use of economic resources will be introduced.
According to the main forecast, if the government does not apply stabilization measures, the state budget deficit in 2021-2023 will remain at the level of about 6% of GDP, and public debt will continue to grow up to 66% of GDP. At the same time, compliance with EU fiscal rules requires Slovakia to reduce the deficit to 4.9% of GDP in 2021, 3.7% in 2022 and 2.9% in 2023.
To achieve such medium-term goals, optimization of budget expenditures in the amount of EUR 1.1 billion in 2021 and up to EUR 3.4 billion in the period from 2022 to 2023 is planned. In particular, review of expenditures on employment and wages in the public administration sector allows to save EUR 765 million; optimization of digitalization costs has the potential to reduce annual costs by 10-20% (EUR 48-95 million); redistribution of expenditures for social groups at risk of poverty or social degradation is possible in the amount of EUR 13.7 million (with the simultaneous need for additional funding from EU funds of EUR 263 million).
It is emphasized that the implementation of such measures is possible under the condition of political stability in the country. It is assumed that if such actions are successful, it will lead to stabilization of public debt at the level of 60% of GDP (the forecasted dynamics of public debt relative to GDP is portrayed on the graph).
Thus, under the baseline government scenario, during 2020 the Slovak economy will be in a deep recession and GDP will shrink by 7.2%. This assessment is based on the assumption that the Slovak economy and its foreign trade partners will remain under the influence of pandemic (quarantine measures limiting business activity) for 2 months. Economic performance will fall sharply, especially in the second quarter, in the services, industry and construction sectors. In particular, the industry is expected to decrease by 39.6%; spheres of transport, trade, housing and food is expected to decrease by 37.4%; construction is expected to decrease by 50 %; professional, scientific, technological activities, administrative services are expected to decrease by 37.2%; income from real estate trade is expected to decrease by 40 %; income in the field of arts, entertainment, recreation is expected to decrease by 60.1%.
A gradual recovery is expected in the second half of 2020. By the end of 2021, the economy may catch up with pre-crisis results, but pre-crisis expectations will not be met.
Not only investment and lack of external demand, but also limited domestic consumption will lead to a decline in GDP in 2020. Although the current level of household income will not decrease significantly, household consumption will be affected by quarantine measures and uncertainty about the future. The revenue shortfall is partially offset by government support measures. Investment in 2020 will decline by 20.3% (more than during the financial crisis of 2008), and the economy will slow down sharply. Exports will suffer significant losses, reaching 21.4%. However, the trade balance at the end of 2020 may be paradoxically positive, as declining consumption will also reduce the volume of imported goods and services. Public consumption will reduce the effects of the crisis.
In 2021, the recovery will continue, and by the end of the year the economy may reach pre-crisis levels. A 6.8% increase in GDP will support domestic and external demand. Against the background of reducing uncertainty, investment activity must also resume. However, economic activity will remain relatively low.
At the end of projection horizon (2023), GDP growth will slow down and economic indicators will not fully meet pre-crisis expectations. In general, the Slovak economy can compensate for about half of the losses of 2020, as compared to pre-crisis expectations. Economic activity, especially in 2023, will be supported by attracting EU funds. Due to this, the negative dynamics of production of goods and services can be significantly compensated.
At the same time, uncertainty about further developments will remain high. The continuation or exacerbation of the COVID-19 pandemic, particularly in the second half of 2020, could significantly deepen the economic downturn.
When developing alternative crisis scenarios, the authors of the document took into account, first of all, the effect of such negative factors as:
uncertainty of the duration and intensity of the COVID-19 epidemic;
long-term disruption of global logistics chains;
tendencies of companies to save and create a liquidity reserve as opposed to investment;
the trend of localization of supply chains of goods and services, as well as the use of local labor resources.
Crisis scenario №1: Prolonged pandemic
The first crisis scenario envisages increasing the duration of government measures to limit business activity in connection with the COVID-19 pandemic to 3 months. A longer course of the pandemic will lead to a larger drop in production. However, since no major disruption of the supply chain is expected, some of the production losses will be offset after the economic recovery, similar to the baseline scenario.
Longer quarantine will reduce Slovakia’s GDP by 12.9% in 2020. Quarantine measures combined with a decrease in external demand will cause a significant decline in production of Slovak enterprises and a loss of up to 30% of exports. As a result of declining revenues, companies will be forced to significantly reduce labor and investment costs as compared to the baseline scenario. The reduction in investment activity will have the greatest negative impact in the short and medium term. Lower wages and employment will lead to lower household consumption, which will partially reduce public sector consumption. Employment will decrease by 5% from the level of 2019.
In 2021, there will be a relatively rapid recovery of the economy, which will grow by more than 11%. In 2023, GDP growth is expected at the level of 1.7% (the graph shows the forecast trajectories of GDP according to the baseline and crisis scenarios).
According to the scenario, the state budget deficit increases up to 10% of GDP in 2020 and decreases to 3.6% of GDP in the period from 2021 to 2023, which is accompanied with a movement of public debt indicators to 66.6% of GDP in the period up to 2023 (see Figure 2).
Crisis scenario №2: Slower recovery
In the second crisis scenario, the duration of quarantine is 2 months, however, with lower economic recovery rates and higher aggregate losses due to negative factors such as: repeated waves of the COVID-19 pandemic are expected; asynchronous restart of foreign trade, as the epidemic affected different countries at different times; supply chains are more deeply broken and need more time to recover.
Weakening of international economic ties, reduction of investment by companies, tendencies of households to save will result in long-term economic stagnation.
In this scenario, the economies of the trading partners of the Slovak Republic do not reach the pre-crisis level throughout the projection horizon (2023). Employment will decrease by 4.3% from the level of 2019.
The slower recovery of the world economy leads to a cumulative decline in Slovakia’s GDP by an additional 8.5 percentage points by 2023. That is, in 2020, GDP will decline by 11.4%, while in 2023 the economy will be 2.5% lower than in 2019.
According to the results of 2020, the state budget deficit is 9.4% of GDP. Unlike the first scenario, the economy is not recovering rapidly, and in 2021 the economy is stagnating. The lack of tax revenues does not decrease until the end of the projection horizon, and the state budget deficit remains at the level of 5.4% of GDP until 2023. Public debt is growing to 76.7% of GDP in 2023.
Figure 2. Forecast indicators of the public debt of the Slovak Republic in the baseline and crisis scenarios
Images of mfsr.sk.