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Economic and Monetary Developments in Slovakia in the past 20 years Ján Tóth Deputy Governor of the National Bank of Slovakia.

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Presentation on theme: "Economic and Monetary Developments in Slovakia in the past 20 years Ján Tóth Deputy Governor of the National Bank of Slovakia."— Presentation transcript:

1 Economic and Monetary Developments in Slovakia in the past 20 years Ján Tóth Deputy Governor of the National Bank of Slovakia

2 2 Outline  Slovakia - different phases of transition  Slovak vs. Czech Experience  „Looking back“ - selected economic indicators  Euro adoption and Great Recession

3 3 Different phases of transition  Early transition - Federation  Meciar’s Era  Stabilization period, catch-up in integration processes  Big reform push period  Pre-euro  Euro (on the onset of Great Recession)

4 4 Early transition 1990-1993  1989-1992 economic policy within the Federation the same  The early transition had much greater impact on Slovak unemployment (more heavy industry focused on ex-Soviet markets), in 1992 exceeding 10% in SR vs. 2.6% in CR  New tax system (VAT introduced)  The currency fixed at 1:1 first, but the Slovak economy less competitive (creation of Slovak central bank, 10% devaluation in summer 1993)

5 5 Meciar’s Era 1994-1998  Little interest to attract FDI through privatization  First tight fiscal policy, later very loose (also due to issuance of government guarantees)  Twin deficits, fixed exchange rate regime protected by very high real interest rates, deteriorating loan portfolios of state banks  No OECD, NATO membership  EU membership likely to be postponed  Collapse of fixed exchange rate at the end of 1998

6 6 Stabilisation 1999-2002  Liberalisation of markets, high inflation and unemployment  Big push towards integration  OECD membership (2000)  Preparation for EU and NATO membership (2004)  Privatization of state banks including the cleaning up of loan portfolios (gross costs 10.6% of GDP, net 5.5% of GDP)  Opening up for FDI, big privatization improves foreign reserves as well as net foreign debt position

7 7 Big reform push 2003-2006  Flat tax, labor market liberalization, pension reform  Much greater visibility among investors  New capacities based on FDI mainly in autos and electronics  Strong sustainable real currency appreciation, inflation stabilization (inflation targeting regime)

8 8 Pre-euro period 2007-2008  Very high growth rate  Continuing currency appreciation  Flat tax, labor market liberalization, pension reform  Much greater visibility among investors  New FDI capacities expanding

9 9 EURO and Global Recession 2009-  Greater slump, faster recovery  Ex-ante expected benefits of EURO adoption: Direct (immediate) benefits  elimination of exchange rate risk against euro  lower costs of capital  elimination of some transaction costs  better resistance to (currency) crises  higher price transparency Indirect (long-term) benefits  trade growth  increase of FDI Resulting in faster growth/increase of living standards/progress in real convergence

10 10 Slovak vs. Czech experience  Growth  Policy (ratings, bond spreads, structural indicators)  Inflation, interest rate  Exchange rate

11 11 GDP growth and convergence Real GDP index GDP per capita in PPP (SK/CZ) Source: Eurostat, NBS calculation, Fischer and Stirböck (2004) Note: Standard pace of convergence is assumed to be 2.4 % p.a. 60 bp 20 bp

12 12 Credit ratings of Slovakia and Czech Republic Rating S&P Grade19941998200420092012 AA- CZ A+ SK A CZSK A- CZSK = CZ BBB+ CZ BBB BBB- BB+ SK BB BB- SK -5 grades -4 grades -2 +1 Non-Investment Grade Investment Grade

13 Government bond spreads SR vs CR 13 Slovak euro adoption Source: ECB

14 14 Why are we still lagging behind Czechs? World Competitiveness Yearbook 2013 Global Competitiveness Report 2013-2014 Source: WEF Source: IMD

15 ... significant worsening of several (mostly soft) indicators: Hiring and firing practices (-111) Diversion of public funds (-92) Quality of the educational system (-84) Cooperation in labor-employer relations (-83) Burden of government regulation (-82)... inclusion of new (soft) indicators with low ranking: Efficiency of legal framework in settling disputes (143) Efficiency of legal framework in challenging regs. (142) Effect of taxation on incentives to work (131) Country capacity to retain talent (130) Effect of taxation on incentives to invest (122) 15 What drags Slovakia down? (according to Global Competitiveness Reports) Source: WEF

16 16 Inflation Source: Eurostat, NBS calculation 36 % Start of inflation targeting in CZ Start of inflation targeting in SK Price level convergence driven predominantly by inflation between 1998-2004. Exchange rate becoming the main source in the pre-euro period. Inflation differential taking the main role again after the euro adoption.

17 Real interest rates 17 Note: 3M MM deflated by HICP excluding food and energy prices. Source: ECB, OECD, NBS calculation

18 18 Exchange rate developments Source: Eurostat, NBS calculation 20 %

19 How deep was the crisis? Recession reality worse than forecasts by 10.7% in CR and 15.3% in SR 200820092010 Forecasted CZ growth 4.13.64.1 Actual GDP growth 3.1-4.52.5 Difference 1.08.11.6 Source: CNB forecast (7/8/2008) Forecasted SK growth 7.66.66.4 Actual GDP growth 5.8-4.94.4 Difference 1.811.52.0 Source: NBS forecast (P3Q-2008) 19 Source: Eurostat, NBS calculation

20 How fast is the recovery? Recovery reality worse than forecasts by 3.2% in CR and 1.8% in SR 201020112012 Forecasted CZ growth 1.61.82.9 Actual GDP growth 2.51.8-1.2 Difference -0.904.1 Source: CNB forecast (5/8/2010) Forecasted SK growth 4.33.04.1 Actual GDP growth 4.43.22.0 Difference -0.1-0.22.1 Source: NBS forecast (P3Q-2010) 20 Source: Eurostat, NBS calculation

21 Slovakia needed 2 years to catch up with Czech exports after the breakup of Great Recession But the export recovery is much stronger now 21 Source: ECB, Eurostat, NBS calculation

22 Equilibrium REER and market (1993M1 = 100) 22 Source: NBS calculation

23 REER misalignment 23 Source: NBS calculation

24 Undervalued REER supports market share growth now 24 Source: ECB, Eurostat, NBS calculation Note: REER is based on PPI – manufacturing. 5 quarters centered moving averages are presented.

25 Slovak economy was supported mainly by the loose interest rate 25 Source: EC, ECB, OECD, NBS calculation Note: deflated with HICP excluding energy and food prices

26 26 Some lessons learned  Most direct benefits of euro have materialized: transaction costs declined  But huge external shock exaggerated the lack of flexibility of the currency regime vis-a-vis neighbours  And the euro area debt crisis introduced additional costs related to contagion and fiscal contributions to the EFSF and ESM  Indirect benefits not yet visible (higher FDI, trade growth) as the effect of the crisis is much stronger than the monetary integration effect  Very important to have the rest of economy as much flexible as possible to offset the rigidity of the currency regime

27 27 Thank you for your attention


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