Sramko also refers to burning issues, such as the impact of the crisis on the Slovakian economy, the measures taken by the country’s authorities to counter the effects of the crisis. Moreover, the Governor underlines the commercial relations between Slovakia and Romania, which, however, are rather low, almost €1 billion annually. He further added that Romania could become a competitor for the Slovakian economy, in terms of the auto sector.
Can you describe Slovakia’s way from independence to euro adoption? Its main challenges, events, its advantages? What big mistakes has done Slovakia in its way to adopt euro and how were these mistakes corrected? At the same time, which were the main right decisions?
The main challenges on our way since independence have been liberalization of the current and capital account, removing imbalances on current deficit and of fiscal deficit, stabilize inflation, introduce reforms for sustainable growth and for attracting FDI. We are not aware of any big mistakes, apart from being late with reforms, which has caused postponement of FDI and the whole catching up process. It seems the main right decisions to start as soon as possible with euro adoption strategy and the consolidation in the fiscal area.
Which were the main economic decisions taken by Slovakia’s authorities after the country has gained its independence?
As it has been mentioned: liberalization of FX flows and of energy prices, tax reform, OECD, EU membership with all required steps towards stable and friendly business environment, towards competitiveness and openness of the economy.
After Slovakia regained its independence, the country had a huge inflow of foreign investment. How did you manage to attract the foreign investors? Did you introduce any specific measures for enhancing exports?
All above mentioned measures combined with qualified and low cost working force newly built infrastructure created Slovakia as the good place to start and to move the business. In some cases also fiscal stimulus has been used (tax holidays, building infrastructure and so on).
Slovakia’s main problems in meeting the Maastricht’s criteria were the budget deficit and the inflation. How did you manage to reduce the inflation rate from 4.3% in 2006 to 1.9% in 2007? However, in December 2008, the annual inflation in Slovakia was the second from the euro zone. What happened in 2008 with inflation? I guess it is not entirely because of the crisis, as it evolved in the second part of the year? Was there some control of the prices during 2006-2007, which was less strict in 2008?
Inflation development in 2007 was influenced by favorable development in energy prices which reduces their dynamics from 13,3% in 2006 to 1,3% and in non-energy industrial goods which decline in 2007 around 1,1% compare to increase 0,6% in 2006. Impact on such development had prudent monetary policy and development in oil prices and to some extent also exchange rate. There were no special regulations on prices in 2006-2008.
In 2008 inflation was influenced mainly by the development in energy prices (gas prices which were reflected also in prices for heating with some lag). During 2008, Slovakia witnessed also acceleration of inflation rate and this was mainly the impact of supply shock in food prices, which had also impact on development in prices of restaurants.
A large move was the decreasing the current account deficit from 7.9% in 2002 to 0.8% in 2003. How did you manage this? And why the deficit restarted in the following years?
Primarily published current account deficit at 0.8% level in 2003 was calculated from preliminary monthly surveys about foreign direct investment. In February 2007 the 2003 current account deficit (income balance) was adjusted based on data from newly established annual survey for foreign direct investment. This caused an increase of primarily published deficit to 5.9%. The decrease of ratio of balance of payments current account deficit to GDP from 7.9% in 2002 to 5.9% in 2003 resulted from previous FDI inflow (into car industry which increased the production). In 2003 the share of trade balance deficit to GDP moved down by 6.8 p.p. on year on year basis to 1.9%. However, within the overall current account balance was this strong improvement partly offset by worsening of other current account items, mainly income balance where an increase of profit (intended to be reinvested back in economy) paid to foreign investors occurred. This allowed further investment into production expansion and modernization, which was realized through investment imports taking place in following years resulting in growth of trade balance deficit and thereafter the balance of payments current account deficit. In 2007 another sharp decline in trade balance deficit was registered (to 1.2% level) as an evidence of previous investment with further positive prospects for future.
On January 19th, the European Commission revised its forecast regarding the economic growth in the Europe Union. Following this revisal, Slovakia will report this year the highest growth of the GDP (2,7%). How can be this prognosis touched taking into account that some of the most important industries of the country (as the car producing) will be harshly affected by the crisis and now, also, by the gas shortage?
In the environment of the extremely high uncertainty regarding the impact of the global crises it is difficult to make and assess any prediction. The NBS publish the next prediction in March.
Talking about the crisis, does Slovakia has an anti-crisis plan? Which are the main decisions which are to be taken within this plan? On what economic sectors do you count now, during the crisis?
The Slovak government introduced in November 2008 a list of 26 measures to face the global crisis. Regarding the macroeconomic policy, the government will focus on stimulation of domestic demand. To give an immediate support of the economy, the implementation of the structural funds should be accelerated on the budget-calculated level. The government wants to open up new finance for small and medium enterprises in cooperation with commercial banks, further to support of the domestic non-financial corporation. In the area of the labour market, the government will concentrate on the active measures, increase support to the unemployed or low income households.
Has Slovakia any characteristic advantages or disadvantages, comparing to the rest Eastern countries, in front of the crisis?
Slovakia has one big advantage and it is the single currency - euro. The single currency is more stable in comparison with the currencies of the rest Eastern countries. The next advantage is stable business environment and more confidence. Adopting the euro we remove some risks to foreign and domestic investors (for instance exchange risk). The main disadvantage is the openness of the economy, the economy depends to large extent on foreign demand and the industry is focused mainly on machinery and electrotechnical equipments. That could pose some problems in case of weak external demand for this kind of goods.
How large is the economic trade between Romania and Slovakia? What are the main products exported and imported to Romania?
Slovakia is running trade balance surplus vis-à-vis Romania. The share of exports and imports to/from Romania are relatively low. Main exported and imported products are intermediate manufactured products and machinery and transport equipment.
Which are the main economic sectors where Romania and Slovakia compete? And I’m referring to sectors whose products are exported. For Example, Romania might become an important car maker, as Ford bought a big factory last year. Renault is also here. However, Slovakia is an important car producer. Shall we see a competition between Romania’s car producers and Slovakia’s ones? Or between other sectors of the two countries?
I see the competition as competition of brands, not as competition of countries. There is no particular analysis about sectors in which Slovakia and Romania should compete. Concerning the above mentioned automotive industry in some extent Romania might become competitor for Slovakia. However, this type of investment is somehow a long run investment (building of plants, forming of sub-suppliers network, etc.) and we do not expect meaningful interest in reallocation of car producers between these two countries .In addition in case of Slovakia a positive effect might be expected from euro adoption that assures stable environment with no exchange rate volatility.
Which are now, in your opinion, Romania’s main deficiencies. And, of course, its advantages?
The relation between deficiencies and advantages is changing over the time and it always depends on the right decision of the authorities when deciding about next steps and approaches. For example being an emerging economy is an advantage with respect to higher growth rates and sounder financial system, as it usually is less involved in operations resulting into losses in the case of financial crises in comparison to the more developed countries. Further advantage is the labour force (skilled and relatively cheap) by which such country can benefit in case of crises in the developed countries. Disadvantage may be openness of the economy, less value added production, homogenous production structure.
Romania’s national currency RON is depreciatting now quite fast. What would you do about this if you were the Governor of the Romanian National Bank?
I do not feel like to answer such question. What I can say is to express my wish of good luck and my hope that Romania will not be hit significantly and harmfully with ongoing financial and overall crises.
