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Economic and Monetary Development s in Slovakia in the past 20 years

Economic and Monetary Development s in Slovakia in the past 20 years. Ján Tóth Deputy Governor of the National Bank of Slovakia. Outline. Slovakia - different phases of transition Slovak vs. Czech Experience „ Looking back “ - s elected economic indicators Euro adoption and Great Recession.

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Economic and Monetary Development s in Slovakia in the past 20 years

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

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

  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. 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. 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. 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 (grosscosts 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. 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 • Strongsustainablereal currency appreciation, inflation stabilization (inflation targeting regime)

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

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

  12. Credit ratings of Slovakia and Czech Republic -2 +1 Investment Grade -4 grades -5 grades Non-Investment Grade

  13. Government bond spreadsSR vs CR Slovak euro adoption Source: ECB

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

  15. What drags Slovakia down? (according to Global Competitiveness Reports) • ... 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) Source: WEF

  16. Inflation 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. Start of inflation targeting in CZ 36 % Start of inflation targeting in SK Source: Eurostat, NBS calculation

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

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

  19. How deep was the crisis?Recession reality worse than forecasts by 10.7% in CR and 15.3% in SR 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 Source: Eurostat, NBS calculation

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

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

  23. REER misalignment Source: NBS calculation

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

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

  26. Some lessons learned • Most direct benefits of euro have materialized: transaction costs declined • But hugeexternal shock exaggerated the lack of flexibility of the currency regimevis-a-visneighbours • And the euro area debt crisis introduced additional costs related to contagion and fiscalcontributions 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 thecurrency regime

  27. Thank you for your attention

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