FDI facts and medium term outlook for Slovakia

Bratislava, 29 November 2011

Vladimir ZlackýChief Economist

2

Some Facts About Foreign Direct Investment

3

Total stock of FDI / GDP comparable to other CEE coun tries

0

20

40

60

80

100

120

PL RO SK CZ HU BG

FDI STOCK (% of GDP, 2009)

Source: Eurostat

� Total stock of FDI in Slovakia at 58% of GDP i.e. foreign investments worth almost EUR 35 bn came into Slovakia over the last twenty years

4

Slovakia has a strong record in attracting FDI

FDI (% GDP)

Source: UniCredit Bank, EUROSTAT, NBS

� Due to a favorable relationship between labor cost and productivity, Slovakia has a strong record of attracting FDI

� Recent slow-down in FDI inflow to be addressed via reform efforts

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1,7%2,5%

8,4%

-0,1%0,6%

6,9%

5,0%4,8%5,1%

0,9%

16,9%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

16,0%

18,0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1H2011A

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Manufacturing and financial sector attracted most F DI

FDI stock by sectors (bn. EUR, 2008)

0

0,5

1

1,5

2

2,5

3

3,5

Transporteq.

Basicmetals

Refinery Machinery Chemicals Food Plast &Rubber

Wood &Priniting

Electricaleq.

Textile Other man.

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Apart from NL, Germany and Austria invested most

0

1

2

3

4

5

6

7

8

9

NL DE AT HU CZ IT CY FR BE LU KR US GB BR CH Other

NL27,7%

DE15,5%

AT14,4%

HU6,5%

CZ5,9%

IT5,7%

CY3,4%

FR3,2%

Other17,7%FDI by country (bn. EUR, 2009, stock)

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Will Slovakia remain competitive in the medium -term ?

� Sound macroeconomic environment� Strong micro-foundations of the economy� Reasonable likelihood of continued reform efforts

Three main reasons why the answer is YES:

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Sound Macroeconomic Environment

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Slovakia a top growth performer of the past decade

Index 2000=100 CAGR 2000-2010

Slovakia 159,7 4,8%

Lithuania 153,3 4,4%

Romania 149,2 4,1%

Bulgaria 148,8 4,1%

Poland 146,4 3,9%

Estonia 145,9 3,8%

Latvia 143,2 3,7%

Czech Republic 136,9 3,2%

Luxembourg 135,1 3,1%

Cyprus 132,1 2,8%

Source: UniCredit Bank, EUROSTAT

� Due to structural reforms and forces of convergence, Slovak economy was the fastest growing one in the EU(27) in the past decade with the average annual growth rate of 4.8%

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Macroeconomic outlook is positiveUniCrChapter Title – Chapter Section TitleUniCredit Bank ako ččččlen skupiny UniCredit

2010 2011 2012 2013 2014 2015 2016GDP bn EUR 65,9 69,0 71,2 74,8 79,8 85,3 91,0GDP real growth, % 4,2% 2,9% 1,9% 3,4% 4,7% 4,6% 4,5%CPI avg, % 1,0% 3,9% 2,5% 3,0% 3,3% 3,5% 3,5%Unemployment avg, % 14,4% 13,3% 13,4% 13,2% 12,6% 12,2% 12,1%Government debt, % GDP 41,0% 44,2% 47,6% 48,2% 48,1% 48,1% 47,0%Current Account, % GDP -3,5% -1,4% -0,9% -0,8% -0,8% -0,7% -0,7%

Source: UniCredit Bank, EUROSTAT, NBS, SO SR

� This year the economy will grow by about 2.9% � After a slowdown in 2H11 and 2012, the economy should

accelerate to about 3-4% annual growth � Slovakia poised to grow much faster than most Eurozone

countries

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Slovakia compares favourably in gov debt/ GDP (%) UniCrChapter Title – Chapter Section TitleUniCredit Bank ako ččččlen skupiny UniCredit

7

16 18

31

38 38 39 40 41 44 45 48

60 61 63

68

72

80 80 80 82 83 85

93 96 97

119

143

550

20

40

60

80

100

120

140

160

EE

BG LU RO SI

LT CZ

SE

SK

DK LV FI

PL

ES

CY

NL

MT

AT

EU

27 UK

HU

FR

DE

EA

17 PT IE BE IT

GR

Government debt (2010, % GDP)

Source: UniCredit Bank, EUROSTAT

� In the current difficult market environment, the markets look particularly favorably on a low government indebtedness

� Slovakia’s government debt to GDP is well below 60%

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Slovakia enjoys a good standing on the financial ma rketsUniCrChapter Title – Chapter Section TitleUniCredit Bank ako ččččlen skupiny UniCredit

Source: UniCredit Bank, Bloomberg

� Compared to PIIGS countries Slovakia commands much lower spread vis-à-vis German bunds

� This testifies to a relatively favorable risk profile of the country

0

500

1000

1500

2000

2500

GR PT IE IT ES SK

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Fiscal consolidation program

2008 2009 2010 2011 2012 2013 2014Government deficit (% GDP) -2,1 -8 -7,9 -5,1 -4,7 -2,9 -3Government Debt (% GDP) 27,8 35,4 41,0 44,2 47,6 48,2 48,1

Source: UniCredit Bank, MF SR

� After two years of overspending (2009-10), the current and anyfuture government likely to undertake fiscal consolidation

� The main objective is to bring public finance deficit below 3% GDP in 2013

� A new constitutional law should introduce a debt ceiling of 60/50% GDP and an independent fiscal council

� The new law should reduce a room for future fiscal excesses

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Strong micro-foundations of the economy

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Favorable relationship between labor cost and produ ctivity

35

13

61

31

0

10

20

30

40

50

60

70

DE SK DE SK

Labour costs Labour productivity

tis. E

UR

64%

50%

Note: Labour costs – compensations per employee, Labour productivity – GDP per employmentSource: UniCredit Bank, EUROSTAT

� Slovakia is a fundamentally attractive place to invest – Slovak workers are relatively productive (50% GER) but cost little (36% of GER)

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Slovakia has a competitive labor code

Employment protection index - OECD 2008

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

USACANGBRNZLAUS

IRL

JPN

CHEDNK

SK - no

wSW

EIS

LHUNKORNLD

SK -201

1FINCZEPOLAUT

ITA

BELDEUNORGRCFRAPRTESPM

EXLU

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OECD average - 2008

Str

icte

r re

gula

tions

Source: UniCredit Bank, MF SR

� After a reform of the labor code in 2011, Slovakia has top 10 most competitive labor codes in OECD

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All-in labor costs still relatively competitive

423

648

1022 1061

1277

2918

891

0

500

1 000

1 500

2 000

2 500

3 000

3 500

BG RO PL HU SK CZ DE

Note: Labour costs – compensations per employee Source: UniCredit Bank, Eurostat

� In the run-up to the euro, labor costs increased in Slovakia but still largely competitive with Hungary and the Czech Republic, much less than in Germany

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Continued reform efforts

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Slovakia has a track-record of being a reformist co untry

� Fiscal consolidation – necessary to bring the public finance on a sustainable footing

� Labor code – to increase labor market flexibility

� Pension reform – parametric changes to make it automatically immune to worsening demographic outlook

� Project Singapore – complex program to improve the business environment

� Knowledge-based economy – any government should make progress here