VZCZCXRO0885
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHSL #0499/01 2501102
ZNR UUUUU ZZH
R 071102Z SEP 07
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 1179
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BRATISLAVA 000499 
 
SIPDIS 
 
SIPDIS 
 
DEPT PASS TO USTR FOR RDRISCOLL 
TREASURY FOR AALIKONIS 
USDOC for 4232/ITA/MAC/EUR/MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
SUBJECT: STRONG MACRO PERFORMANCE KEEPS SLOVAKIA ON TRACK FOR EURO 
IN 2009 
 
 
¶1. SUMMARY: Slovakia's Statistical Office recently reported that the 
Slovak economy grew 9.4 percent in the second quarter of 2007.  The 
swift economic growth was reflected also in higher salaries and 
lower unemployment.  The average real wage increased 4.1 percent to 
19,600 SKK (USD 795) in the second quarter, but is still outpaced by 
strong productivity growth.  Salaries in Slovakia should soon break 
through the 20,000 SKK threshhold, also without the "Christmas 
bonuses" that the Fico government awarded last year.  Unemployment 
in the country fell to 11.5 percent and registered unemployment 
reached 8.3 percent, the lowest figure since 1996.  EU norm 
harmonized inflation dipped to 1.5 percent, the lowest in the 
country's 14 year history.  Analysts believe Slovakia is on track to 
join the Euro in January, 2009.  END SUMMARY 
 
NATIONAL BANK CONFIRMS STABILITY OF GDP GROWTH 
---------------------- ----------------------- 
¶2. The National Bank of Slovakia noted that the recent economic 
growth at 9.4 percent in the second quarter represents no danger of 
creating economic imbalances or overheating. The primary reason is 
that real wage growth, reported at almost 4 percent for the quarter, 
continues to be lower than the growth of labor productivity.  The 
Statistical office of the Slovak Republic updated its predictions 
for the whole year 2007, including expected GDP growth at 8.8 
percent, average inflation at 2.5 percent, unemployment rate at 10.8 
percent, employment growth at 2.3 percent, average nominal monthly 
wage growth at 7.2 percent up to 20,120 SKK (USD 815) and real wages 
growth at 4.6 percent. 
 
INFLATION THIRD-LOWEST AMONG EU COUNTRIES 
----------------------------------------- 
¶3. Slovakia had the third lowest inflation rate among all EU member 
states in July 2007, reaching the historical low of 1.2 percent 
(following inflation in Malta -0.2 percent, Denmark 1.1 percent and 
France 1.2 percent). Twelve month average inflation decreased from 3 
percent to 2.7 percent, and despite predictions, missed fulfillment 
of the Maastricht required 2.6 percent by 0.1 percent.  The National 
Bank of Slovakia expects national inflation to reach 2.6 percent 
within the next month.  The low inflation figures have been driven 
in part by the strong Slovak Koruna, which has appreciated almost 9 
percent against the Euro in the first two quarters of the year. 
 
WALKING TOWARDS EURO ADOPTION 
----------------------------- 
¶4. With inflation forecast at 2.6 percent next month, Slovakia will 
meet the Maastricht criteria well ahead of expected Euro adoption in 
¶2009.  Despite these excellent macroeconomic numbers, which are 
widely seen as a result of the structural reforms implemented by 
previous Dzurinda government, the current GOS has recently been 
accused by the media of not implementing the necessary programs and 
policies to adequately support Euro adoption in 2009.  For example, 
the public tender for the Euro public relations campaign was twice 
cancelled and re-opened because of questions relating to the 
transparency of the process.  The opposition has played up these 
mistakes, as well as recent legislative initiatives that will 
increase costs on employers, to make it clear that the blame for any 
delay would fall to the current government.  Despite the media 
speculation, there have been no indications that the government has 
changed its oft-repeated policy that Euro adoption in 2009 is among 
its top economic priorities. 
 
¶5. It is widely accepted by local analysts that the final decision 
by the European Union will be as much a political decision as an 
economic one.  The case of Latvia, where Euro adoption was delayed 
due to the country being over its inflation criteria by 0.1 percent, 
is oft-cited in the Slovak press.  Nevertheless, analysts stress 
that the EU's independence and competence would be seriously 
endangered, if, in case of Slovakia, the EU were to make a political 
decision to delay Euro adoption despite excellent macroeconomic 
results.  The Ministry of Finance and National Bank of Slovakia 
continue to see Euro adoption for Slovakia in 2009 as the only 
existing alternative. 
 
FDI INFLOW HIGHEST-EVER 
----------------------- 
¶6. Slovakia recorded the highest-ever FDI inflows in 2006, reaching 
4.2 billion USD (based on OECD statistics).  These numbers to some 
extent reflect cross-border takeovers, but to a greater extent 
represent additional investment by foreign companies with existing 
operations in the country.  In the case of Slovakia the figures were 
boosted by a large takeover in the energy sector by Italian company 
Enel, which is responsible for one-fourth of total flows.  With the 
Fico government having put a stop to all privatizations, this number 
is expected to drop significantly in 2007.  However, there have been 
recent rumors in the press that Ford is considering a large 
investment in Eastern Slovakia. 
 
 
BRATISLAVA 00000499  002 OF 002 
 
 
¶7. The GOS approved a new Act on Investment Incentives, drafted by 
Ministry of Economy, which for the first time provides equal 
treatment to foreign and domestic investors.  The incentives are 
available to varying decrees depending on the region and type of 
investment, with higher value-added industries and the less 
developed eastern part of the country as the highest priorities. 
This is an interim law that will be updated again in early 2008, 
when a new and more detailed Act on Investment Aid, designed to meet 
EU criteria for incentives and thus simplify the overall process for 
investors, is expected to be approved. 
 
NATIONAL STRATEGIC REFERENCE FRAMEWORK APPROVED BY BRUSSELS 
----------------------------- ----------------------------- 
¶8. The European Commission approved Slovakia's National Strategic 
Reference Framework for 2007-2013.  This document is the strategic 
plan for utilizing European Union structural funds and identifying 
key priorities, reflecting the Lisbon strategy objectives: 
convergence, regional competitiveness and employment, and European 
territorial cooperation. Slovakia will be eligible for drawing 
11.587 billion EUR in 2007-2013, and will be required to co-finance 
the projects with national public sources (state budget, regional 
budgets) and private sources. Consequently, 11 operational programs 
will be approved in the coming months, outlining concrete strategic 
areas for the projects. 
 
¶9. COMMENT: Slovakia's strong economic performance is expected to 
continue through the remainder of the year and into 2008 as new 
investments continue to come on line.  Despite recent murmurings in 
the press, most analysts remain confident that the Maastricht 
economic criteria will be fulfilled in the coming months.  Recent 
changes to the Labor code and proposed amendments to the Act on 
Social Insurance, though having only relatively minor impacts on 
business, have nevertheless resulted in a more negative view of the 
business environment in Slovakia (according to a recent survey by 
the Business Alliance of Slovakia) and have stoked skepticism about 
Fico's long-term commitment to the flat tax and other economic 
reforms of his predecessor, especially after Slovakia enters the 
Euro zone.  END COMMENT. 
 
VALLEE