VZCZCXRO7047
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHSL #0081/01 0561302
ZNR UUUUU ZZH
R 251302Z FEB 08 ZDS
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 1538
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 BRATISLAVA 000081 
 
SIPDIS 
 
C O R R E C T E D  C O P Y - SENSITIVE CAPTION ADDED 
 
SENSITIVE 
SIPDIS 
 
DEPT PASS TO USTR FOR RDRISCOLL 
USDOC for 4232/ITA/MAC/EUR/MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
SUBJECT: BOOMING ECONOMY REMAINS ON TRACK FOR EURO ADOPTION 
 
 
BRATISLAVA 00000081  001.2 OF 002 
 
 
¶1. (SBU) SUMMARY: Slovakia's economy continues to grow at an 
astronomical rate - 10.3 percent for 2007 - keeping the country on 
track for euro adoption in 2009.  A few signs of a possibly 
overheating economy are present, such as creeping inflation, but 
these do not appear serious at this point.  Prime Minister Fico 
appears increasingly committed to maintain sound macroeconomic 
fundamentals, despite occasional rhetorical flourishes to the 
contrary.  Foreign Direct Investment levels continue to rise, and 
the government has approved legislation to level the playing field 
for domestic and foreign investors seeking investment incentives. 
END SUMMARY. 
 
A VERY STRONG ECONOMY 
--------------------- 
¶2. (U) Fourth quarter and year-end statistics paint a picture of 
remarkable growth.  Slovakia's Statistical Office estimates that the 
Slovak economy grew by 14.1 percent in the fourth quarter of 2007. 
Overall 2007 real GDP growth is projected to be 10.3 percent, which 
will almost certainly make Slovakia the fastest growing economy in 
the EU in 2007.  Average real wages increased 4.2 percent to 19,600 
SKK (USD 795) in the third quarter, but are still outpaced by strong 
productivity growth.  Registered unemployment in the country fell to 
7.9 percent, the lowest figure since 1996. 
 
¶3. (SBU) Note: GDP figures for the 4th quarter are inflated due to a 
decision taken by the Statistical Office to include one-off excise 
tax intakes from cigarettes in the 4th quarter numbers.  Due to an 
EU directive, the price of cigarettes increased as of January 2008 
by 18 percent, which led to a fourth quarter 2007 pre-stocking by 
distribution companies equivalent to eight months of cigarette 
sales.  The additional tax income - estimated at nearly 400 million 
USD -- was thus credited to the fourth quarter data.  Excluding the 
cigarette effect, the real GDP for the quarter is 9.7 percent, which 
is closer to the initial estimate.  The corresponding excise tax 
intake will be lower in the first half of 2008, which will likely 
lead to lower GDP growth in that period.  In January 2009, a second 
round of cigarette tax hikes is planned, hence the real GDP growth 
in the final quarter of 2008 may also be artificially high.  End 
Note. 
 
¶4. (U) Slovakia's Maastricht fundamentals remain generally sound. 
The 2008 national budget forecasts a fiscal deficit of 2.5 percent. 
While such a deficit technically fits EU criteria, the EC gave the 
government's budget a lukewarm review in its January 30 evaluation 
of Slovakia's euro convergence plan, highlighting the need of 
further decreasing the fiscal deficit, adopting responsible public 
spending policies and continuing the implementation of structural 
reforms.  In response, Prime Minister Fico announced on February 16 
that the government will now seek to reduce the deficit below 2 
percent.  Inflation rose gradually over the course of the year, and 
is estimated at 2.8 percent for 2007, which is below the Maastricht 
target. 
 
NATIONAL BANK CONFIRMS STABILITY OF GDP GROWTH 
---------------------- ----------------------- 
¶5. (SBU) Ivan Sramko, Governor of National Bank of Slovakia (The 
Central Bank), told Ambassador Obsitnik during a February 14 
courtesy call that strong 4th quarter economic growth is not 
expected to lead to an overheating of the economy.  He noted that 
growth is primarily export driven and not based on large increases 
in domestic consumption, which will reduce the effect on inflation. 
Sramko noted that Slovakia's rising inflation rate is being driven 
by external factors (energy and food prices) and remains within the 
Maastrict criteria.  The Governor acknowledged, however, that 
sustainability of inflation is the main indicator that is being 
watched by Brussels before the EC makes a final decision on Euro 
adoption. 
 
¶6.  (SBU) Sramko expressed confidence in Prime Minister Fico's 
commitment to make the choices needed to keep inflation under 
control.  He noted Fico's public rhetoric about health and social 
insurance policy, but said that the Prime Minister is "really very 
practical" and listens to the Central Bank's advice.  The governor's 
comments were interesting since, in previous meetings, Sramko had 
been less willing to praise the PM directly for his role in economic 
policy. 
 
FDI RISES, REGULATIONS TO BE LIBERALIZED 
---------------------------------------- 
¶7.  (SBU) The new Act on Investment Incentives, which went into 
effect at the beginning of 2008, simplifies the process for 
obtaining state aid and 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 and 
southern part of the country as the highest priorities.  Ambassador 
Obsitnik met with Peter Hajas, CEO of The Slovak Investment and 
Trade Development Agency (Sario), on February 11 and underlined the 
 
BRATISLAVA 00000081  002.2 OF 002 
 
 
importance of transparent and more detailed regulations for 
potential investors, which should be approved in the beginning of 
¶2008. 
 
¶8. (SBU) Foreign Direct Investment in Slovakia remains strong, with 
an increasing emphasis on smaller companies (rather than large 
manufacturers like Kia and Peugeot).  Sario reported 64 investment 
projects in 2007 worth SKK 42.5 billion (USD 1.9 billion) that 
created 14,738 new jobs.  This is almost double the number of 
reported investments in 2006, but only a slight increase in overall 
investment volume.   Most projects were realized in Kosice region 
(16), Nitra region (9), Trnava and Bratislava region (7) and in 
Zilina and Trencin region (7).  14 projects were realized in the 
machinery industry, 12 in the electromechanical industry, 10 in 
automotive and 7 in the chemical sector. 
 
OBSITNIK