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PP RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
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DE RUEHSL #0084/01 0481551
ZNR UUUUU ZZH
P 171551Z FEB 09
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC PRIORITY 2318
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
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UNCLAS SECTION 01 OF 03 BRATISLAVA 000084 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EUR/CE L. LOCHMAN, K. ERTAS 
STATE FOR EUR/ERA J. KESSLER 
STATE PLEASE PASS TO TREASURY/L. NORTON 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV LO
SUBJECT: SLOVAKIA STRUGGLES TO COMBAT ECONOMIC CRISIS 
 
SUMMARY 
------- 
 
¶1. (SBU) After hoping for several months that it might have 
dodged the global economic crisis, the GoS has recently begun 
to face up to the fact that it hasn't.  The auto industry has 
turned in gloomy forecasts, and every week another company or 
two announces cutbacks, layoffs, or closures.  In response, 
the GoS has brought forth two legislative packages aimed at 
stimulating new investment, lowering payroll costs, and 
speeding up infrastructure projects.  Local economists 
complain that the infrastructure projects are problematic, 
and that most of the measures do not go far enough to keep 
businesses open. 
 
¶2. (SBU) The GoS intends to finance much of the EUR 330 
million package by cutting government spending--to include 
heavy cuts in transfers to the local and city levels of 
government--in an effort to keep the deficit below 3 percent 
of GDP.  These cutbacks may negate some of the benefits of 
the stimulus.  Generally, the GoS's reaction to the crisis is 
slower and less effective than one could wish, but PM Robert 
Fico appears to be listening to the business community and 
avoiding potential protectionist pitfalls.  End summary. 
 
 
WAVES OF BAD NEWS 
----------------- 
 
¶3. (U) The news of economic recession began to crash over 
Slovakia in the latter part of January, as the natural gas 
crisis was coming to a conclusion.  The news here has been 
growing bleaker by the day.  Automakers and their suppliers, 
a disproportionately large segment of the Slovak economy, 
have seen sharp drops in orders since October; in December, 
production was down 35.7 percent from a year ago.  The 
outlook for 2009 is a 25 percent drop from 2008 production. 
Hyundai/Kia is still running two shifts, but last month it 
cut the workday from 8 to 6 hours, and it is said to be 
contemplating a move to one shift.  PSA Peugeot Citroen 
recently announced its first layoff of permanent workers, 
having already laid off most of its short-term contract 
employees. 
 
¶4. (SBU) U.S. supplier Molex, which employs 1,000 Slovak 
workers to produce electrical connectors, announced at the 
beginning of February that it would close its operation here 
over the next year.  U.S. Steel, whose Kosice plant supplies 
materials mostly for household appliances and the auto 
industry, is down 50 percent in new orders and is idling its 
workers one day a week at 60 percent pay.  Most producers and 
suppliers have resisted layoffs, favoring cutbacks in working 
hours. 
 
¶5. (U) Though the automotive industry is the hardest and 
earliest hit, the recession is being felt across the board. 
Real estate values are falling, and the construction industry 
with them, and even the relatively robust services and 
technology sectors are contracting.  At least two U.S. 
companies are approaching the Slovak Government with 
proposals to re-open their investment incentive packages as 
they consider global restructuring.  Overall economic growth 
estimates have been dropped from 7 percent to 4.6 percent to, 
most recently, the 2 - 2.5 percent range, and many expect 
further downward revisions. 
 
 
THE GOS REACTS 
-------------- 
 
¶6. (U) Late in January, the government formed the "Committee 
for the Financial Crisis," composed of key ministers, 
parliamentarians, labor unions, industry groups, and bankers. 
 The group has proposed two packages of emergency measures, 
the so-called second and third crisis packages (the "first 
package" was a bundle of 27 measures aimed at preventing the 
spread of the financial crisis to Slovakia), and a budget of 
EUR 330 million in crisis funding.  Further packages are 
expected as the situation continues to deteriorate and 
industry demands stronger measures. 
 
¶7. (U) The second package, approved in  early February, 
includes government grants for newly self-employed workers, 
for creating so-called "social enterprises" (essentially 
 
BRATISLAVA 00000084  002 OF 003 
 
 
community make-work programs aimed at long-term unemployed), 
subsidies for commuting, and grants to cover social insurance 
deductions for employers furloughing workers at 60 percent 
wages (on the U.S. Steel model).  The third package, just 
passed in parliament, includes a higher floor for personal 
income tax (from EUR 3435 to EUR 4026 annual compensation), 
additional tax deductions for self-employed workers, quicker 
reimbursement for VAT returns (from 60 to 30 days), a lower 
threshold for investment incentives, concessionary financing 
for small businesses, employment retention incentives for 
distressed businesses, and a government guarantee on 
mortgages.  Both packages also contain a number of minor 
measures to encourage new investment. 
 
 
THE CRITICS WEIGH IN 
-------------------- 
 
¶8. (SBU) The government is also aiming to accelerate the 
start of a series of highway construction projects using 
public-private partnerships (PPPs) and EU structural funds. 
The PPP projects, already delayed and fraught with charges of 
opaque tender proceedings and cronyism, have run up against 
the credit squeeze, and the GoS is considering funding these 
itself.  The most widely shared criticism of these projects 
is that the GoS would be better served using the 
hard-to-spend EU monies on these projects, rather than 
attempting to manage two large baskets of highway 
construction--much of it as yet unplanned.  As well, 
suspicions of corruption have turned much of the Slovak 
public against the PPP; most economic experts would rather 
see the money channeled through the higher auditing standards 
of the EU. 
 
¶9. (SBU) A more telling criticism among economists is that 
the packages contain mostly half-way or misguided measures 
that do little to keep people employed.  Since Slovakia 
depends heavily on exports, there is little to be done to 
stimulate domestic demand, apart from plussing up government 
spending. New investment, the goal of many measures from both 
packages, is not a real possibility in today's credit- and 
cash-poor environment.  That leaves only one additional 
target for the stimulus: employment, and the GoS's measures 
are generally thought not to be sufficient to keep businesses 
open with a full workforce. 
 
 
FINANCING STIMULUS WITH SPENDING CUTS 
------------------------------------- 
 
¶10. (SBU) Perhaps the most unrecognized problem is the 
proposed method of financing the EUR 330 million effort. 
Socialist PM Robert Fico, having got anti-deficit religion 
from Slovakia's euro adoption process, has become fixated on 
keeping budget deficits to a minimum.  It was not until late 
in 2008 that he publicly entertained the possiblity of 
relaxing the 1.7 percent goal agreed internally in mid-2008. 
More recently, he has been setting expectations in the 2.5 
percent range, though gradually conceding that the crisis may 
require going all the way to the Maastricht ceiling of 3.0 
percent.  While economists generally like fiscal discipline, 
they have begun calling for even more flexibility on deficit 
ceilings until economic trends swing upward.  OECD 
Secretary-General Angel Gurria made this point during a visit 
earlier this week. 
 
¶11. (SBU) If the deficit ceiling is sacrosanct, how to raise 
EUR 330 million for the stimulus packages?  By cutting other 
government spending, especially funding for local 
governments.  Conventional wisdom would say this is an 
especially bad time to rob local governments, but the local 
community of economists has yet to raise its collective voice 
against this line of cannibalistic thinking. 
 
 
COMMENT: IT COULD BE WORSE 
-------------------------- 
 
¶12. (SBU) All in all, the reaction to the crisis is better 
than one might expect from a Slovak government that describes 
itself as socially oriented.  The government is properly 
focused on employment, and it is talking to businesses about 
what they need to stay open.  While far from perfect, the 
stimulus packages do at least try to address the needs of 
 
BRATISLAVA 00000084  003 OF 003 
 
 
employers and the working (and recently laid off) public. 
The government could do more to bring in the ideas of the 
pro-business opposition, which it has gone out of its way to 
spurn.  But that constituency has offered mostly recycled 
ideas for stimulating new investment through tax breaks 
(including a reduction in the flat tax rate) and streamlined 
government.  At least the GoS has ignored the calls of 
unions, older industries, and agricultural businesses to 
combat the recession with a slug of old-fashioned 
protectionism. 
 
¶13. (SBU) Of more concern is the slowness with which the GoS 
has grasped the situation and its limited reach for ideas to 
deal with it.  Fico's idee fixe of financing the stimulus out 
of hide may well negate much of the positive effect of 
accelerated public spending.  By the same token, the failure 
to understand that public spending has to happen within the 
next 6-12 months to have an effect may lead to a procyclical 
inflationary trap as the economy revives itself.  This is a 
hard time for Fico to learn economics on the job, but he has 
done this once before, with the successful adoption of the 
euro.  And this gives us some cause for hope. 
 
EDDINS