Slovakia’s finance minister seeks to keep economy moving

Peter Kazimir

One of the EU’s longest serving finance ministers, Slovakia’s Peter Kazimir, is well-known in Europe for his fiscal achievements, his admiration for former peers Wolfgang Schäuble of Germany and Jeroen Dijsselbloem of the Netherlands, and his famous comparison of populism in Europe to “a lasagne of evil”.

Each layer of the lasagne represents a different stratum of society that has failed to curb populism, he explained to the Financial Times in May 2017, and authorities across the EU now have to deal with it.

But Slovakia it is not without its own political problems. Former prime minister Robert Fico was forced to resign in March following demonstrations prompted by the murder of a journalist who had been investigating political corruption linked to an Italian mafia group. The case sparked mass public protests and resulted in the formation of a new government under Peter Pellegrini, to which Mr Kazimir was reappointed.

Experience pays

A keen supporter of the European project and strict fiscal policies, Mr Kazimir only recently turned 50 but already has some six years as minister of finance under his belt, as well as two years as a member of parliament and vice-chairman of the finance and budget committee, and another four years as state secretary of the ministry of finance between 2006 and 2010.

“After [Spain’s former minister of the economy] Luis de Guindos left for the European Central Bank [ECB] on June 1, I am the longest serving minister in the EU despite my age. I now have 12 years in public finances,” says Mr Kazimir.

One of his key objectives over the years has been fiscal consolidation. Particularly in the past two years, consolidation in Slovakia has been supported by greater social security contributions, lower interest payments and lower government spending, according to a 2018 International Monetary Fund (IMF) mission statement.

An increase in VAT collection has further boosted government revenues. According to IMF data, Slovakia’s general government revenues increased by 4.9% between 2016 and 2017, contributing to a smaller fiscal deficit in 2017 of 1.65% of gross domestic product (GDP) compared with 2.2% in 2016. This has also been supported by GDP growth of 3.4% in 2017. This year, the forecast is for 4% growth.

“We are almost there,” says Mr Kazimir. “We have achieved a primary surplus and we are planning to continue [with this], so a balanced budget is really achievable. I am already working on the budget for next year with a deficit close to zero in nominal terms.”

For 2018, the IMF expects further fiscal deficit reduction to 0.9% of GDP, with forecasts for below 0.2% from 2020.

“The combination of deficit reduction and robust economic growth has naturally had a positive impact on general government debt trends,” said Moody’s in its March ratings update. Government gross debt peaked at 54.7% of GDP in 2013 and reached 50.4% of GDP in 2017, according to IMF data, with forecasts for a steadily decline to 40.3% of GDP by 2023.

Structural challenges

Austerity is not the answer to everything, however. Experts from the IMF point to the need for the Slovakian government to deploy fiscal resources to maintain and modernise the country’s road infrastructure as well as to “align the education quality with the future labour market needs of the economy”. All of this should be financed by building on the country’s “fiscal consolidation achievements”, it adds.

“We are a country with a lot of structural problems,” acknowledges Mr Kazimir. “The biggest ones I see are the regional disparities and the situation in the labour market.”

Until 2016, Slovakia was struggling with double-digit unemployment. As of the end of 2017, this had fallen to 8.3% of the total labour force, according to IMF data.

Yet there is a risk that the country could suffer from a shortage of skilled labour, especially as its ageing population further reduces the labour force.

If left unaddressed, this could dent productivity and damage the prospect of converging with EU income levels, according to an IMF statement. In 2017, per-capita GDP at market prices in Slovakia was €15,600, according to Eurostat, compared with an EU average of €29,900 and a eurozone average of €32,700. Standard & Poor’s sees this as a key constraint for Slovakia’s A+ (stable) sovereign rating. Moody’s rates Slovakia A2 (positive), and Fitch A+ (stable).

Still, real wages increased by 3.3% in 2017, according to Trading Economics data, half a percentage point lower than in 2016 due to a pick-up in inflation throughout 2017.

An overheating economy?

Slovakia’s economic success in recent years is partly due to the country’s car industry, which accounts for about 35% of exports. Investment in further capacity in the sector – underlined by the €1.4bn investment from Jaguar Land Rover secured in 2016 – is set to increase car production in the country by about 40% in the next half-decade, according to S&P, which should support economic growth in the next two years through both investment and exports.

Still, the export focus of the Slovakian economy also exposes the country to risks posed by a recession in its major export markets, while the “important role played by the automotive industry… also illustrates the potential impact of a downturn in the fortunes of an industry that is both vulnerable to the cycle and likely to face longer term structural challenges”, says Moody’s.

However, in 2017 the Slovak economy enjoyed a boost in household credit, which also positively influenced Slovakia’s public finances due to a boom in domestic spending.

“In the past, we used to be fully dependent on exports, on international demand,” says Mr Kazimir. “Now the economy is very balanced: household consumption, private investment, public investment, everything is represented by appropriate figures. But of course we need to be very cautious about the structure and details of this loan growth.”

Mortgages and other loans to households picked up by about 12% in 2017, with corporate loan growth also in the area of 7% to 10%, according to S&P. In July 2017, Slovakia’s central bank introduced macroprudential measures to reduce retail lending by increasing the counter-cyclical buffers for banks to 1.25%, alongside previously introduced measures concerning lending practices, which appear to be slowing the growth in household credit.

“Macroprudential measures are on track now and we are very supportive of much tighter regulation on consumption loans and mortgages,” says Mr Kazimir. “We expect that we can cut these dynamics [by about half] to year-on-year growth of about 6% or 7%.”

The significant growth in credit was supported by widespread pressure in the eurozone on profitability in the banking sector due to low interest rates and net interest margins. Still, the measures introduced show that “this is on the radar”, says Mr Kazimir, and that the non-performing loan ratio in the sector is “under control at about 4%” – indicating that a stress scenario for the banking sector as a result of strong credit growth is unlikely.

The European stage

On the back of his domestic fiscal consolidation success, in late 2017 Mr Kazimir threw his hat into the European ring when nominations were opened for one of the eurozone finance ministers to replace Mr Dijsselbloem as long-serving Eurogroup chairman. Only Mr Kazimir and Latvia’s Dana Reizniece-Ozola were candidates from a ‘new’ EU member state.

At the vote in December, Mr Kazimir withdrew after the first round – as did Ms Reizniece-Ozola – and Portugal’s Mário Centeno emerged as the bloc’s new representative.

“I think it was fair competition,” says Mr Kazimir. “I wish Mário all the best. It is not an easy task. From time to time we face very difficult issues [in the Eurogroup] and this summer will probably again be quite hot on the deepening of the European Monetary Union and many other issues.”

Yet while the election of Portugal’s finance minister as Eurogroup chairman showed that a step-change is happening in the EU with the appointment of a leader from a country which has in the past been bailed out by the group, representatives from the eastern member states remain underrepresented in key roles.

“It was really an interesting exercise, personally and professionally,” says Mr Kazimir, adding that it was very important domestically to have EU representatives coming from the new member states, “[as] we used to be called, but, really, this is very relative”. Slovakia, alongside nine other countries, joined the EU more than 14 years ago, in May 2004, followed by Bulgaria and Romania in 2007 and Croatia in 2013. Still, representatives from the newer member states might still see issues “from different angles”, notes Mr Kazimir, which underlines the case for more representatives from eastern European countries.

Next year will push the issue of inclusion back up the EU agenda, with the expiry of the mandates of three members of the ECB executive board, including that of president Mario Draghi. This could open up another opportunity for keen Europeans such as Mr Kazimir.