The government has begun implementing an ambitious program of banking sector and enterprise reform in 1999. A key aspect of this program is the restructuring and privatization of three large state-owned banks. As a by-product of the bank restructuring, the bad assets carved out from the banks will be worked out, together with tax and social security arrears. The Slovak authorities have embarked on an ambitious task to deal with inherited weaknesses of the banking system. Now the challenge is to focus on the institutional improvement in banking supervision.

Abstract

The government has begun implementing an ambitious program of banking sector and enterprise reform in 1999. A key aspect of this program is the restructuring and privatization of three large state-owned banks. As a by-product of the bank restructuring, the bad assets carved out from the banks will be worked out, together with tax and social security arrears. The Slovak authorities have embarked on an ambitious task to deal with inherited weaknesses of the banking system. Now the challenge is to focus on the institutional improvement in banking supervision.

II. Enterprise Performance and Restructuring1

1. This chapter documents major developments in enterprise performance and restructuring in Slovakia during the last decade, with an emphasis on the last five years. As background to the discussion, the next section describes the domestic and external environments within which enterprises have operated since the Slovak Republic separated from the Czechoslovak Federation. Section B provides an overview of changes in the enterprise sector in Slovakia, and Section C presents a more detailed analysis of enterprise performance, with special attention given to developments in profitability, productivity, and employment. The chapter concludes by summarizing the main findings and drawing implications for future enterprise performance.

A. The Environment

The Domestic Environment: Privatization and the Legal Framework

2. By the end of the 1990s the private sector accounted for more than 80 percent of the country’s GDP. The dynamics of the enterprise sector improved significantly with private sector ownership, although the uneven performance of private enterprises during the last ten years reflected to some extent their method of privatization. Until the dissolution of the Czechoslovak Federation in January 1993, the privatization process in the Slovak Republic was driven by federal legislation and was very similar to the process in the Czech Republic. Small-scale privatization proceeded through auctions of shops and service facilities,2 and was completed in March 1994.3 For large enterprises, privatization through vouchers was initially the principal mechanism. However, after the breakup of the Czechoslovak Federation, the planned second wave of voucher privatization was cancelled, and was replaced with mostly nontransparent sales to insiders. Both approaches failed to bring new financial resources or external expertise to the privatized enterprises, and did not promote the development of entrepreneurship, which in turn had an adverse effect on the pace of enterprise restructuring.

3. Prior to 1999, the restructuring of enterprises, and private sector activity more generally, were hampered by several deficiencies in the legal system (Box 1), problems with enforcement of the law, and unwarranted government interference in the functioning of the market. Laws did not protect the rights of minority shareholders, failed to ensure transparency in corporate governance, and contributed to slowing down the restructuring of enterprises by protecting certain “strategic” enterprises. The government that assumed office in October 1998 made improving the business environment a key priority, and significantly strengthened the legal framework. The enforcement of this new framework will, inter alia, require strengthening of the judiciary system, and poses the next challenge for the authorities. In particular, in the case of bankruptcy claims, judges will need to upgrade their skills and eliminate the demonstrated bias in favor of keeping indebted firms afloat With this in mind, Slovakia has been drawing upon international assistance to train commercial and bankruptcy court judges, although realistically, only gradual improvement can be expected.

The Legal Framework

This box presents the main elements of the legal framework under which Slovak enterprises have been operating, focusing on past weaknesses, and on the ways they have been addressed by the current government.

The framework prior to 1999—key weaknesses
  • Company Law: provided no protection of the rights of minority shareholders; was unable to ensure transparency in corporate governance.

  • Bankruptcy Law: contained no clear definition of insolvency; was biased in favor of the debtor.

  • Competition Law: the law itself was in line with the requirements of European law and competition policy, but enforcement was regularly undercut by the efforts of the legislative and executive branches to shield substantial portions of the enterprise sector from its purview.

  • Act on Strategic Enterprises (1995): postponed indefinitely the privatization of many companies, and provided them with various advantages, notably exclusion from the application of the Competition Law.

  • Price Law (1995): endowed the Ministry of Finance with discretionary powers to intervene in any product and service markets, including import and export markets.

  • Revitalization Act (1997): established that firms playing an important role in regional employment, regional or sectoral development could be granted deferrals and exemptions on their arrears, or be shielded from bankruptcy claims in exchange for the submission of a restructuring plan.

  • Enforcement: Very poor, owing to the lack of means and qualification of the judges, corruption, and a bias of the judges in favor of keeping indebted firms afloat.

Changes initiated since 1999
  • Abolition of the Revitalization Act, the Act on Strategic Enterprises, and the Price Law.

  • Agreement on the privatization of substantial stakes in public utilities.

  • Setting up of new regulatory bodies for the telecommunications and the energy sectors, and for capital markets and insurance companies.

  • Amendment of the Commercial Code.

  • Progress in completing the negotiations with the EU (chapters on small and medium-sized enterprises and on industrial policy, and on company law).

  • Amendments to the Bankruptcy Law facilitating the initiation of bankruptcy proceedings and shortening the resolution process, protecting the right of the creditors, and giving more prominence to restructuring (as opposed to liquidation).

  • Amendments to the Accounting Act and to the Auditing Act, submitted to parliament in April 2001.

  • Harmonization of Slovak Accounting Standards with the International Accounting Standards to be completed by the end of 2002.

  • New Securities Law to come into effect in January 2002.

  • On the judiciary framework and the enforcement of laws, technical assistance to train commercial and bankruptcy court judges.

The External Environment: Foreign Direct Investment

4. Foreign direct investment, particularly in the past two years, has played an important role in the success of direct sales and large-scale privatization. Over the period 1990–2000, the cumulative flow of foreign direct investment to Slovakia was just over US$ 4.5 billion, compared with a GDP of about US$ 20 billion in 2000. Reflecting in part a response to improvements in the legal framework, roughly half of this amount came into the country in 2000 (see Table 1), placing Slovakia in terms of FDI per capita in second place among the transition economies of Central and Eastern Europe.

Table 1.

Inward Foreign Direct Investment in the Slovak Republic

(In millions of U.S. dollars)

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Source: National Bank of Slovakia.

5. FDI not related to privatization, amounting to nearly to 4 percent of GDP in 2000, has also contributed to improvements in enterprise performance. The example of Volkswagen shows how a project initially viewed as quite isolated from the rest of the Slovak economy—employing relatively few people, engaging in a low value-added activity, and with minimal links to local suppliers or consumers—turned out to have positive agglomeration and spillover effects on the local economy (Box 2).

Volkswagen Slovakia: A Success Story

A case showing the positive effects of FDI is Volkswagen Slovakia, a foreign-owned firm, which built a plant in Bratislava in the early 1990s to assemble its Golf model from imported components. Soon it added another model, and then expanded the plant to allow the manufacturing of gearboxes. In 2000, Volkswagen produced 181,000 cars, 364,000 gearboxes, and almost eight million gearbox components, collecting Sk 85 billion in sales revenue. Almost all output is exported. Volkswagen currently employs over 7,000 people in Slovakia. Since its founding, the company has invested over DM 1 billion in the Slovak Republic. Major future investments are envisaged, particularly those related to the plan to produce the new Colorado model in Slovakia. Volkswagen has encouraged the development of local suppliers of parts for its cars. In 2000, Slovak companies manufactured automobile components worth Sk 36 billion. While more than half of this output is produced for the Volkswagen plant in Bratislava, the rest is sold abroad.

B. Overview of Enterprise Restructuring

6. Central planning industrialized the Slovak economy to an excessive degree—industrial enterprises were large and oriented toward the Comecon market.4 In 1989, industry accounted for half of Slovak value added, while services accounted for only one third. By contrast, for an average middle income country these shares are 33 and 50 percent, respectively. By 2000, the structure of the Slovak GDP resembled more closely the Organization for Economic Cooperation and Development (OECD) average; the industry and service sectors accounting for 29 percent and 60 percent, respectively (Figure 1).

Figure 1.
Figure 1.

Composition of GDP

Citation: IMF Staff Country Reports 2001, 129; 10.5089/9781451835434.002.A002

Source: Statistical Office of the Slovak Republic.

7. The change in the composition of output went hand in hand with far-reaching enterprise restructuring, as some old-system enterprises exited, and new, more outward-oriented enterprises, started business. The general shift in economic activity away from large industrial enterprises over 1993–97 has been amplified over the past two years through enterprise restructuring, which in part reflected improvements in the legal environment. It is clear from Table 2 that over 1997–99 there has been a gradual decrease in the share of large and medium enterprises in the total value added of the economy, while the share of small enterprises has increased.

8. The shares of small enterprises (fewer than 20 employees) and of individual entrepreneurs in total employment went up between 1997 and 2000. The total number of enterprises with 20 or more employees in the economy was on the rise between 1997 and 1999, but then fell in 2000 to slightly below the 1999 figure (Table 3). The same is true of industry as a whole and of manufacturing. While the rise is indicative of a reduction in the average size of enterprises, the decline probably reflects closures of nonviable enterprises as a result of more aggressive application of the bankruptcy law.5

Table 2.

Share of Value Added for the Economy by Size Structure of Enterprises

(In percent)

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Source: Statistical Office of the Slovak Republic.
Table 3.

Number of Enterprises with 20 or More Employees

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Source: Statistical Office of the Slovak Republic.

9. The evolution of the financial performance of enterprises also provides evidence of progress in their restructuring. Following several years of decline, including a major drop in 1998, profits rebounded in 1999. As illustrated by Figure 2, enterprise profits and GDP have followed fairly different patterns over the last several years. Prior to 1998, the slow pace of restructuring and inconsistent macroeconomic policies allowed high economic growth to coexist with a corporate sector that sheltered many loss-making firms. This situation changed after 1998, as new government policies were accompanied by a deepening of the restructuring process, which ostensibly resulted in an increase in aggregate profits in 1999 and 2000. The substantial koruna depreciation at end-1998 also helped improve the financial situation of large export oriented firms, particularly those that were not indebted abroad. On the other hand, during this same period, GDP growth was subdued, in part reflecting the effects of a rather restrictive fiscal policy and lower employment.

Figure 2.
Figure 2.

Growth Rates of Profits, and Real GDP (In percent)

Citation: IMF Staff Country Reports 2001, 129; 10.5089/9781451835434.002.A002

10. Although the pickup in enterprise performance over the past few years has been fairly broad-based, it has not been uniform (see Figure 3). While Slovakia has developed a core of highly efficient, internationally competitive enterprises that set the standard for the rest of the economy, some firms have lagged, and others have survived exclusively because of the protection provided by a forgiving legal framework. Major studies on enterprise restructuring in Slovakia6 conclude that the major transfer from public to private ownership and reduction of excess labor has gone hand in hand with good export performance, output growth, and financial success in a number of cases, but they also underscore some weaknesses in the process. In particular, OECD (1999) and Marcinčin (2000) detail concerns about the outcome of insider privatization, which in tandem with the feeble legal framework, is determined to have weakened the incentives for the new owners to undertake major restructuring.

Figure 3.
Figure 3.

Profits in Selected Sectors

(In millions of Slovak koruny)

Citation: IMF Staff Country Reports 2001, 129; 10.5089/9781451835434.002.A002

11. The change in economic policy under the new government has produced a new economic environment. Budget constraints are being hardened inter alia through strengthening of the bankruptcy law and elimination of political interference in bank lending; competition has been promoted, notably through the entry of foreign firms; and large-scale privatization has been furthered. The remarkable growth in exports and the rapid rise in FDI reflect, at least in part, the maturing of viable firms that seek new export markets and foreign partners.

C. The Facts About Enterprise Performance7

12. The ongoing restructuring of the Slovak corporate sector has resulted in a differentiated trend between sectors and types of enterprises. Although it is difficult to identify profitable sectors in Slovakia, it is fair to say that the transformation of the economy has favored light industry, services, and trade at the expense of the heavy industry, which dominated production until 1990. Productivity has been in line with profitability and has reflected strong cyclical effects. Nevertheless, recent increases in productivity are also associated with substantial enterprise restructuring. This restructuring has been characterized by a massive reallocation of labor, from the state to the new private sector, and from the old industrial sectors to new activities in services and trade (World Bank, 2001 and EBRD, 2000). While this process is typical of the transition to a market economy, the lag between job destruction and new job creation in Slovakia seems to have been longer than in the neighboring countries by the reluctance to undertake widespread structural reforms, and by macroeconomic imbalances that prevailed in 1996–98.

Profitability

13. The financial performance of enterprises shows a clear bounce-back after 1999. Infostat data indicate a mild decline in the profitability of nonfinancial enterprises between 1995 and 1997, a sharp drop in 1998, a recovery in 1999, and further substantial improvement in 2000 (Annex Table 1). This movement was not uniform across the economy. From 1995 to 1997 the aggregate profits of profit-making enterprises were growing, and so were the aggregate losses of loss-making enterprises. The losses increased further in 1998. The improvement in average profitability in 1999 was driven primarily by higher profits of profit-makers; in 2000, though, the reduced losses of loss-makers—which in part reflected the closure of some nonviable enterprises—contributed more to the improvement in the overall financial performance.

14. The deterioration in profitability in 1998 and subsequent recovery in 1999 was largely driven by a profit decline followed by a rebound among the largest enterprises—those that employ more than 1,000 employees (Table 4). The 2000 growth was much more broad based, with profit numbers improving, in some cases substantially, in all the categories except the smallest and the largest enterprises.

Table 4.

Net Profits of Nonfinancial Enterprises by Size

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Source: Infostat data.

Size groups for 1995–96 are: Enterprises with up to 24 employees; 25–99; 100–499; 500–999; 1,000 and more.

In 1997, the number in the cell above the total refers to enterprises with 250 or more employees.

15. Among the major sectors of the economy, agriculture was unprofitable throughout the period (Annex Table 1). Mining was profitable, although the slump in the late 1990s decreased profitability but did not drive the sector into losses in the aggregate, while 2000 witnessed a vigorous recovery. Construction experienced a boom in 1996–97, then went into a slump, but now seems to be on a recovery path. Trade was on a similar trajectory, except that the fall and the rebound were much more pronounced.

Data Issues

The analysis of financial performance of Slovak enterprises was made difficult by the lack of comprehensive and reliable information, especially prior to 1993. To assess corporate sector performance, we used three different and complementary databanks.

Infostat

Infostat is an affiliate of the Statistical Office of the Slovak Republic. The data come from Summary Economic Outcome and Acquisition of Investments in the Slovak Republic, published quarterly by the Statistical Office of the Slovak Republic. The publication contains various financial indicators (such as revenue, cost, profit) and gross investment for various groupings of Slovak enterprises (by branch; by size; by type of ownership; profitable or loss-making enterprises). The series run from 1996 (or 1995 where possible to calculate from indices) until 2000. Yearly indicators are collections of quarterly data, which in turn are compiled based on enterprise responses to questionnaires. This data bank was used intensively in this chapter, since it has extensive coverage, and is the only one to have data for the year 2000. However, the quality of the data might be compromised because the data are compiled on a quarterly basis, while the law requires firms to prepare only annual financial statements.

Datacentrum

This data bank is produced by the Ministry of Finance on the basis of tax returns of enterprises. The data also include information on assets and liabilities. The series cover the years 1994–1999. Profits of profit-makers, losses of loss-makers, and net profits are broken down by branch, by ownership, and by region, which represent a valuable source of information. However, the profits are biased downward because firms have an incentive to underreport their profits to tax authorities. A comparison with Infostat at the aggregate level confirmed this bias in profits but also showed that the movements in profitability go in the same direction in the two series, except in 1999.

Albertina Company Monitor

This data bank offers details at the firm level based on financial statements that can be found in public sources – mostly in the Commercial Register. As a result, the enterprises represented are mostly those that are required to publish their financial statements, such as publicly traded companies. The information on individual companies is quite detailed, but aggregate results may be questionable. The financial statements date from the years 1993–1999.

Data on productivity (based on value added) had to be constructed. This task was made difficult by the frequent changes in statistical methodology, the lack or unreliability of price deflators, and the difference in approach to classification of economic activity between data banks. For instance, the sectoral breakdown of employment is available only for enterprises with 20 or more employees. To construct consistent data on productivity, price deflators were calculated for the sectors using national accounts (which is the only source for production in real prices) and then used to convert into real terms the value added created by enterprises with 20 or more employees. The results were divided by the number of employees in the sector.

16. After a highly profitable 1995, manufacturing as a whole started to incur losses, culminating in a substantial loss in 1998. In the following year, the sector returned to profitability, and posted a very solid performance in 2000. The improved financial results of profit-making enterprises and the decrease in the losses of loss-makers contributed almost equally to the large improvement in the profitability of manufacturing in 2000.

17. The restructuring process exhibits different patterns in the different subsectors of manufacturing, as illustrated by differences in profitability (Annex Table 1). Three groups—manufacture of food products, beverages, and tobacco; manufacture of pulp, and paper and paper products, combined with publishing and printing; and manufacture of rubber and plastic products featured stable—exhibited a profitable performance throughout the period. All the other sectors had at least one loss-making year.

18. Interestingly, in addition to the magnitude, the timing of the cycle also varied across sectors. The worst year was 1996 for manufacture of nonmetallic mineral products and for manufacture of transport equipment; 1997 for manufacture of wood and wood products and manufacture of textiles and textile products; 1998 for manufacture of leather and leather products and manufacture of basic metals and metal products; and 1999 for manufacture of chemicals.

19. All subsectors were on the upswing in 2000. The gains in the chemical sector and manufacture of transport equipment were particularly noticeable and helped propel the profitability of manufacturing as a whole in 2000. The only manufacturing sector that continued to make losses in 2000 was manufacture of machinery and equipment, a former pillar of the Slovak industrial complex.

20. The movements in aggregate, sector-wide profits or losses may have been dominated by the fortunes of a few major enterprises in these sectors. To gain insights into what was happening to a “typical” firm, it is useful to look at measures of profit scaled by the size of the firm—such as return on sales.

21. Table 5 shows median returns on sales calculated on the basis of firm-level data in the Albertina Company Monitor database (see Box 2). This complementary analysis draws a picture close to the one presented above on the basis of aggregate data: positive median returns in the food sector throughout the period for which data are available (1993–99), and negative median returns in textiles from 1995 through 1999, with 1998 being the worst year and some recovery in 1999. Firm-level data in publishing and printing also confirm the aggregate picture of this sector being stable and profitable.

Table 5.

Median Return on Sales in Selected Industries 1/

(In percent)

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Source: Albertina Company Monitor Database.

Return on sales is the ratio of profits to sales.

22. Slicing performance by the type of ownership tends to favor the private sector. The profitability of public sector nonfinancial enterprises exceeded initially that of their private counterparts by a wide margin, came down steeply between 1995 and 1998, and then staged a modest recovery (Annex Table 2). The profitability of the private nonfinancial sector was flat in 1995–97, dipped in 1998, and recovered in 1999–2000. The comparison between the public and the private sector turns dramatically in favor of the latter if the operations of the enterprises in the energy sector and the gas pipeline operator TRANSGAS are purged from the data.8 The private sector is barely affected by this adjustment, while the public sector is pushed into losses for all years except 1995 and 2000 (Table 6).

Table 6.

Profits of Non-Financial Enterprises with 20 or More Employees by Ownership

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Source: Statistical Office of the Slovak Republic.

Enterprises with 25 or more employees.

23. Within the private sector, foreign-owned enterprises were the most profitable and were also the only segment to increase employment in 2000. The “other” sector, which mainly includes fully or partially foreign-owned enterprises, featured the most robust performance, with high profitability in all the years. The importance of this sector in the economy has increased, as indicated by the growth of its share in total revenue and private sector revenue. The cooperative sector—which accounted for less than 4 percent of total revenue in 2000—never had a profitable year. The profitability of the domestically owned private enterprises was on a declining trend from 1995 until 1998, when it became negative. The losses were slightly lower in 1999, while 2000 ushered in an impressive return to profitability.

24. The superior profitability of the “other” sector lends support to the casual observation that the best firms in Slovakia are foreign owned. At the same time, the fairly successful year 2000 for domestically owned firms demonstrates that foreign ownership is not a necessary condition for good performance, and that Slovak entrepreneurs are quite capable of earning profits in the new environment.

25. A look at the regional variation in enterprise profits shows the Bratislava region as the most thriving area (Table 7). The total profit earned in the region declined from 1995 to 1998, but the region never had losses in the aggregate. The nearby Trnava region featured similar performance, although on a smaller scale. The Kosice region had a few good years, but then showed sustained aggregate losses, as did all the other regions. All in all, these numbers draw a fairly bleak picture, with no turnaround apparent in the regions associated with the “old industry,” such as metallurgy or armaments production. Given the general improvement in economic activity in 2000, one can expect more favorable numbers for all the regions for that year once the data become available, but there is little anecdotal evidence to suggest that the rest of the country has started to catch up with the dynamic Bratislava region, which benefits from the proximity to Austria, high educational level of its population, agglomeration effects, and other advantages.

Table 7.

Enterprise Profits by Region

(In millions of Slovak koruna)

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Source: Datacentrum.

26. This aggregate picture does not mean that there are no profitable enterprises outside Bratislava. For example, a highly successful pharmaceutical firm Slovakofarma is registered in the Trnava region. Volkswagen produces several car components outside the Bratislava region. There is also hope for the enterprises of the heavy industry to continue in their old line of activity and become profitable. As demonstrated by the acquisition of the core assets of the Eastern Slovak steel producer VSŽ by US Steel (see Box 4), even foreign investors see good prospects for some parts of Slovakia’s heavy industry. However, as the U.S. steel acquisition also makes apparent, a solution to tax, credit, and inter-enterprise arrears, and a separation of non-core activities in enterprises, are required to make some large enterprises viable.

Productivity

27. Low productivity of labor was one of the leading causes of enterprise losses at the beginning of the transition. Table 8 reports the rates of labor productivity growth based on value added calculated for industry and its main subsets (manufacturing, mining, and electricity, gas, and water supply). The decline of productivity growth in manufacturing between 1997 and 1998 and its subsequent pickup are in line with the dynamics of enterprise profitability indicators, although the rate of productivity growth in 2000 is probably overstated.

Table 8.

Growth Rates of Labor Productivity

(In percent)

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Sources: Statistical Office of the Slovak Republic and Staff Calculations.

28. Labor productivity based on output in industry and in manufacturing can also be calculated from the monthly data published by the Statistical Office of the Slovak Republic. The year-on-year growth rates of output, employment, and productivity for industry are shown in Figure 4. This figure shows a shift from decline to increase in labor productivity in the second half of 1999, and a strong acceleration of growth in 2000. This acceleration is indicative of the substantial enterprise restructuring underway in 2000.

Figure 4.
Figure 4.

Labor Productivity Growth in Industry

(In percent)

Citation: IMF Staff Country Reports 2001, 129; 10.5089/9781451835434.002.A002

29. The strong growth of productivity was accompanied in 2000 by a reduction in employment in both manufacturing and industry as a whole. This reduction subsided toward the end of the year, and in 2001 employment in industry has been expanding, while productivity continues to grow, although at a slower pace. This is a welcome development in Slovakia, given the high unemployment rate. It also may signal that the phase of reactive restructuring, characterized by output contraction and labor shedding in response to the new market environment, is largely over for the majority of Slovak enterprises, and that they are entering a new phase of strategic and deep restructuring combined with expansion.

Privatization of VSŽ (Východoslovenske Železiarné - Eastern Slovak Steelworks)

In the early 1990s, VSŽ, the largest steel producer in Slovakia, employed more than 25,000 workers—which made it the second largest employer in Slovakia. The plant used to generate 9 percent of the country’s GDP and 12 percent of its exports. The skilled and cheap labor, and the fairly new equipment, made the plant internationally competitive.

In spite of this, the company was in a deep crisis from 1998 until mid-2000. The plant had been privatized in a series of nontransparent steps between 1992 and 1995, and ended up under the control of its managers and several politically connected individuals. In addition to its good potential, the plant enjoyed favorable treatment from the government. It generated profits in 1994—1997. However, the profits, as well as resources borrowed from domestic and foreign banks, were invested in numerous businesses unrelated to steel production, such as a soccer club, a bank, and newspapers. Without a clear sense of direction and suffering from poor management, the company recorded a loss in 1998 and defaulted on its foreign debt payments in 1999.

The government partially renationalized the firm by buying shares from the market and, with 51 percent of the shares, took control of VSŽ at the end of 1999. The strategy for the turnaround of the company was the spinning off of non-core businesses, separation of non-saleable non-core assets, such as a hospital, and the sale of the core metal concern to a foreign strategic investor.

The strategy culminated in 2000 with the sale of the company Steel Kosice, which contained the core assets of VSŽ, to an American concern, U.S. Steel, for US$60 million. In addition, U.S. Steel agreed to defray US$325 million of bank debts and US$15 million of overdue tax obligations. The company committed itself to investing at least US$700 million in the plant over the next 10 years and to not laying off any workers, limiting reduction in the workforce to natural attrition.

In the first few months of its operation, the new company, U.S. Steel Kosice, has achieved substantial cost savings. An increase in production from 3.3 million tons in 2000 to 4 million tons in 2001 is planned, despite global overcapacity. Inspired by the success of its acquisition, USX, the parent company of U.S. Steel, is negotiating with the Slovak government the purchase of some other assets of the remnants of VSŽ.

Employment

30. Reduction in employment in Slovakia since its independence has gone far beyond what could be explained by cyclical factors. Unemployment in the country has a substantial structural component (IMF, 2000), which is related to changes in the economy in general and enterprise restructuring in particular. Labor-shedding by old enterprises was a noted feature of the early years of transition both in Slovakia and in other Central European economies. Unfortunately, a lag between the destruction of old jobs and the creation of the new ones (in the private sector, mostly in services and trade) seems to have been longer in Slovakia than elsewhere.

31. A recent study (World Bank (2001)) identifies a number of factors that have resulted in a low demand for labor in the Slovak Republic. The closure of nonviable enterprises and the elimination of redundancies was responsible for a major jump in unemployment in the early years of transition. This could have been offset over time by job creation in the new private sector, but its growth was rather sluggish. The low volume of foreign direct investment, lack of access to bank credit, a complicated tax regime and burdensome regulation for small and medium-size enterprises (the most dynamic sector in terns of job creation) and a deceleration of export growth in the mid-1990s, all stood in the way of building a strong demand for labor. In addition, high payroll taxes (the highest in the OECD) create a wedge between labor costs and wages, and discourage the creation of new jobs, at least in the formal sector.

32. The unemployment problem was amplified by a mismatch in the skills required in the new economy and those offered by available workers, the solution for which require aggressive investment in human capital. The situation is aggravated by a geographic mismatch between emerging job opportunities and the residence of the majority of the unemployed. In addition, relatively generous social assistance benefits provide disincentives for job search by the people who cannot expect to get a job paying much more than the minimum wage.

33. The recent changes in the economy should prompt an increase in the demand for labor. These changes include an upsurge in foreign direct investment; a simplification of the tax regime for small and medium-size enterprises; a reduction in the corporate tax rate; the improved access of small and medium-size enterprises to bank credit following the resolution of the problems in the banking system and strengthening of accounting standards; and high rates of export growth. At the same time, still-high payroll taxes will continue to dampen labor demand, and under present fiscal conditions these taxes can be lowered only gradually. The recently announced measures to clamp down on informal employment will bring down the unemployment rate somewhat by forcing the employers to bring some of the workers on the formal payroll. However, these measures will also put some of the informally employed completely out of work.

D. Conclusions

34. The impressive turnaround in enterprise performance in 1999–2000, and the efforts of the government to improve further the legal framework, with a view to facilitating corporate governance and creating an incentive structure more suited to promote economic efficiency, suggest that the Slovak enterprise sector is being put on a more sound footing. Nevertheless, substantial enterprise restructuring is still ahead, and the improvement in aggregate enterprise performance masks important differences among enterprises.

35. Private firms have outperformed state-owned firms, once the operations of the energy and gas transportation sectors are excluded from the data. Foreign-owned firms have represented the most successful segment of the enterprise sector. Geographically, profitable enterprises have tended to concentrate in and around Bratislava, while enterprises in other regions have on average made losses. It is hard to find systematic differences in performance associated with enterprise size; the 2000 recovery appears to have been rather broad-based, encompassing enterprises of all sizes.

36. There are profitable firms in every sector of the economy, but certain patterns have emerged. The food sector, the pulp, paper, printing and publishing sector, and the rubber and plastics sector have been strong performers throughout the transition. Several other sectors have pulled themselves up nicely in the past couple of years, most notably the transport equipment sector, propelled by its flagship—the German-owned firm Volkswagen Slovakia. On the other hand, the machinery and equipment sector, associated with the old Slovak industry, has remained unresponsive.

37. The extent of enterprise restructuring achieved so far, and its ongoing strength, suggest that the productive base of the Slovak economy is being renewed and lead to optimistic expectations about future GDP and employment growth. Fast productivity growth since mid-2000, combined with wage moderation and a broadly stable exchange rate, has improved the competitiveness of Slovak industry. The large flow of foreign direct investment to Slovakia in 2000, and the high likelihood that the flow will be even greater in 2001 and over the medium term, also bode well for output and employment growth, given the superior average performance of foreign-owned firms in the recent past.

38. The amended bankruptcy law and other legislation being developed, if forcefully implemented, will lead to the closure of non-viable enterprises, while forcing the rest to pick up the pace of restructuring and adopt a high standard of corporate governance. This high standard should facilitate access to foreign partners, and translate into strong output growth. More transparent accounting standards and effective dispute resolution procedures should make it easier for banks to find companies with good prospects, and less risky to lend to them. This should alleviate the credit rationing affecting the small and medium-size enterprises. Moreover, the recapitalization, restructuring, and privatization of the largest state banks will put them in a position to become a source of funds for a wider group of enterprises. The recent significant reduction in the corporate income tax should also promote business activity.

References

  • Djankov, Simeon and Gerhard Pohl, 1998, “The Restructuring of Large Firms in the Slovak Republic,” Economics of Transition 6 (1), pp.6785.

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  • EBRD, 1995, Transition Report 1995: Investment and Enterprise Development, London.

  • EBRD, 2000, Transition Report 2000: Employment, Skills and Transition, London.

  • IMF, 2000, Slovak Republic: Selected Issues and Statistical Appendix.

  • Marcinčin, Anton, 2000, “Enterprise Restructuring,” in Anton Marcinčin and Miroslav Beblavý (eds.), Economic Policy in Slovakia 1990–1999, Vico, Bratislava.

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  • OECD, 1999, OECD Economic Surveys: Slovak Republic.

  • World Bank, 1998, Slovak Republic: A Strategy for Growth and European Integration.

  • World Bank, 2001, Slovak Republic: Poverty, Employment and Labor Market Study.

ANNEX

Table 1.

Net Profits of Non-Financial Enterprises

(In millions of Slovak koruny)

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Source: Statistical Office of the Slovak Republic.
Table 2.

Profits of Non-Financial Enterprises with 20 or More Employees by Ownership with Operations of Energy Sector and TRANSGAS Excluded

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Source: Statistical Office of the Slovak Republic.

Enterprises with 25 or more employees.

1

Prepared by Vladimir Klyuev.

2

The extent of restitution, which was the first privatization mechanism adopted by the Czechoslovak parliament, was quite small.

3

Seventy-seven percent of operating units slated for small privatization were auctioned off in 1992.

4

Council for Mutual Economic Assistance. Established in 1949 by the U.S.S.R. and Bulgaria, Czechoslovakia, Hungary, Poland, and Romania. Other countries of the socialist block were affiliated with this intergovernmental organization until its dissolution in 1991.

5

In addition there was a considerable shift of employment toward enterprises with fewer than 20 employees. Indeed, the total number of enterprises increased in 2000.

7

See Box 3 for a discussion of data issues.

8

The energy sector is dominated by state-owned monopolies, whose profitability is largely determined by government regulation of its input and output prices, TRANSGAS is a highly profitable enterprise transporting Russian gas to Central and Western Europe. This enterprise, whose profits derive from the strategic geographic location of Slovakia, is not representative of the public sector.

Slovak Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund