Slovak Republic: Selected Issues

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

An Overview of the Slovak Economy through the Lenses of the National Financial Accounts1

A. Introduction

1. The purpose of this note is twofold: (i) to provide a broad overview of the main developments in the Slovak economy from the vantage point of the national financial accounts and (ii) to analyze whether (and to what extent) the economic crisis has prompted changes in the financial relationships among the main sectors of the economy.

2. The financial accounts provide a broad overview of a country’s financial transactions. The financial accounts and (the derived) flows of funds record the acquisition or disposal of financial assets and liabilities that take place among a country’s economic sectors and between them and the rest of the world.2 The balance indicates the net lending or net borrowing position of each sector. A net lending position arises when net saving and capital transfers are more than sufficient to finance the accumulation of non-financial assets (surplus), while a net borrowing position emerges when the opposite situation occurs. Therefore, the financial accounts show how net lending sectors allocate their surpluses, acquiring new financial assets or reducing outstanding liabilities, and how net borrowing sectors finance their deficits, incurring new liabilities or drawing down their assets

3. The NBS publishes the national financial accounts information on a quarterly basis starting from 2004. Thanks to this detailed database, it is possible to build flow-of-funds matrices on a “from-whom-to-whom” basis, which allows analysis of the relationships and interconnections among the different sectors of the economy, including the types of financial assets held or transferred. The sectors considered in the analysis are:

  • non-financial corporations (S.11);

  • the National Bank of Slovakia (S.121);

  • other monetary financial institutions (S.122, since this group comprises mainly commercial banks, for sake of simplicity, this terminology is used in the rest of the note);

  • other financial corporations (which comprises other financial intermediaries (S.123), financial auxiliaries (S.124), insurance corporations and pension funds (S.125);

  • the general government (S.13);

  • households and non-profit institutions serving households (S.14 and S.15); and

  • non-residents (S.2), also labeled as rest of the world in the rest of the text.

The analysis has been carried out on annual data in order to avoid short-term volatility of financial flows. The study also focuses on the changes in the net borrowing positions of nonfinancial corporations, households, general government and commercial banks before and after the 2009 global crisis.

4. The results of this analysis have to be considered with some degree of caution. The year 2009 not only marks the global financial and economic crisis, but also the adoption of the euro by the Slovak Republic. This changeover generated some reshuffling of assets and liabilities among the NBS, the domestic commercial banks and the non-resident sector, in which the ECB is included.

B. Main Findings

5. The Slovak economy has been a net borrower of funds from the rest of the world for the whole period considered. In principle, this pattern is consistent with that of a small-open economy such as Slovakia that is in the process of catching-up with more advanced economies in the EU and hence in need of resources from abroad to fund domestic investment and thereby foster economic growth. Indeed, in the first four years after EU accession in 2004, Slovakia absorbed funds from abroad to the tune of 7 percent of GDP per year. Since 2008, Slovakia’s net borrowing position gradually narrowed, reaching virtual balance in 2011. This might reflect two driving forces. On one hand, Slovakia may have entered a more mature state of development, which requires lower absorption of foreign savings to finance domestic investment. On the other hand, the 2009 crisis might have reduced nonresidents’ willingness to acquire Slovak assets. The fact that net borrowing resumed in 2012–13 tends to tilt the scale toward the latter. This development seems at odds with the contemporaneous shift of Slovakia’s external current account balance into surplus, although large errors and omissions may cloud the link between balance-of-payments statistics and national financial accounts.3

A03ufig01

Slovak Republic: Net Lending(+)/Borrowing(-), 2005-13

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Eurostat, and IMF staff calculations.

6. Slovakia’s net debtor position peaked in 2009–10 at 57 percent of GDP. This was partially due to the fall in nominal GDP that occurred in 2009 as consequence of the global economic crisis. Since then, it has gradually declined, falling slightly below 54 percent in 2012, before widening marginally to 55 percent of GDP in 2013.

7. Considering the net borrowing position of each sector vis-à-vis the rest of the economy (including the non-resident sector), some specific patterns can be detected. In particular:

  • Households’ net lending position improved significantly in the aftermath of the 2009 crisis as households may have increased their saving for precautionary purposes given the increase in unemployment and the uncertain economic outlook (Figures 1 and 2). Since then, their net lending position has trended downward to become virtually nil in 2013 and their net financial wealth has stabilized at about 38 percent of GDP.

  • The net borrowing position of the non-financial corporate sector gradually but steadily improved until 2010, when it reached virtual balance (Figures 3 and 4). Over the same period, private sector investment has decelerated, albeit with ample swings. The non-financial corporate sector’s net borrowing position increased again in 2011–12, but in 2013, it became a net lender probably reflecting good profitability and low investment spending.

  • The net borrowing position of the general government started deteriorating before the 2009 crisis and reached its peak in 2010 (Figure 5 and 6). The general government had a small net lending position in 2012, as the accumulation of assets outpaced the increase in liabilities. This is somewhat surprising given a sizeable deficit in the fiscal accounts, and reflects an increase in the government’s shares and equities, possibly due to revaluation of the state’s participation in non-financial corporations. The government returned to a net borrowing position in 2013.

  • While in the years preceding the 2009 crisis, commercial banks oscillated between being net lenders to and net borrowers from the rest of the economy, in subsequent years, they have been consistently net lenders, except in 2013 (Figures 7 and 8). At first sight, this evidence seems to contradict the widespread opinion that banks have closed the taps of credit to the economy as a reaction to the global economic and financial crisis. However, this is not completely correct, as discussed later.

Figure 1.
Figure 1.

Slovak Republic: Households, 2004–13 (Stocks)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 2.
Figure 2.

Slovak Republic: Households, 2004–13 (Flows)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 3.
Figure 3.

Slovak Republic: Nonfinancial Corporations, 2004–13 (Stocks)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 4.
Figure 4.

Slovak Republic: Nonfinancial Corporations, 2005–13 (Flows)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 5.
Figure 5.

Slovak Republic: General Government, 2004–13 (Stocks)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 6.
Figure 6.

Slovak Republic: General Government, 2005–13 (Flows)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 7.
Figure 7.

Slovak Republic: Commercial Banks, 2004–13 (Stocks)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 8.
Figure 8.

Slovak Republic: Commercial Banks, 2005–13 (Flows)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.

8. In order to understand better the interlinkages among the various institutional sectors of the economy, a “from-whom-to-whom” matrix has been constructed. To simplify the analysis, the sample period has been split into before-the-crisis (2005–08) and after-the-crisis (2010–13). The average flows of funds are represented in Figure 11 (see also Tables 1 and 2), where the size of the bubble indicates the average net financial wealth position of each sector in percent of GDP. The color of the bubbles identifies whether a sector has a positive (green) or negative (red) net financial asset position. The arrows go from sectors that lend funds to those that borrow funds and the thickness of the arrows corresponds to the size of the change in net claims in percent of GDP.

Figure 9.
Figure 9.

Slovak Republic: Rest of the World, 2004–13 (Stocks)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 10.
Figure 10.

Slovak Republic: Rest of the World, 2005–13 (Flows)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: National Bank of Slovakia, Haver, and IMF staff calculations.HH = Households; NFC = Nonfinancial corporations; GG = General government; NBS = National Bank of SLovakia; CB = Commercial banks; OFC = Other financial corporations; NR = Non residents.Dep. = Currency and deposits; Bonds = Securities other than shares; Loans = Loans; Equity = Shares and other equity; Oth.acct. = Other account payable; Res. = Insurance technical reserves.
Figure 11.
Figure 11.

Slovak Republic: Flow of Funds, 2005–13

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Source: National Bank of Slovakia, Eurostat and IMF staff calculations.
Table 1.

Slovak Republic: Flow of Funds, 2005–08

(In percent of GDP)

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Sources: National Bank of Slovakia, Eurostat and IMF staff calculations.
Table 2.

Slovak Republic: Flow of Funds, 2010–13

(In percent of GDP)

article image
Sources: National Bank of Slovakia, Eurostat and IMF staff calculations.

9. Before the crisis, the nonfinancial corporate sector was the largest borrower of funds from the rest of the world. The fact that the domestic NFCs have such close links with the rest of the world is not surprising. In fact, about half of the sector is foreign-owned, as indicated by the portion of total shares and other equity in the hands of non-residents. Most of the financial flows from the rest of the world may represent intra-company lending. However, the flow of funds from non-residents has more-than-halved in the post-crisis period, falling from an average of 4.4 percent of GDP per year to 1.9 percent, probably reflecting the impact of the global crisis as well as fewer investment opportunities. At the same time, the flow of funds vis-à-vis commercial banks inverted its direction: while in the pre-crisis period the NFC sector was a net borrower from commercial banks, it has become a net lender in the post-crisis period. Whether this is the result of lower demand for credit by NFCs or lower supply of funds by commercial banks is to be determined. However, it is worth noting that there is significant intra-NFC lending, the amount of which exceeds intra-bank activity. NFCs seem to have increased their mutual financing in the form of both trade and financial credits partially offsetting lower bank funding.

10. After 2009, the general government has significantly increased its borrowing from non-residents. While general government’s borrowing from non-residents was marginal in the pre-2009 period (averaging 0.6 percent of GDP per year), it soared to about 4½ percent of GDP in the post-crisis period. This radical shift clearly has been facilitated by the fact that Slovakia joined the euro area on January 1, 2009. By removing foreign exchange risk and fostering the government’s credibility, euro adoption has provided Slovakia with the access to a much wider financial market. The greater reliance on external funds has also been a deliberate choice of the authorities aimed at differentiating the investor base. The general government’s net debtor position, which increased from 6 percent of GDP in 2004 to 11 percent in 2008, has reached 26 percent of GDP in 2013. If we consider the general government’s total financial liabilities net of intra-governmental lending—which is a broader aggregate than general government debt according to the Maastricht definition—the general government’s indebtedness has increased from 48 percent of GDP in 2004 to 59.3 percent of GDP in 2013; well above the threshold of 57 percent of GDP for general government debt that according to the national Fiscal Responsibility Act would require a balanced budget. However, if we take into account the general government’s deposits, which are the most liquid assets, the net indebtedness of the general government would amount to 53.8 percent of GDP in 2013, lower than the threshold of 55 percent of GDP for general government debt that calls for a freezing of some lines of general government spending. These considerations raise the issue whether a gross or a net definition of general government debt might provide a better picture of the financial situation of the general government. Finally, it is worth noting that the state maintains sizeable equity participation in the nonfinancial corporate sector (22.3 percent of NFC shares and other equity, equivalent to 18 percent of GDP). Consequently, there might be scope for further privatization with potential benefits in terms of debt, the budget, and capital market development.

11. The household sector has been, on average, a net lender of funds to the rest of the economy in both periods. However, the direction of the flow of funds has changed somewhat. Most notably, while in the pre-crisis period, households were a net lender of funds to the banking sector, in the aftermath of the crisis they became a net borrower. Contrary to some other countries in the region, Slovak households entered the 2009 crisis with a low level of debt, allowing them to increase their leverage somewhat. Slovak banks, which had loan-to-deposit ratios around 85-90 percent before the crisis and thus were not dependent on wholesale or parent funding, took this opportunity to expand their lending to households at a steady pace, mainly through mortgage lending. While households were deleveraging elsewhere in the region, the Czech Republic and Poland also saw household debt rise. At the same time, Slovak households’ net lending position vis-à-vis the nonfinancial corporate sector has faded away because of retail investors’ very limited appetite for bond and equity investment as well as the lack of an adequate legal, institutional and administrative framework conducive to capital market development. On the other hand, households’ net lending position vis-à-vis other financial corporations has increased, reflecting the development of pension funds as well as some diversification of households’ portfolios, although the bulk of their financial wealth remains invested in bank deposits (about 63 percent of total assets).

A03ufig02

Households’ Debt

(In percent of GDP)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Source: Harver.
A03ufig03

Private Sector Credit

(Monthly data, year-on-year percentage changes)

Citation: IMF Staff Country Reports 2014, 255; 10.5089/9781498333801.002.A003

Sources: ECB and IMF staff calculations.

12. If the financial sector as a whole is considered, its financial position in relation to the rest of the world has shifted from being a net borrower to a net lender of funds. Most of this variation seems to be due to the change in the net financial position of the NBS. Presumably, the adoption of the euro and the shift of monetary and liquidity responsibilities to the ECB, which is included in the aggregate rest of the world, has resulted in some reshuffling of assets and liabilities among the NBS, the domestic commercial banks, and the rest of the world. In 2009 in fact, it can be seen that commercial banks withdrew their excess liquidity deposited at the NBS, part of which was channeled back to parent banks (as indicated by the decline in the liabilities vis-à-vis non-residents) and part was invested in government bonds.

13. However, the position of commercial banks may have not changed so significantly. The change in Slovak banks’ net position seems to confirm the view that, because of the financial crisis, domestic credit institutions, which are mostly foreign owned, have rechanneled funds towards their respective parent banks, as has happened in other countries. However, this result is entirely due to a significant outflow that occurred in 2012, probably in reaction to a tightening of prudential regulation on capital and dividend distribution as well the adoption of a special levy on banks’ liabilities. Excluding that year, commercial banks have continued to channel funds into the country to the tune of 0.7 percent of GDP (broadly in line with what they did in the 2005–08 period), which seems to weaken the argument of foreign-banks’ de-leveraging, at least in the case of Slovakia.

14. The size and the role of other financial corporations, albeit still limited, have increased in recent years. Other financial corporations have maintained broadly unchanged their net borrowing/lending positions in relation to the other sectors of the economy. However, after 2009, their net asset position has become positive and the links with the household sector and rest of the world have intensified.

C. Conclusions

15. This note provides a brief overview of the financial interlinkages among the sectors of the Slovak economy and describes how the flows of funds have changed after 2009. In that year, two important structural breaks occurred: the global economic and financial crisis hit the Slovak economy and Slovakia joined the European Monetary Union.

16. The Slovak economy has been a net borrower of funds from the rest of the world for the whole period considered. A net borrowing position is consistent with Slovakia still catching up with more advanced economies in Europe, and thus funding investment with foreign borrowing. While before the 2009 crisis, the non-financial corporate sector, which is mainly foreign-owned, was the largest borrower, in the last few years the general government has become the largest recipient of funds from abroad, as it has sought to diversify its investor base.

17. The household sector has been, on average, a net lender of funds to the rest of the economy but the direction of the flow of funds has changed. Reflecting some deepening of the credit market, households’ position vis-à-vis the banking sector has shifted from a net lender to a net borrower of funds. At the same time, households’ net lending position vis-à-vis the nonfinancial corporate sector has faded away because of retail investors’ very limited appetite for bond and equity investment as well as the lack of an adequate legal, institutional and administrative framework conducive to the development of capital markets. On the other hand, households’ net lending position vis-à-vis other financial corporations has increased, reflecting the development of pension funds as well as some diversification of households’ portfolios, although the bulk of their financial wealth remains invested in bank deposits.

18. The role of domestic commercial banks does not seem to have significantly changed after the crisis. At first sight, the shift from a net borrowing to a net lending position vis-à-vis non-residents seems to confirm the view that, because of the financial crisis, Slovak banks, which are mostly foreign owned, have rechanneled funds towards their respective parent banks, as has happened in other countries. However, this result is entirely due to a significant outflow that occurred in 2012. Excluding that year, commercial banks have continued to channel funds into the country, broadly in line with what they did in the pre-crisis period, which seems to weaken the argument of foreign-banks’ de-leveraging, at least in the case of Slovakia.

1

Prepared by Alessandro Giustiniani.

2

In this note, the flows of funds are derived as differences between stocks at the end of the year.

3

There are anecdotal reports of branding, which could imply that a country’s exports are likely to be overestimated.

Slovak Republic: Selected Issues
Author: International Monetary Fund. European Dept.