Annual Report - VÚB banka

Development of the External Environment
In the year 2007, the Slovak economy has built
upon the positive trends initiated in the previous
year and posted its best performance ever. Indeed,
increasing capacities and launched production
in the export-oriented car and electronics manufacturing
has pushed real GDP growth to close to
ten percent from the previous all-time strong gain
of eight and an half percent in 2006. This was the
sixth consecutive year when Slovakia outgrew its
Visegrad four neighbors. Importantly, growth of the
Slovak economy was nearly four times higher than
that of the Eurozone, which means that Slovakia
has last year made yet another sizable step toward
the Western European standards of living.
Importantly, growth of the Slovak economy has not
only been fast but also well balanced and broad
based. Both foreign and domestic demand contributed
positively to growth. The corporate sector
saw profi ts increase by XX% over the already
record-high levels of 2006, while households benefi
ted from further decline in unemployment and
meaningful income gains. Strong economic growth
boosted also the fi nances of the public sector, allowing
it to cut the overall fi scal defi cit to well below
3% of GDP without foregoing increases in real public
spending.
Financial markets-wise, the year 2007 has been
affected by two major events. The fi rst event was
the revaluation of the koruna exchange rate parity
within the ERMII on March 16. The new parity of
35.4424 koruna vs. the euro was put 8.5% stronger
than the original one of 38.4550 set upon Slovakia’s
entry into the EMRII on November 25, 2005. In
reaction, the koruna has fast appreciated to an all-
-time strong level of 32.68 vs. the euro and, shortly
after, the central bank has in two steps reduced
the offi cial interest rates by cumulative 50bps. The
second development affecting the Slovak fi nancial
markets has been more of a global nature and emanated
from the crisis on the US sub-prime mortgage
market, which burst out in late summer. This
crisis gradually spread out to involve broader credit
markets, choking off liquidity and tightening credit
conditions also in Europe. Besides, it dealt a blow
to confi dence of investors and led to a massive increase
in risk aversion, which affected also emerging
markets of Central Europe, including Slovakia.
In reaction, the koruna has basically stopped appreciating
and broadly stabilized within a range until
the beginning of 2008.
Banking sector-wise, the local market continued to
enjoy further expansion. Both the loan and the deposit
market expanded strongly, having grown volumes
by 24% and 13%, respectively. On the loan
market, growth continued to be higher in the retail
than in the corporate segment, but, compared to the
previous years, the gap has narrowed, to 28% and
22%, respectively. On the deposit market, growth
was broadly even between the two segments. Besides,
after a bad year 2006, the asset management
business had resumed growing, posting over 20%
expansion in volumes.
2008 Macro Outlook
The year 2008 will in many ways be a breaking one
for Slovakia. If everything goes as planned, this year
will be the last one for the koruna, which is scheduled
to be replaced by the euro upon Slovakia’s entry
into the Eurozone on January 1, 2009. Before adopting
the single European currency, Slovakia has to
fulfi ll the fi ve Maastricht criteria, which is seen very
likely. Some discussion nonetheless remains about
the sustainability of the criteria fulfi llment, which at
the beginning of 2008 still leaves some probability
that the euro adoption is postponed. In any case,
the conditions on the Slovak fi nancial markets are
already very similar to that of the Eurozone, with
the key NBS’ 2-week repo rate being just 25 basis
points above that of the ECB’s 4.00%.
Economy-wise, the year 2008 is unlikely to produce
yet another record-high GDP growth. Against the
stalled output in the US and generally weakening
EU economies, also the Slovak business confi dence
has taken hit recently, with the overall economic
sentiment indicator having declined at the beginning
of 2008 back to its long-term trend. Still, at
around 7%, GDP growth is projected to be healthy
and strong relative to Slovakia’s neighbors and EU
countries in general.
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VUB, a bank of Intesa Sanpaolo group