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. 7 VUB, a bank of Intesa Sanpaolo group
Sk / EUR and USD exchange rate • Sk / EUR • Sk / USD Yields on bonds 8 • 3-years GB • 5-years GB • 7-years GB Interest rates development • 3M BRIBOR • 2W REPO rate <strong>Annual</strong> <strong>Report</strong> 2007
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