ANNUAL REPORT 2008 - Polymer Bank Notes of the World

1 ECONOMIC AND MONETARY DEVELOPMENTSIN SLOVAKIAOn 8 July 2008 the ECOFIN Council adopteda decision allowing Slovakia to join the euroarea as from 1 January 2009, increasing thenumber of euro area countries from 15 to16. The Council’s decision was based on theconvergence reports prepared by the ECB andthe European Commission in May 2008, andfollowed discussions by the EU Council in thecomposition of the Heads of State or Government,an opinion of the European Parliament and aproposal from the European Commission. Onthe same day, the ECOFIN Council adopted aregulation irrevocably fixing the conversion ratebetween the Slovak koruna and the euro at SKK30.1260, the ERM II central rate at the time of thedecision. On the day that the conversion rate wasset, the Slovak koruna was trading close to thatrate. During the Slovak koruna’s participation inERM II, from 28 November 2005, its central paritywas revalued twice against the euro, by 8.5% inMarch 2007 and by 17.6472% in May 2008.Slovakia’s economy has grown at very robustrates in recent years, following a period ofsluggish economic growth below 2% in thelate 1990s. The improvement in the growthperformance over the past ten years has beensupported by deep structural reforms and theensuing significant inflow of foreign capital.Real GDP growth peaked above 10% in 2007,followed by a more moderate rate of 6.4%in 2008 (see Table 13). Slovakia’s economicperformance over the past few years has beenclosely related to significant improvementsin its production capacity, in particular in theindustrial sector. The majority of new plants,which are concentrated in the car and electronicindustries, are export-oriented. Looking at theexternal environment, Slovakia has recordedsignificant deficits in its combined current andcapital account for most of the past decade.These deficits, however, have to a large extentbeen financed by inflows of foreign directinvestment, with debt-creating flows playingonly a secondary role. In the first half of thedecade, large investment projects initially causedsome deterioration in the current and capitalaccount balances, reflecting in particular importsof new technologies. This effect was, however,temporary, as significant improvements in theexport capacity of industry contributed to areduction of these deficits. The average currentand capital account deficit has stood at 5.5% ofGDP over the past five years.The inflation performance of the Slovakeconomy over the past decade has been relativelyvolatile. Changes in administered prices andindirect taxes contributed significantly to thisvolatility. Following a period of high inflation,annual HICP inflation decreased graduallyfrom 2004, reaching a trough of 1.9% in 2007,notwithstanding a temporary increase in 2006.This decline followed the adoption of aninflation-targeting framework by Národnábanka Slovenska. The moderation in inflationwas supported by the gradual appreciation of theSlovak koruna against the euro. Subsequently,Slovak HICP inflation increased again, peakingin September 2008 at 4.5%, reflecting to asignificant extent developments in global energyand food prices. Against the background of thesignificant easing of global commodity prices,inflation rates started to moderate again in thelast few months of 2008 and in early 2009. For2008 as a whole, HICP inflation stood at 3.9%.Notwithstanding significant improvements, thelabour market continues to be characterisedby considerable structural rigidities. At thebeginning of this decade, the situation in thelabour market did not improve in spite ofrelatively robust economic growth. This changedin 2004, when substantial tax, social benefitand labour market reforms were implemented,which, together with the ensuing sizeable inflowof foreign capital, contributed to robust jobcreation. The unemployment rate also declinedbecause of the outward migration of workersfollowing Slovakia’s accession to the EU inMay 2004. Despite these improvements, theunemployment rate has remained close to 10%,reflecting the existing rigidities in the labourmarket. These rigidities contribute, in particular,to the high rate of long-term unemployment, anunfavourable skill mix among the unemployedand substantial disparities between regionallabour markets.138 ECBAnnual Report2008