Slovak Republic Investor Roadshow March 2006 Martin Bruncko Chief Advisor to Minister of Finance Daniel Byt čá nek Director of Debt and Liquidity Management Agency, ARDAL Tomas Kapusta Head of Debt Management, ARDAL
Outline Overview and Macroeconomic Policies 03 Transforming Slovakia to a Competitive Economy 13 Slovakia EMTN Programme and Bond Issue 20 2
Slovakia : Key Credit Highlights Moody ‘s: A2 positive outlook Strong Ratings S&P: A stable outlook International EU member (2004) Integration NATO member (2004) OECD member (2000) High GDP Growth 6.0 % in 2005, vs 1.3% for Eurozone, one of the Highest in Central Europe Low Debt Levels General government debt is 35.2% of GDP (2005), compares favourably with regional peers Early EMU Entry Slovakia one of the first Central European sovereigns to enter EMU, expected 2009 3
GDP Growth Remains Robust Slovakia Real GDP Growth 7% Highest growth in Central Europe 6% 5% 4% Top 3 performer in the OECD 3% 2% 1% Sustained robust growth despite 0% weak external environment 2001 2002 2003 2004 2005 2006* Fuelled by domestic demand 2005* Real GDP Growth, Peer Comparison 7% 6% Stimulated by significant FDI 5% 4% Economic growth expected to 3% remain high 2% 1% 0% Portugal Eurozone Greece Czech Slovakia * Forecasts 4
Fiscal Deficit Lower Than Most Neighbours Slovakia General Government Deficit (% of GDP) 0% Continued fiscal prudence 2001 2002 2003 2004 2005* 2006* -1% -2% -3% One of the strongest fiscal positions -4% Maastricht in Central Europe -5% Criteria -6% -7% General government deficit is -8% -9% expected to be below 3.0% of GDP in 2005 2005* General Gov. Deficit (% of GDP), Peer Comparison 0% 2006 Budget set government deficit Slovakia Czech Portugal Eurozone Greece -1% at 2.9% of GDP… -2% -3% …within Maastricht Criteria -4% -5% -6% -7% * Forecasts Source: European Commission, spring 2005 5
Unemployment Exepected to Continue to Decline Factors behind declining Slovakia Unemployment Rate unemployment: 25,0% 20,0% structural reforms leading to 15,0% sustained economic growth 10,0% 5,0% major labor market reform 0,0% 2001 2002 2003 2004 2005 2006* more favorable demographic trends Development of the Unemployment Rate, Peer Comparison 2002 2007F Change in p.p. Employment forecast to grow Slovakia 18.7% 15.4% -3.3 average rate of 1.0% annually Czech 7.3% 7.4% +0.1 (2006-2008) Greece 10% 9.7% -0.3 Portugal 5.1% 7.8% +2.7 In the European Union, Slovakia Eurozone 8.4% 8.0% -0.4 compares favorably in reduction of unemployment * Forecast Source: European Commission, autumn 2005 6
FDI Growing Steadily Total FDI Stock (US$ million) FDI Stock by Country of Origin, 09/2005 20000 Other; 6,9% Netherlands; 18000 France; 3,0% 21,9% USA; 4,1% 16000 Czech Republic; 5,2% 14000 12000 UK; 6,8% 10000 8000 Hungary; 7,1% 6000 Italy; 7,2% Germany; 19,2% 4000 2000 Other; 8,5% Austria; 15,0% 0 2001 2002 2003 2004 2005 2006* * Forecasts Source: National Bank of Slovakia 7
Balance of Payments Expected to Improve Slovakia Balance of Payments Components 1999 Austerity Package reined in the 5000 Current Account deficit 4000 3000 CA balance expected to improve in 2000 2006 to 4,2% of GDP due to exports 1000 growth 0 2001 2002 2003 2004 2005* 2006* Current account deficit FDI In 2005, EU countries represented 85.4% of total exports and 71.1% of 2005* Current Account, Peer Comparison total imports of goods 0% Portugal Slovakia Czech Greece Eurozone Eurozone -1% -2% Financing needs more than covered -3% -4% by FDI -5% -6% -7% Lowest foreign financing need in the -8% -9% region (to be confirmed) -10% Source: National Bank of Slovakia * Forecast 8
Monetary Policy on Course Inflation fell sharply to current Slovakia CPI Inflation subdued level, despite surging oil Regulated prices contr. 9% prices... 8% 7% 6% ...and is forecast to remain broadly 5% 4% flat (at 3.5%) 3% 2% 1% Free float of the Koruna since 1998 0% 2001 2002 2003 2004 2005 2006* Source: National bank of Slovakia, Ministry of Finance Successive liberalisation of financial 2005 CPI Inflation, Peer Comparison transactions since 2000 3,5% 3,0% ERM II entry in November 2005 2,5% 2,0% (1 EUR = 38.455 SKK) 1,5% 1,0% ERM II standard fluctuation band of 0,5% 0,0% +/- 15% will be observed Greece Czech Eurozone Portugal Slovak * Forecast 9
EMU Entry in Sight Fulfilment of Maastricht Criteria 70% 16% Inflation targeting under ERM II conditions to continue 14% 65% 12% 60% Fiscal criterion to be met this year 10% 55% % Long-term yields under reference 8% 50% value of Maastricht criteria 6% 45% Public debt level already below 4% 40% Maastricht threshold 2% 35% EMU Entry Expected in 2009 0% 30% Inflation Fiscal deficit Interest rate FX volatility Public debt Maastricht Slovakia Source: Ministry of Finance, European Commission, NBS, SUSR Note: FX volatility is defined as deviation from central parity at 38.455 SKK/ € within the period from 2004-2005 10
Prudent Debt Management Slovakia Public Debt (% of GDP) Maastricht Criterion 60% 50% Since 2003, specialised Debt and 40% Liquidity Management Agency, 30% ARDAL, in place 20% 10% Fiscal adjustment and prudent debt 0% management stabilised public 2001 2002 2003 2004 2005* 2006* indebtedness 2005* Public Debt % of GDP, Peer Comparison Successive reduction of state 120% guarantees 100% 80% One of the lowest debt burdens in 60% 40% the region 20% 0% Greece Eurozone Portugal Czech Slovakia Source: European Commission * Forecast 11
Outline Overview and Macroeconomic Policies 03 Transforming Slovakia to a Competitive Economy 13 Slovakia EMTN Programme and Bond Issue 20 12
Long-term Fiscal Sustainability Supported by Major Structural Reforms 1989 2006 CENTRALLY PLANNED FUNCTIONING MARKET ECONOMY ECONOMY • • GOALS OF functioning market high and sustainable economy growth REFORMS • long-term competitiveness • Lisabon strategy goals TYPE OF REFORMS • privatizations • price deregulations • • structural reforms market institutions 13
On-going Successful Privatisation Program Privatisation in two stages: Privatisation Receipts (% of GDP) 2000-2001: Banking sector 16.0 14.0 2002 onwards: Utility, Transportation 12.0 Proceeds used to finance pension reform 10.0 and repayment of state debt 8.0 Left to be privatised: 6.0 Book value of SKK 100bn for sale 4.0 Total portfolio contains 118 companies 2.0 0.0 Approx 65% of book value in SE 1998 1999 2000 2001 2002 2003 2004 2005 (electricity) and SPP (gas) Source: Fund of National Property 14
Pension Reform : Well Funded Key reforms recommended by EC to relieve pressure on public financing: Provide economic incentives to prolong working lives Limit access to early retirement schemes Strengthen link between contributions and entitlements Curtail future public spending requirements by instituting more appropriate pension indexation mechanism Spread future pensions-related risks across several pension pillars SLOVAK REFORM IMPLEMENTS ALL THESE RECOMMENDATIONS Radical reform of 1st pillar (pay-as-you-go pillar) Introduction of the 2nd pillar (private pension accounts invested in capital markets) Improving the regulatory environment for efficient functioning of the 3rd pillar 15
Introduction of Flat Rate Tax Radical simplification of the tax system elimination of virtually all exceptions, exemptions, deductions, special rates, and special regimes elimination of dividend, inheritance, gift taxes, and real estate transfer tax Introduction of low nominal rates 19% flat individual income tax 19% corporate tax 19% unified VAT on all goods and services - without any exceptions Shift from direct to indirect taxes Slovakia has one of the lowest corporate and effective tax rates in EU 16
The Slovak Tax Reform : Results No decrease in tax revenues Increased revenues from indirect taxes Less scope for tax evasion and tax avoidance More motivation to pay taxes Better incentives for investment and work Lower marginal rates More transparent and equitable taxation 17
Further Key Structural Reforms Health-Care System financially self-sustainable Improved quality of services provided Education Improved efficiency and quality of secondary education system Increased capacity and quality of tertiary education Public Administration Improved quality of public services Continued de-centralisation of public administration 18
Outline Overview and Macroeconomic Policies 03 Transforming Slovakia to a Competitive Economy 13 Slovakia EMTN Programme and Bond Issue 20 19
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