Anti-corruption fight was the main pre-election promise of coalition parties

The parliamentary elections held on 29 February 2020 saw the defeat of the ruling centre-left coalition led by the Smer-SD party and resulted in the victory of the anti-corruption, pro-EU and pro-NATO Ordinary People and Independent Personalities party, headed by Igor Matovič. The winning party was joined by three other centre-right and moderate conservative parties, among which two Eurosceptic ones (We Are Family and Freedom and Solidarity), to form a government, which took office on 21 March. However, all ruling parties have a common policy goal, that is, the fight against corruption, in the wake of the murder of an investigative journalist and his fiancée in February 2018, which had sparked mass protests. In the meantime, investigations have uncovered bribery between officials from various state bodies (police, judges) and a businessman, who has been charged with ordering the killing. According to Transparency International, Slovakia ranked 59 out of 180 countries in 2019 in the corruption perception index (2 ranks higher than the previous year). This has called for various judiciary reforms in the government’s programme, among which a revision in the nomination procedure of judges.

Other key pre-election promises of the new coalition rest on improving the deteriorating business environment, due in particular to an erratic and unpredictable tax policy and the lack of investment in research and development, and the balancing of economic growth across regions, as the country is split between a richer western region (including Bratislava) and poorer central and eastern regions. The convergence of living standards with those of Western Europe has also stalled in recent years (cf. graph 1).

Coronavirus-induced measures will likely put the country in recession this year

But the outbreak of the coronavirus in Europe at the end of February and in Slovakia, where the first case was confirmed early March, has upset the fresh government’s agenda, although the epidemic still seems relatively contained in the country, with 534 confirmed cases on 6 April and only two deaths. The government adopted prevention and containment measures at an early stage to delay the spread of the virus, including social distancing and closing of borders, schools, nonessential shops (although some have been allowed to reopen as of 30 March provided they follow strict hygiene rules), entertainment premises, hotels and restaurants. While these measures will certainly help to contain the epidemic, they will weigh on the economy. The key automotive sector (which accounted for about one third of industrial receipts and of exports last year) is significantly impacted, with all four domestically-producing brands (Volkswagen, PSA Peugeot, Jaguar Land Rover and Hyundai Kia) having temporarily stopped production in the country for at least two weeks. Kia was the first to resume production on 6 April. Other major companies in the sector, such as the Continental tyre producer, are also halting operations, not directly because of the epidemic but rather because of a drop in orders. On the other hand, some sectors (including manufacturers of food, paper products, and medical equipment) will benefit from increased demand, including Chirana Medical, the lung ventilator producer, which should considerably increase its production this year. What is more, the new government has already announced a package of support measures representing about 1% of GDP per month, targeting in particular affected companies that do not lay off workers (deferral of tax payments, state intervention in payrolls, etc.). As a member of the Eurozone, the country will also be entitled to the monetary policy support from the ECB, which vowed to provide supportive financing conditions. However, while a slowdown in the manufacturing industry was already observed before the outbreak, the toll is expected to be huge on the economic activity and the country will likely face a contraction of its real GDP growth this year because of the disruption in the automotive sector, the drop in domestic consumption due to confinement measures and the collapse of external demand. Slovakia is indeed one of the European Union’s most open economies, with goods and services exports accounting for almost 100% of GDP in 2019. With a gross public debt that is under control (amounting to 47% of GDP in 2019) and has been declining in recent years thanks to fiscal consolidation leading to fiscal surpluses, the country has some fiscal room to fight the effects of the containment measures.

Analyst: Florence Thiéry – f.thiery@credendo.com