(For other news from the Reuters Central European Investment
Summit, click on
http://www.reuters.com/summit/CentralEuropeanInvestment08?pid=500)
By Peter Laca
VIENNA, Oct 22 (Reuters) - Slovakia's economy will slow more
than expected next year because of the global financial crisis,
but the future euro zone member should still expand by at least
5 percent, central bank Vice-Governor Martin Barto said on
Wednesday.
Slovak consumer prices should not rise sharply after euro
zone entry in 2009, and the central bank has so far not
discussed revisions of its inflation goals, Barto also said.
The National Bank of Slovakia (NBS) is now working on a
regular update of its economic forecasts, which Barto said would
be probably published together with those from other members of
the single currency bloc early in December.
Speaking at the Reuters Central European Investment Summit
in Vienna, Barto said the 2009 growth forecast would come down
from the bank's current prediction of 6.6 percent.
"I would expect that the proposal would be somewhere between
5 and 5 1/2 percent of growth for next year," Barto said.
"This is my personal estimate based on the first forecasts
of euro zone countries, European Union countries, neighbouring
countries, which are our main trading partners."
Growth of 7.6 percent is expected in 2008.
Slovakia has been largely shielded from the full brunt of
the financial crisis. But the small and open economy, heavily
dependent on exports of cars and electronics goods, could see an
indirect impact if demand in its main trading partners slows and
tighter financing prompts consumers to curtail spending.
Apart from the automobile and electronics sectors, Barto
said the Slovak construction sector may also be hit because of a
higher cost of funding.
Governments and central banks across Europe have slashed
growth forecasts, but Slovakia is expected to remain one of the
fastest growing economies in the EU, and Barto said euro zone
entry could add up to 0.5 percentage points of growth per year
to the economy and help attract new investments.
"With the euro zone membership, Slovakia might escape a
drastic decline in growth," he said.
Lower GDP growth might also undercut 2009 budget revenues.
The fiscal plan is based on economic growth of 6.5 percent,
but Barto said the government had enough tools to react if that
were the case and he expected the cabinet to cut spending if
state revenues fall short of projections.
He also dismissed suggestions of a few analysts that the
credit crisis might somehow endanger Slovakia's euro zone entry.
"There is no doubt about Slovakia's euro zone membership as
of Jan. 1, 2009. There is nothing that could prevent Slovakia
from joining," Barto said.
LIMITED INFLATION IMPACT
Euro zone entry will lock Slovakia in to the area's lower
borrowing costs. Its main interest rate of 4.25 percent is 50
basis points above the European Central Bank's after Bratislava
did not follow the coordinated rate cuts by the ECB and other
major central banks earlier this month.
Slovak interest rates will have to fall to match the euro
zone's when it becomes the 16th member of the bloc. Barto said
the NBS will debate various options for aligning the rates,
including a cut all at once or in gradual steps, probably at
the monthly monetary policy meeting.
The impact of lower interest rates on the Slovak economy
will depend on the actual lending policies of banks operating
there, as they may tighten what has been a relaxed approach and
ask for higher risk premium.
"In the end, the situation might be that monetary conditions
will not change so much," he said.
Opinion polls show many Slovaks worry euro zone entry will
bring higher inflation, similar to a jump in price growth in the
first ex-communist euro switch Slovenia after its entry in 2007.
But Barto said the NBS did not expect a spike.
"In our discussions so far, there is not a discussion of a
revision of inflation figures," he said. "We have no signals
about the possibility of stepping over these targets... I would
say we are quite optimistic about inflation."
The NBS now targets annual inflation calculated under EU
methodology of 4.0 percent for the end of 2008 and 2.8 percent
for December next year.
Barto said that despite plans by Slovak Prime Minister
Robert Fico to boost welfare spending, he believed the cabinet
would continue reducing the public deficit.
"I think he is willing to fulfil the budget deficit figure
of 1.7 percent (of GDP) for next year," he said. "Also, I think
he understands quite well that inflation is now mostly in hands
of the government's fiscal policy, I think he is quite well
aware of this fact and feels the responsibility of this."
(Editing by Toby Chopra)
