Instability of Slovak coalition to freeze reform and policy, suggests Fitch

By bne IntelliNews March 31, 2016

Major changes in Slovakia's economic and fiscal policy are unlikely given the potential instability of the newly formed government, Fitch Ratings suggested in a report issued on March 31.

Slovakia’s new government was formed after four disparate parties agreed to cooperate in the wake of the inconclusive March 5 elections. Analysts have suggested the coalition may not prove stable enough even to last a year, let alone to the end of it’s mandate.

The left/leaning Smer, which lost its parliamentary majority in the vote, signed an agreement to cooperate with the far-right Slovak National Party (SNS), ethnic Hungarian Most-Hid, and pro-business Siet. The deep differences amongst the four, and potential for collapse, makes any progress in reform or major policy moves highly unlikely, the Fitch analysts point out.

“We think this makes major economic structural reforms less likely during the current parliament, as the risk of political instability (and possibly early elections) could limit the scope for major policy steps in contentious areas,: the report reads. "These include tackling regional economic disparities and high structural unemployment, which are weaknesses in Slovakia's sovereign credit profile."

The ratings agency adds that it expects the government deficit to continue to fall gradually over the course of the new parliament, squeezing to 2.2% of GDP this year and 2.1% in 2017, from 2.7% in 2015. Economic growth will be the main driver of the reduction through increased government revenues, the analysts note. 

Fitch expects GDP to expand 3.2% in 2016 and 3% in 2017. Private investment, including a €1.5bn investment by Jaguar Land Rover, will also increase growth potential, the analysts predict.

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