Tim Gosling in Prague -

Analysts met the news that Slovakia's first ever single-party government would be led by Robert Fico with dismay. Six months into the new administration, those fears have not been borne out, but what happens when the economic firefighting is over?

Alarm calls went up in March when Fico's Smer party rode the so-called "Gorilla" corruption scandal to a landslide victory in parliamentary elections. The prime minister's earlier stint in office in 2006-2010 was marred by rampant corruption and populist policies, which prompted many to fret that Central Europe could have a "Viktor Orban mark II" on its hands. Yet in contrast to the combustible Hungarian PM, Fico has spent his current time in charge building a new image for himself as a fiscally responsible administrator and a consensus builder.

His government's immediate commitment to the EU project and German-led calls for austerity on taking office sent a positive signal. Together with the country's relatively robust economic growth, this has helped Slovakia avoid the sort of market collapse that Budapest suffered around the turn of the year.

Investors appear happy enough with the Smer government so far. Slovak bond yields have slid sharply since January - the 2020 benchmark was 250 basis points (bps) below early year levels in late July - and Bratislava has managed to diversify its investor base with bond issues in Czech koruna, Swiss francs and US dollars. Analysts at Komercni Banka point out that the year's financing needs were already covered in July, and Slovakia has the time and space for pre-financing for 2013. At the same time, the ratings agencies and the International Monetary Fund have also offered their support in recent weeks. On August 3, Standard & Poor's affirmed its 'A' rating on Slovakia.

Economist Jaromir Sindel at Citigroup laughs as he relates that he began covering Slovenia as well as Slovakia because investors so regularly used to send him inquiries related to the small Balkan country, committing the same faux pas as former US president George W. Bush. "Investors not dedicated to [Central and Eastern Europe] are not so worried about the details - as long as Fico sticks to the fiscal consolidation, bond investors will remain happy," he says.

An agreeable fellow

Fico is clearly looking to build a new image as consensus builder, Sindel says, even if sometimes that consensus is forced. "Compared with the expectations, Fico has been far less aggressive. I think he's looking to the next elections already, and he realizes his biggest potential opposition is himself."

Sharon Fisher of IHS Global Insight stresses that Fico is no Orban, though warns there are still dangers ahead. "The catastrophic scenario [of Hungary] is not likely to play out [in Slovakia], but there are definitely risks for the business environment and foreign investment," she says. "Some are already upset about some of the issues, as you can see from the most recent confidence reports from Business Alliance Slovakia, with a sharp drop in the last quarter."

While Fico's commitment to keep to the 2012 budget deficit target of 4.6% of GDP and follow that up by bringing the gap in below the magic 3% threshold cheered analysts, they worry that thus far the populist Smer is attempting the trick purely via revenue-raising measures.

The previous 19% flat tax system has been scrapped, raising corporate taxes to 23% and creating an upper income tax band of 25%. Meanwhile, regulated companies will face a windfall tax. "Basing the entire fiscal consolidation programme on revenue is shaky, especially given the uncertainty in the Eurozone and likely impact on Slovak economic growth," points out Fisher.

Indeed, Fico and his finance minister, Peter Kazimir, have already admitted that tax revenue is falling behind, and that they will have to freeze pensions and social benefits - a move Fico categorically ruled out in March - to help plug a gap of around €500m for 2013. That will rankle with Smer's core electorate. However, the previous centre-right government left a paucity of fat available to trim after inheriting a deficit of around 8% when it took over from Smer in 2010.

Meanwhile, the banks are unhappy over an increase in a special tax on the sector originally introduced by Fico's predecessor, Iveta Radicova. Analysts also worry about the government's rolling back of pension reform by cutting flows to the second pillar. However, Slovakia is not the first in the region tempted to bet against raised liabilities in the future to borrow that cash. Hungary decimated private pension funds, while Poland performed a similar trick to Smer.

Nobody compares Donald Tusk with Orban, but that's because the Polish PM avoids Fico's occasional tub-thumping. The one real red flag raised by "Smer version 2.0" so far was an announcement in late July that the government is preparing to expropriate Slovakia's private health insurers, whose sins are apparently taking funds intended for medical care and locking them up as profit. "It's definitely a negative signal," says Fisher, suggesting it was probably just a way of getting rid of the private sector competition.

When the firefighting is over

Economic growth remains key for Fico's whole leadership outlook. Sindel says this "man of consensus" will likely persist as long as growth does, but that "could change if Slovakia goes into recession."

In Slovakia, growth for now depends on large foreign manufacturers, particularly expansion by the country's giant carmakers, which have helped drive year-on-year GDP growth 3.0-3.4% since the last quarter of 2011. Smer needs to keep that up over the short term, and be ready to accelerate growth once the firefighting is finished.

Fisher says foreign investors - hand in hand with coalition partners - quashed many of Fico's more controversial promises in his last administration. However, she also points out that investors don't have too many options right now either. For instance, struggling through the crisis, Peugeot-Citroen slashed hundreds of jobs at old plants in France producing flagship ranges, while expanding production at its modern Slovak factory, where small and cheap models are built to send to both under-confident European consumers and those with growing incomes in emerging markets.

Longer term, however, Fico will need to curry favour with a wider range of investors, as the economy is clearly at risk from its heavy dependence on the auto and electronics sectors. "Economic diversification is badly needed, although it won't happen of course while companies go through the crisis," Sindel points out.

Fisher worries that a forthcoming draft of a new labour code could hold back investment. Mooted changes include strengthening the unions; limits on freelance work, self-employment and temporary contracts; and raising the cost of firing staff.

If they do arrive however, it's also important where within Slovakia investors head. Despite the strong recovery since 2009, unemployment remains a blight stuck at 13-15%, which in turn depresses domestic demand to leave the country with even greater exposure to export demand out of the EU. "Unemployment is huge in the east," points out Sindel. "They need to attract investors to those regions, but first of all they need to build roads so they can get there."

Shelling out for expensive highways is clearly a step too far for the moment, however. So too is dealing with the chronic corruption that plagues the country and deters investors, suggests Fisher. "I don't think anyone thinks [Fico] is clean," she says. "It was the main reason he lost the election in 2010. The parliament has just voted down immunity for MPs, which is a good start, but I think there will be a few grand gestures, with little underlying change."