De-railing Slovakia’s economy

Add Slovakia to the PIGS list.

The media across Europe, European Voice of course included, has covered the eurozone debt crisis extensively. Increasingly too they and you are turning the focus to the PIGS – Portugal, Italy and Spain as well as Greece. No foreign media are, however, writing about the state of Slovakia’s finances.

They should, because, while Slovakia looks safe, it is rapidly becoming like Greece.

In the year running up to its adoption of the euro on 1 January 2009, Slovakia’s public debt was a splendid 28% of its gross domestic product (GDP) and its budget deficit was well below 3%. The figures have worsened – official data suggest that Slovakia’s debt will reach 41% of GDP this year – but are still very good by EU standards. Where, then, is the problem?

The problem is the government’s use of public-private partnerships (PPPs). Immediately after adopting the euro, the government embarked on a politically attractive, but very costly road-construction programme through PPPs. The three PPP highways will cost more than €8 billion. That is a lot of money for a small economy.

Accounting for PPPs is tricky, practices vary and rules change. How much of the funds involved in PPPs should appear as public debt? In reality, though, all the risks of these PPP projects are being borne by the Slovak government, as, at the request of its private partners, it will guarantee repayment.

If the costs of the PPPs were reflected in full, Slovakia’s real public debt would amount to over 51% of GDP in 2010 – an increase of 80% since the euro’s adoption and 10% higher than reported by the government.

The country’s budget deficit has grown even faster. It was 2.2% of GDP in 2008, grew to 6.3% of GDP in 2009 and, according to the approved national budget, should reach 5.5% of GDP (€3.75bn) in 2010. By other countries’ recent standards, this is still modest.

But if the costs of PPP highways are added to these official figures, the result is shocking. The two PPPs due in 2010 will cost more than €6bn, around 8% of GDP. That takes the real deficit to around 15%. This is worse than Greece’s or the UK’s.

This is a problem for Europe. But it is a problem that the EU is ignoring. The European Central Bank monitored Slovakia’s convergence with the Maastricht treaty criteria before it joined the euro, but it is not its responsibility to warn against this PPP-induced divergence from the terms of the stability and growth pact.

This is a blind spot. There are others. The European Commission has reservations about the projects’ impact – but on the environment, not its finances. The European Investment Bank (EIB), meanwhile, is expected to announce next week that it will lend €1bn loan to finance the PPP highways.

The EIB’s role is crucial, not just because of the size of its loan, but also because private banks would not take the risk of financing PPP highways without the EIB’s involvement.

The EIB’s criteria are project-based. But the EIB’s objectives, as stated on its website, also include furthering “the objectives of the European Union by making long-term finance available for sound investment”. Is it “sound” to support an investment that will take the budget deficit to 13% of GDP?

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In recent weeks, EU member states have voiced and shown their concern about the inadequacies of economic governance in the eurozone. How PPPs are accounted for is a topic to which they should turn their attention and oblige EU institutions to factor in. The rapid deterioration in Slovakia’s real public finances should show how dangerous this blind spot is.

 

From:

Juraj Mesik

Bratislava