Slovakia’s CA swings to EUR21.2m deficit in November

The current account reported a deficit of EUR21.2m in November, thus swinging from upwards revised surplus of EUR145.8m in October, but coming 57.3% y/y lower than the EUR49.7m deficit reported in November 2015, the latest figures released by the NBS on Thursday showed. In Jan-Nov the current account deficit narrowed by 19.2% y/y to EUR66.1m, while in annualized terms, the current account surplus widened EUR183.2m as of end-November from EUR154.7m surplus in the twelve months ending in October.

The CA swinging into deficit in November above all reflected the much lower merchandise trade surplus – it contracted by 55.0% m/m to only EUR191.2m as exports expanded by only 1.9% m/m, while imports – by stronger 5.9% m/m. This development has been already seen in foreign trade data released earlier this month. Thus, the merchandise trade surplus was too low to be able to compensate for the deficits on the primary and secondary income accounts, despite the fact that they narrowed by 16.4% m/m and 13.0% m/m, respectively. The services account expanded in the month, but it had only minor contribution. In annual terms, the narrowing of the CA deficit was underpinned by the fact that the deficits on both the primary and secondary income accounts narrowed and although the surplus on the merchandise trade contracted by 26.8% y/y (as exports’ growth of 4.1% y/y was slower than that of imports of 5.5% y/y), the services account swung into a surplus. As for the eleven months of 2016, the current account deficit decrease was supported by increasing by 12.0% y/y merchandise trade surplus to EUR2.58bn, the tripling surplus on the services account to EUR300m, which at least partially compensated the widening deficits on the primary and secondary income accounts (the former increased by a third to EUR1.9bn, the former – by 2.7% y/y to EUR1.1bn).

Looking forward, growing domestic demand, in particular household consumption on the back of improving labor market, decreasing unemployment and wages hikes, along with the entry of Jaguar as a new foreign car producer in the country are two factors likely to boost imports, especially given their high investment-intensiveness, in our view. Much would depend also on how fast the country will manage to improve absorption of EU funds and thus to support investments, both public and private. At the same time, we believe that Brexit-related concerns remain the main downside risk to exports, but so far it seems that the UK’s decision to leave the EU has not had a serious negative influence. The announced earlier this week by Britain’s PM Theresa May Brexit scenario would definitely have a downside effect on Slovakia’s exports and hence, current account balance, as the UK is the second most-important market for the country’s car exports. Yet, the negotiations on a comprehensive free trade agreement as desired by PM May are yet to start and may not be completed in two years as she plans, which will delay the direct impact on the Slovak economy.

The capital account posted a surplus of EUR67.2m in November, up from EUR12m in October. As the capital account includes mainly EU transfers, we believe that the capital surplus increase in November reflects some speeding up of the process of drawing EU funds under the new 2014-2020 programming period. We may expect the surplus on the capital account to continue increasing going forward as the finance ministry announced that Slovakia has absorbed 3.98% of EU funds under the 2014-2020 EU budget framework and the 11 operational programs (OPs) as of end-December, more than double the 1.94% as of end-November, and the process may be expected to intensify further as the projects’ preparation advances.

The financial account balance registered a net inflow of EUR645.2m in November, up by 71.9% m/m from the downwards revised EUR375.3m in October, which was supported by significant inflows of direct and other investments. The net FDI inflow surged to EUR418.3m in November, while the other investments account reported a significant inflow as compared to outflows reported the previous month and a year ago. At the same time, the portfolio investment account reported an outflow in the month. We may expect direct investments in the country to rebound, especially given that Jaguar Land Rover has committed to invest some EUR1.4bn initially by 2018 (and further EUR500m with the production expansion) in its new car plant in Nitra and that a number of its potential subcontractors already head to Slovakia. Reserve assets decreased by EUR16.3m in November, while in Jan-Nov they were down by EUR58.2m.

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