BRATISLAVA, October 21, (WEBNOVINY) — The general government deficit may rise profoundly above 4 percent of GDP in spite of initial, ambitious plans of the Iveta Radicova Cabinet to cut it to 3.8 percent of economic growth. Bank analysts forecast this scenario if competent authorities fail to adopt appropriate consolidation measures that will most likely be necessary after the revision of GDP growth estimates for next year. Finance Minister Ivan Miklos admitted this option, too. On Thursday, he pointed to potential lack of willingness to pass additional measures in the wake of the government’s collapse and ahead of the early elections called for March 2012.
The 2012 deficit may climb close to 4.9 percent of GDP projected for this year. A gap of hundreds of millions of euros may arise in the budget after the downward projections of GDP growth. ING Bank, for instance, trimmed its estimate from 3.4 percent to 1.5 percent.
“It would mean a shortfall in next year’s state budget revenues of some EUR 650 million, based on our calculations. On such shortage the deficit would reach 4.7 percent of GDP without additional steps,” analyst with ING Bank, Eduard Hagara, elaborated. Thus, the indicator would approach this year’s projections of 4.9 percent of GDP rather then drop to 3.8 percent planned for 2012 and further below the 3-percent Maastricht criterion in 2013.
Slovenska sporitelna is a bit more optimistic but it also predicts that the deficit could increase by hundreds of millions of euros. The largest bank in Slovakia prognosticates 2012 GDP growth at 1.8 percent. A 1-percentage point slowdown would cause a deficit rise by some EUR 200-250 million. “This means that 1.8-percent growth could mean a shortfall of some EUR 320-400 million, i.e., about 0.5 percent of GDP,” SLSP analyst Michal Musak specified. Consequently, the deficit would climb to some 4.3 percent of GDP.
Regarding these prognoses, analysts question the plan to slash the deficit below 3 percent of GDP as soon as in 2013. “I see some risks that it won’t be possible to cut the deficit below 3 percent of GDP by 2013. Of course, much will depend on the attitude of the future government to consolidation and on the performance of the Slovak economy,” Musak added. Hagara provided a similar assessment regarding potential deficit increase to above levels. “Deficit reduction below 3 percent would be very unlikely,” he noted.
If Slovakia’s fiscal objectives fail, the country may see an increase in lending costs and thus, in cost of its debt service. Markets respond negatively if countries struggle to gain control over debts. However, if economic downturn is the main reason, then other EU countries will be in a similar position and the impact on interest rates could be weaker, according to Musak. Should the deficit rise because of insufficient consolidations, investors will eye more responsible states and won’t buy Slovak government bonds. This scenario would trigger growth of Slovakia’s public debt and pressures on the country’s rating, Hagara says.
On Thursday, Finance Minister Ivan Miklos admitted on air of TA3 news channel that the pace of fiscal consolidation could slow down considerably versus initial projections next year in the wake of the fall of the Iveta Radicova Cabinet. Budget gaps that may arise after the revision of macroeconomic prognoses due to economic slowdown may lead to a deficit increase. Following the government collapse and ahead of the early elections, approval of additional consolidation measures could be problematic.
The minister pledged to issue a new prognosis in early November. In late August, the Finance Ministry downgraded GDP growth outlook for 2012 to 3.4 percent. He confirmed that the following growth estimate will probably be even lower.
SITA