Slovak Republic Investor Roadshow March 2006 Martin Bruncko Chief - - PowerPoint PPT Presentation

Investor Roadshow March 2006 Martin Bruncko Chief Advisor to Minister of Finance Daniel Bytčánek Director of Debt and Liquidity Management Agency, ARDAL Tomas Kapusta Head of Debt Management, ARDAL

Slovak Republic

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Overview and Macroeconomic Policies 03 Transforming Slovakia to a Competitive Economy 13 Slovakia EMTN Programme and Bond Issue 20

Outline

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 Strong Ratings Moody‘s: A2 positive outlook S&P: A stable outlook  International EU member (2004) Integration NATO member (2004) OECD member (2000)  High GDP Growth 6.0 % in 2005, vs 1.3% for Eurozone, one of the Highest in Central Europe  Low Debt Levels General government debt is 35.2%

• f GDP (2005), compares favourably

with regional peers  Early EMU Entry Slovakia one of the first Central European sovereigns to enter EMU, expected 2009

Slovakia : Key Credit Highlights

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 Highest growth in Central Europe  Top 3 performer in the OECD  Sustained robust growth despite weak external environment  Fuelled by domestic demand  Stimulated by significant FDI  Economic growth expected to remain high

Slovakia Real GDP Growth 2005* Real GDP Growth, Peer Comparison

* Forecasts

0% 1% 2% 3% 4% 5% 6% 7% 2001 2002 2003 2004 2005 2006* 0% 1% 2% 3% 4% 5% 6% 7% Portugal Eurozone Greece Czech Slovakia

GDP Growth Remains Robust

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• 9%
• 8%
• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 2001 2002 2003 2004 2005* 2006*

 Continued fiscal prudence  One of the strongest fiscal positions in Central Europe  General government deficit is expected to be below 3.0% of GDP in 2005  2006 Budget set government deficit at 2.9% of GDP…  …within Maastricht Criteria

Slovakia General Government Deficit (% of GDP) 2005* General Gov. Deficit (% of GDP), Peer Comparison

* Forecasts Source: European Commission, spring 2005

Maastricht Criteria

• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% Slovakia Eurozone Czech Greece Portugal

Fiscal Deficit Lower Than Most Neighbours

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 Factors behind declining unemployment:  structural reforms leading to sustained economic growth  major labor market reform  more favorable demographic trends  Employment forecast to grow average rate of 1.0% annually (2006-2008)  In the European Union, Slovakia compares favorably in reduction of unemployment

Development of the Unemployment Rate, Peer Comparison Slovakia Unemployment Rate 2002 2007F Change in p.p.

Slovakia 18.7% 15.4% 

• 3.3

Czech 7.3% 7.4%  +0.1 Greece 10% 9.7% 

• 0.3

Portugal 5.1% 7.8%  +2.7 Eurozone 8.4% 8.0% 

• 0.4

* Forecast Source: European Commission, autumn 2005

0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 2001 2002 2003 2004 2005 2006*

Unemployment Exepected to Continue to Decline

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2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 2001 2002 2003 2004 2005 2006*

* Forecasts Source: National Bank of Slovakia

Total FDI Stock (US$ million) FDI Stock by Country of Origin, 09/2005

Netherlands; 21,9% Austria; 15,0% Other; 8,5% Italy; 7,2% Hungary; 7,1% UK; 6,8% Czech Republic; 5,2% USA; 4,1% France; 3,0% Other; 6,9% Germany; 19,2%

FDI Growing Steadily

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 1999 Austerity Package reined in the Current Account deficit  CA balance expected to improve in 2006 to 4,2% of GDP due to exports growth  In 2005, EU countries represented 85.4% of total exports and 71.1% of total imports of goods  Financing needs more than covered by FDI  Lowest foreign financing need in the region (to be confirmed)

Slovakia Balance of Payments Components 2005* Current Account, Peer Comparison

Source: National Bank of Slovakia * Forecast

1000 2000 3000 4000 5000 2001 2002 2003 2004 2005* 2006* Current account deficit FDI

• 10%
• 9%
• 8%
• 7%
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% Portugal Greece Slovakia Czech Eurozone

Eurozone

Balance of Payments Expected to Improve

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 Inflation fell sharply to current subdued level, despite surging oil prices...  ...and is forecast to remain broadly flat (at 3.5%)  Free float of the Koruna since 1998  Successive liberalisation of financial transactions since 2000  ERM II entry in November 2005 (1 EUR = 38.455 SKK)  ERM II standard fluctuation band of +/- 15% will be observed

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 2001 2002 2003 2004 2005 2006* Regulated prices contr. Source: National bank of Slovakia, Ministry of Finance

Slovakia CPI Inflation 2005 CPI Inflation, Peer Comparison

0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% Greece Slovak Czech Eurozone Portugal * Forecast

Monetary Policy on Course

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 Inflation targeting under ERM II conditions to continue  Fiscal criterion to be met this year  Long-term yields under reference value of Maastricht criteria  Public debt level already below Maastricht threshold  EMU Entry Expected in 2009

Fulfilment of Maastricht Criteria

Source: Ministry of Finance, European Commission, NBS, SUSR

Note: FX volatility is defined as deviation from central parity at 38.455 SKK/€ within the period from 2004-2005

%

Inflation Fiscal deficit Interest rate FX volatility Public debt

Maastricht Slovakia

16% 14% 12% 10% 8% 6% 4% 2% 0% 65% 60% 55% 50% 45% 40% 35% 30% 70%

EMU Entry in Sight

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 Since 2003, specialised Debt and Liquidity Management Agency, ARDAL, in place  Fiscal adjustment and prudent debt management stabilised public indebtedness  Successive reduction of state guarantees  One of the lowest debt burdens in the region

0% 10% 20% 30% 40% 50% 60% 2001 2002 2003 2004 2005* 2006*

Source: European Commission

Slovakia Public Debt (% of GDP) 2005* Public Debt % of GDP, Peer Comparison

Maastricht Criterion

0% 20% 40% 60% 80% 100% 120% Greece Eurozone Portugal Czech Slovakia

* Forecast

Prudent Debt Management

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Overview and Macroeconomic Policies 03 Transforming Slovakia to a Competitive Economy 13 Slovakia EMTN Programme and Bond Issue 20

Outline

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1989 2006 CENTRALLY PLANNED ECONOMY FUNCTIONING MARKET ECONOMY GOALS OF REFORMS TYPE OF REFORMS

• functioning market

economy

• high and sustainable

growth

• long-term

competitiveness

• Lisabon strategy goals
• privatizations
• price deregulations
• market institutions
• structural reforms

Long-term Fiscal Sustainability Supported by Major Structural Reforms

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 Privatisation in two stages:  2000-2001: Banking sector  2002 onwards: Utility, Transportation  Proceeds used to finance pension reform and repayment of state debt  Left to be privatised:  Book value of SKK 100bn for sale  Total portfolio contains 118 companies  Approx 65% of book value in SE (electricity) and SPP (gas)

Source: Fund of National Property

Privatisation Receipts (% of GDP)

0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 1998 1999 2000 2001 2002 2003 2004 2005

On-going Successful Privatisation Program

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Key reforms recommended by EC to relieve pressure on public financing:  Provide economic incentives to prolong working lives  Limit access to early retirement schemes  Strengthen link between contributions and entitlements  Curtail future public spending requirements by instituting more appropriate pension indexation mechanism  Spread future pensions-related risks across several pension pillars SLOVAK REFORM IMPLEMENTS ALL THESE RECOMMENDATIONS  Radical reform of 1st pillar (pay-as-you-go pillar)  Introduction of the 2nd pillar (private pension accounts invested in capital markets)  Improving the regulatory environment for efficient functioning of the 3rd pillar

Pension Reform : Well Funded

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Radical simplification of the tax system  elimination of virtually all exceptions, exemptions, deductions, special rates, and special regimes  elimination of dividend, inheritance, gift taxes, and real estate transfer tax Introduction of low nominal rates  19% flat individual income tax  19% corporate tax  19% unified VAT on all goods and services - without any exceptions Shift from direct to indirect taxes

Slovakia has one of the lowest corporate and effective tax rates in EU

Introduction of Flat Rate Tax

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No decrease in tax revenues  Increased revenues from indirect taxes  Less scope for tax evasion and tax avoidance  More motivation to pay taxes Better incentives for investment and work  Lower marginal rates  More transparent and equitable taxation

The Slovak Tax Reform : Results

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Health-Care  System financially self-sustainable  Improved quality of services provided Education  Improved efficiency and quality of secondary education system  Increased capacity and quality of tertiary education Public Administration  Improved quality of public services  Continued de-centralisation of public administration

Further Key Structural Reforms

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Overview and Macroeconomic Policies 03 Transforming Slovakia to a Competitive Economy 13 Slovakia EMTN Programme and Bond Issue 20

Outline

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• 6
• 4
• 2

2 4 6 8 10 12 14 16 J F M A M J J A S O N D J F M

Slovak 201 4 Czech 201 4 Czech 2020 Greece 201 6 Portugal 201 5

(bps)

703.2 698.2 262.5 172.0 158.3 151.6 105.8 0.1 0.6 1.5 1.7 1.8 2.5 2.6 5.8 16.6 19.6 734.7 8.2 8.6 55.8 67.6

100 200 300 400 500 600 700 800 Italy France Germany Spain Belgium Greece Netherlands Austria Portugal Finland Ireland Poland Hungary Denmark Sweden Lithuania Czech Slovenia Cyprus Slovak Latvia Estonia

EUR (bn)

Source: Dealogic Bondware

Historical Spreads vs Swaps (2005 to date) Outstanding Debt (EUR Billions), EU Comparison

 One of the highest rated credits in Central Europe  Strong performance of Slovakia eurobonds  Planned issue represents the only foray to EUR markets in 2006

A Strong Credit Offering Scarcity and Diversification

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EMTN Programme  Size EUR 2bn  Joint Arrangers BNP Paribas, Lehman Brothers Eurobond Issue Details  Borrower Slovak Republic  Rating Apositive outlook (Moody’s), Astable outlook (S&P), Astable outlook (Fitch)  Currency EUR  Size 1bn  Maturity 15-years  Listing London Stock Exchange  Roadshow 20th/21st March 2006  Launch and Pricing 22nd March 2006  Joint Bookrunners BNP Paribas, Lehman Brothers

EMTN Programme and Inaugural Transaction Review

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Ministry of Finance  Ivan Mikloš Minister of Finance, Deputy Prime Minister  Vladimír Tvaroška State Secretary  Martin Bruncko Chief Advisor to Minister Debt and Liquidity Management Agency (ARDAL)  Daniel Bytčánek Director, ARDAL  Tomas Kapusta Head of Debt Management Department, ARDAL

Finance Ministry and ARDAL Contacts