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Slovakia: Fewer castles, more opportunity Casey Research 6 February 2008 There are several ways to invest in the Slovak real estate market – what we think will be a coming boom. One way to play the property market is to simply buy a flat in either Bratislava or any of the growing second-tier cities. Foreigners cannot own property in their name, but they can own a Slovak corporation, which can own the property. Estimated fees for incorporating a company are roughly 750 euros. Real estate prices in the capital Bratislava are approaching those of Western European cities, but in the second-tier cities like Zilinia, Banska Bystrica and Kosice, apartments and houses are very inexpensive and loaded with charm. You can still buy a two- to three-bedroom apartment in a classic late-19th, early-20th century building in the cobble-stoned downtown of Banska Bystrica for under US$200,000. It feels very much like Salzburg or Munich in these downtowns, with live music playing every night in the myriad cafés and restaurants. Major multinational companies are gravitating to Slovakia because of its low production and labor costs, strong government support, highly educated labor force, and strategic location. The country has recently won over two big investors – PSA Peugeot-Citroën and Hyundai-Kia – and is ready for more. Recent IMF and OECD reports laud the Slovak economy and rate it third-highest in business climate within the EU, just behind Ireland and the UK. According to the major rating agencies, Slovakia's credit fundamentals have improved considerably over the past few years, as booming exports have slashed the current account deficit while the government has made significant progress in implementing public finance reforms and cutting the budgetdeficit.
We like Slovakia because their federal government allows the local and regional governments to make most of the important economic decisions. Like Switzerland’s Cantons, Slovakia’s eight self-governing regions can negotiate directly with businesses for tax breaks, abatements and investment incentives. The government has succeeded in privatizing most of the previously state-owned firms, a prominent example being US Steel’s purchase of a large steel plant in the eastern region of the country. After winning re-election in 2002, the center-right government implemented ambitious reforms in the tax system, including the previously mentioned flat corporate and individual tax, and abolishing taxes on dividends, while maintaining a relatively low budget deficit. The government has also fundamentally reformed health care, social security, pension systems, and labor laws.
Global economies: Slovakia New York Times 29 January, 2008 Managing to shake off a lethargy that lasted throughout the 1990s, Slovakia is transforming its economy into a central European star. This is the country where optimism has taken root. A winter stroll on the banks of the Danube in Bratislava can be transporting. Catch a silent bus that runs on natural gas and listen to people’s heels as they click over the cobblestones in Old Town. In the alleys behind St Martin’s Cathedral you will find echoes of Vienna, which is only 64 kilometers (40 miles) away. Such are the pleasures of life in this corner of central Europe. But behind the serenity of its façade lies an edifying fact: income per capita here is at 138% of the EU average. It is no small accomplishment for a city in a country, the Slovak Republic, which was rudderless for much of the 1990s. Starting with its famous 19% flat tax rate and its no-nonsense reforms, Slovakia has managed a turnaround. Real GDP in 2007 grew 8.8%, with inflation set to drop to 2% this year. “Slovaks have had their own state for only 16 years. And over that short period we have made it internationally,” says Ivan Gasparovic, the President of Slovakia. The aggressive reforms implemented as of 1998 forced companies to reorient their output and many farmers to go out of business. But by the time Slovakia joined the EU in May 2004, the economy was again buoyant. Minister of Foreign Affairs Jan Kubis says that statistics show Slovakia is today one of the most Euro-optimistic countries in the Union. For Jake Slegers, the president of the American Chamber of Commerce, what really turned the Slovak psyche around was the Ice Hockey World Championship of 2002. “It was the one thing that totally united the country and changed the attitude of the people, from defeatist to optimist. It gave Slovaks a can-do ethos,” says Slegers. Today, Slovakia is a member of NATO and will enter the Euro-Zone in January 2009. It is also the 36th economy in the world for ease of doing business. It is still a prime target for automotive investment – assembly lines here produce fixings and moulds for Volkswagen, KIA and Peugeot. Climbing up the value chain, local firms are now sought for their quality testing. The new left-leaning government is continuing the previous cabinet’s pro-business agenda. Asked where the opportunities lie in 2008, officials here will counter with ‘everywhere’. Winter sports and spa tourism have taken root in the High Tatras range, bordering Poland. In the industrial self-governing region of Kosice, the focus is on mechanical engineering and high-end steel. Slide your finger in a westerly direction, past limestone fortresses and rococo castles, and you will end up in knowledge-based territory – the source of future wealth. “The knowledge-based society is a long-term project for which the results will be visible in 10-12 years. That is why it is a challenge to sell,” says Deputy Prime Minister Dusan Caplovic. It is difficult to convince constituents about prioritizing SMEs with a knowledge component. And yet, more than a third of the 11 billion euros that Slovakia will receive through 2013 in EU structural funds will target innovative projects. Often in the shadow of large foreign investors, SMEs in specialized niches are the real agents of transformational change for this country of 5.5 million. The synergies are already visible in the masterplan for Eurovalley, an R&D center. Recently, the government signed a deal with Samsung LCD to transfer part of its R&D facilities to the town of Trnava. This will attract new SMEs, in turn creating a multiplier effect. “Nowadays, thanks to KIA and Samsung, there’s an increasing awareness of the tandem between Slovakia and Korea,” says Yong Kyu Park, the Ambassador of Korea. The 320 million euro investment by Samsung LCD will put Trnava on the global map for decades, enhancing Slovakia’s overall competitiveness.
Foreign investment in Slovakia doubles in 2007 Dow Jones Newswire 17 January, 2008 Foreign investment in Slovakia doubled in 2007 to EUR1.28 billion, Sario, the investment promotion agency, said Thursday.
End of passport control as East meets West without borders Kate Connolly The Guardian 21 December 2007 The Schengen agreement set up by the EU to create a Europe without borders, was signed 22 years ago in a Luxembourg village of the same name and enacted for the first time 12 years ago. Nine new countries will today join the Schengen zone, marking the end for most of them of their transition from Soviet satellites to full members of the EU. They include Poland, Czech Republic, Slovakia, Hungary, Latvia, Lithuania, Estonia and Slovenia. Malta is the ninth and the only non-former communist country. Germany is home to the biggest share of the new Schengen border with 779 miles, 275 of which are with Poland and 504 with the Czech Republic. Stankowska, a 29-year-old marketing consultant who set up business in Frankfurt four years ago, said she hoped it would be the last time she would have to show her passport at the border and "for old times' sake" would ask the guard for a final souvenir stamp. "It's symbolic," she said. "I've felt like a normal citizen of the EU since [Poland] joined in 2004, and I've travelled across the continent without needing a visa, but this is still a historic day, which I hope to tell my grandchildren about some day." As from today, Stankowska and millions of other citizens of eastern Europe will become part of a club of 400 million who are able to enjoy moving across the EU without a passport, from the Baltic Sea to the Atlantic coast in southern Portugal.
End of passport control as East meets West without borders Kate Connolly The Guardian 21 December 2007 The Schengen agreement set up by the EU to create a Europe without borders, was signed 22 years ago in a Luxembourg village of the same name and enacted for the first time 12 years ago. Nine new countries will today join the Schengen zone, marking the end for most of them of their transition from Soviet satellites to full members of the EU. They include Poland, Czech Republic, Slovakia, Hungary, Latvia, Lithuania, Estonia and Slovenia. Malta is the ninth and the only non-former communist country. Germany is home to the biggest share of the new Schengen border with 779 miles, 275 of which are with Poland and 504 with the Czech Republic. Stankowska, a 29-year-old marketing consultant who set up business in Frankfurt four years ago, said she hoped it would be the last time she would have to show her passport at the border and "for old times' sake" would ask the guard for a final souvenir stamp. "It's symbolic," she said. "I've felt like a normal citizen of the EU since [Poland] joined in 2004, and I've travelled across the continent without needing a visa, but this is still a historic day, which I hope to tell my grandchildren about some day." As from today, Stankowska and millions of other citizens of eastern Europe will become part of a club of 400 million who are able to enjoy moving across the EU without a passport, from the Baltic Sea to the Atlantic coast in southern Portugal.
Slovaks flock to Peugeot plant Rob Cameron BBC correspondent in Trnava, Slovakia 22 April 2006
While Coventry grieves over the departure of Peugeot, the town of Trnava in central Slovakia is being transformed by the presence of a huge Peugeot assembly plant. The move is further evidence of the seemingly irrevocable shift of Europe's auto industry from west to east, and also seals Slovakia's reputation as its new car-making centre.
At Trnava's Technical School, teenage boys are being taught how to assemble passenger cars. There's little doubt where their working life will begin. Push open the school's heavy wooden doors and venture inside, and the first sight that greets the visitor is a brand new Peugeot 207, parked incongruously at the foot of the stairs.
Peugeot training centre
To the left are corridors with peeling paintwork and faded school photos dating back to the 1960s. To the right are the gleaming doors of the "Peugeot Training Centre". The company is taking local recruitment so seriously, they've taken over an entire wing of the school. At present it's open only to Peugeot employees. From 2008, however, pupils at the school will begin passing through those doors, to learn the latest car assembly technology. "My dream job is to be a racing driver - or a test driver," says 17-year-old student Martin. "I'm thinking of going to Peugeot. But only as a test driver. I wouldn't do just anything."
His friend Juraj, originally from Kosice in east Slovakia, is still considering his future. "Originally I wanted to be an ice hockey player," he says. "But I'm not ruling out a job with Peugeot. I'm still a bit young to decide of course. But it could be good."
Greenfield site
Last week, Peugeot announced it was to close its car plant at Ryton near Coventry, in England, in 2007 - with the loss of 2,300 jobs.
In Slovakia, Peugeot have built a colossal, state-of-the-art assembly plant on a greenfield site on the outskirts of Trnava. Located on a newly built stretch of motorway 30 kilometres from the capital Bratislava, the setting is ideal.
The first Slovak-made Peugeot 207s will roll off the assembly line in the autumn. When the plant reaches full strength, it will produce 450,000 cars each year. By 2010, says the company, 60% of all Peugeot 207s will be made in Trnava.
It's not hard to see why Peugeot are moving east. Slovakia's workforce is well-trained and highly motivated. The Slovak government has provided tax breaks worth millions of euros. Trnava provides good access to Peugeot's European markets.
But the real reason is simple economics. Despite record levels of foreign investment, Slovak wages still languish far below the European average. Volkswagen, for example, builds cars in Bratislava - and pays its workers around a fifth of what they would earn in Germany.
European manufacturing centre
It's an equation which is rapidly turning Slovakia into the centre of the European car industry. By the time Peugeot's Trnava plant is fully online, Slovakia will be making more cars per person than anywhere else in Europe. With national unemployment running at 12 percent, Peugeot is having no trouble filling vacancies. Two thousand people have already been recruited for the Trnava plant. The company will employ a total of 3,500.
Many others will find work in local service industries. "It's a great possibility for the students here," says Renata Olexova, an English teacher at Trnava Technical School. "They have a lot of work opportunities here and they can improve themselves. They can go abroad and meet a lot of people. It's a good chance for them."
No illusions
But while most of Trnava's 70,000 inhabitants welcome Peugeot's 350 million euro investment, they have no illusions about the fickleness of the global car industry. "I know how the auto industry works," says Martin Bacita, an engineering student in his fourth year at Trnava University. "That's the car industry. It moves from country to country. They're here today, they might not be here in five years," he added. "But I'm young, and I can deal with it."
Globalisation produces winners and losers. The breezy optimism of Trnava, tempered by a realistic view of global economics, is in stark contrast to the anger and bitterness now being felt in Coventry.
Slovakia speeds up Euro move International Herald Tribune November 28th 2005 Slovakia will begin its test run for joining the euro on Monday after a surprise move over the weekend to join the EU's exchange-rate mechanism earlier than expected.
Slovakia became the seventh of the European Union's newest members to move closer to adopting the euro by establishing formal links with the common currency, a move the central bank said it hoped would keep the koruna stable. The European Union said in Brussels that it had admitted Slovakia to its exchange-rate mechanism effective Monday. The Slovak koruna will be pegged at 38.4550 to the euro under the system, compared with a close Friday of 38.47 koruny to the euro.
The peg starts a test of currency stability before euro adoption, which Slovakia is aiming to achieve in 2009. The government chose to enter the exchange-rate mechanism earlier than the original plan for the first half of 2006 to make the koruna less vulnerable to movements in other East European currencies, the central bank said.
"The 2009 target is still in place, but we view the entry to the mechanism as another way of how to ensure the stability of the exchange rate," the central bank's governor, Ivan Sramko, said during a news conference in Bratislava, the Slovak capital, on Saturday.
The mechanism, one of five tests for would-be euro members, requires each country to keep its currency within 15 percent of a central rate to the euro for two years without devaluing.
Estonia, Lithuania and Slovenia entered the mechanism last year. Latvia, Cyprus and Malta joined this year. All six countries, which entered the EU in May 2004 and expanded the group to 25 countries, plan to adopt the euro as early as 2007.
The three largest newcomers, Poland, the Czech Republic and Hungary, remain outside the exchange-rate agreement.
The koruna has lost 2.6 percent of its value against the euro since March 9, when the euro bought 37.51 koruny. Analysts now expect the koruna to strengthen.
"The currency has a potential to rise by between 5 and 10 percent in the next two years," said Juraj Kotian, an economist at Slovenska Sporitelna, the largest bank in Slovakia.
Slovakia's economy grew 6.2 percent in the third quarter, continuing a trend of solid growth that has prompted the central bank to blame the currency's weakening on developments in the other East European countries. The country's finance minister, Ivan Miklos, said the need to "isolate" the koruna from the region was an important factor in the decision about the timing of the peg.
Slovakia's economy enjoys EU boom Slovakia has been attracting investment from big business, day trippers, and stag night revellers since joining the EU last year. The cobbled streets and fountain-lined squares of Bratislava's old town have always charmed the tourists. But now Slovakia's capital is gleaming with foreign investment. It has become the eastern European darling of the multinationals - and foreign investment is expected to total about £1.5bn (2.2bn euros) this year, twice the amount attracted in 2004. According to the World Bank, Slovakia had the fastest transforming business environment in the world last year, and already comparisons are being drawn with Ireland's economic transformation in the 1990s. Low labour costs, low taxes and political stability make this one of the most attractive economies in Europe. Flexibility Last year, the government replaced its income, corporate and sales tax with a 19% flat tax rate which is now eyed enviously by some Western countries like Austria and Germany. "Investors are not very sophisticated, they are attracted by positive examples," says Eugen Jurzyca, from the Centre for Economic Development. "They see that Slovakia is well placed geographically. But I think it's the government's reform of the labour code as well that makes this an attractive place to be. It's much more flexible than western Europe, hiring and firing is easier, and it's easier to work longer hours." The biggest investments in Slovakia have been in car plants. Fifty km outside Bratislava, a vast car manufacturing plant for Peugeot-Citroen has sprung up in less than a year. Huge flat-roofed white buildings now cover an area that used to be grassy countryside. The diggers are still hard at work, but soon Peugeot-Citroen, Kia Motors, Ford Motor and Hyundai will be manufacturing cars alongside Volkswagen. In less than two years, Slovakia is expected to produce more cars per head than any other country in the world - and it's not just car manufacturers who are coming to the country. "Professionally, I came here about a year ago - I'd never even heard of Slovakia before," says American property developer Eric Assimakopoulos. Future investment His office is decorated with photographs of the rich and famous who have stayed in the upmarket hotel he bought in the city centre. "George Bush stayed here, and his father too," he laughs. "The White House took over the whole lot. "We did an analysis of Slovakia and the fundamentals of this market were much better than others. Firstly, it's quite small and its location near Austria is perfect. I'm thinking ahead of the EU game - maybe Romania and Hungary, even the Ukraine would be good for investments next." But there is little of this kind of investment outside the capital. The east of Slovakia is still frustrated by poor infrastructure and unemployment reaching 20%. Even in Bratislava, there is limited enthusiasm for the nation's new economic stardom. "Not much has changed for me," says Petra, 20. "I guess it's easier to travel and get credit cards, but that's about it. Oh yes... we have some nice EU flags on our buildings now!" "I think the real change will be when we join the Euro," says Nadia, 25, a banker. "Until then we won't be considered as equal to other EU countries in the West." Contributions Western European visitors to Bratislava seem more impressed. There are Austrians getting hair cuts in salons here, making a quick day's shopping trip over the border. "We have lots of clients on our books now," says Annette, the manager of a new salon. "It's a bit cheaper here for them." And it seems that Bratislava is now on the map for the British stag night. "This is much better than Prague," says Tony Jeffreys, from Suffolk. "We hadn't really thought of it before, but it's now easy to get here, and it's part of the EU, isn't it?" Slovakia, along with the other new EU members, contributes just 4% towards the EU's economy. Experts predict that this will grow as more investors start looking eastwards.
GDP growth 5.1% in first half of 2005 THE SLOVAK economy grew by 5.1 percent year-on-year in the second quarter of 2005, with a gross domestic product of Sk357.6 billion (€9.3bn), the TASR news agency wrote, based on information released on September 9, 2005 by Slovakia’s Statistics Office (ŠÚ). The GDP for the first half of 2005 stood at Sk690.2 billion (€17.9 billion), and was also up by 5.1 percent year-on-year. Positive results were also reported in areas such as unemployment and wages. According to the ŠÚ, unemployment decreased by 2 percent year-on-year to 16.9 percent in the first half of 2005. The employment rate increased 2.2 percent to 2.187 million people. Nominal monthly wages increased by 8.2 percent year-on-year in the second quarter of 2005 to reach Sk16,737 (€435), while real salaries were up 5.6 percent. In the first half of 2005, monthly nominal salaries in Slovakia rose by an average of 9.1 percent to Sk16,381. Real salaries were up 6.2 percent year-on-year.
Slovakia Leading the Pack German investors prefer east Europe to west, with Slovakia leading the region, according to a German chambers of commerce survey. The German-Hungarian chamber of commerce reported that 90% of companies surveyed expect "either flat or rising investment activity" in Slovakia. The CEE state has successfully wooed foreign investors with its business-friendly 19% flat tax regime, flexible labour market and reputation for fiscal austerity. This reputation has been borne out by the latest budget figures showing a SKK6.4bn surplus over January-April. In the survey, the Czech Republic comes second to Slovakia, with Poland and Hungary following behind. Romania's business environment is also regarded by German companies and investors as being almost as attractive as that of Poland or Hungary, following the election of a centrist, pro-reform administration. In addition, Bulgaria, Ukraine and Croatia are seen as more desirable investment locations than EU members Austria and Germany. According to the survey, Hungary is losing favour with investors, with companies located there anticipating a 12% rise in profits this year, down from expectations of a 20% increase in 2004. Investor confidence in the CEE state has been undermined by repeated budget deficit target overshoots, high taxes relative for the region and large bureaucracy.
UK's Investment Regime is no Longer Leader of The Pack Gordon Brown walked into a recent meeting of EU finance ministers insisting “we believe that tax competition is the best way forward”. Using taxation to make Britain a more attractive place to invest has been the policy of all British chancellors for the past 20 years. Having been among the leaders, however, the UK is being overtaken. It has fallen out of the top ten in international competitiveness studies and is in danger of rejoining the pack. The days are long gone when leading British companies queued to leave the country to avoid punitively high tax rates and a regime notoriously unfriendly to companies relying on foreign earnings. The reform of corporation tax set in train in 1984 allowed the main rate to be cut from 54 per cent to 35 per cent and today's 30 per cent. Rules that sent multinationals to Amsterdam and other centres were softened and the Treasury listened to calls to align taxation of key sectors better with the way their businesses operated. Top rates of UK income tax were heavily cut, foreign expatriates — needed to make the City a top world financial centre — were treated sympathetically, and favourable arrangements were often allowed to rich foreign individuals who chose to locate here. This change of heart, along with wider economic reforms and the English language, helped to make the UK Europe’s leading destination for foreign direct investment. Eurozone countries preferred to invest in Britain. It was even claimed that the UK had become a tax haven. That position has progressively come under attack from two directions. Pressures to raise tax rates or tighten tax rules have grown, both at home and abroad. So has competition from other countries keen to emulate the UK approach, starting more than a decade ago with Ireland adopting a 12.5 per cent company tax rate. Making the rich pay more tax is always a good political slogan, especially if they pay less than ordinary people and the revenue can be allocated to specific popular causes. Ireland’s low company tax rate boosted revenue sixfold in a decade but now there are calls for higher rates to help redistribute wealth. Measures to protect tax revenue by closing loopholes for avoidance have so far proved a greater threat. The combination of rising public spending programmes and political resistance to higher tax rates puts pressure on the new combined Revenue & Customs to squeeze as much as possible from existing taxes. Unless elections cut them short, Finance Acts typically contain hundreds of pages that are mostly designed to close loopholes. Some are intended to raise tax bills. Others, especially when not subject to consultation in advance, have unintended consequences that make life harder for multinationals, for whom tax planning is almost a profit centre in its own right. This can work both ways. Arrangements to encourage film-making in Britain proved so costly that they were withdrawn in favour of more modest incentives. Stamp duty on UK share transactions, a British rarity, presents a typical quandary. Use of financial derivatives such as contracts for difference has made the tax voluntary for the global investment banks that choose to base operations in the UK. So revenue is in decline and the tax has become unfair for small investors. But if the Treasury took action to protect the revenue, it could drive trade offshore or to rival continental centres. Most of the official pressure from the EU is to harmonise rates upwards, but the reality is that tax competition is dragging company tax rates downwards across Europe. Most of the EU member states from Central and Eastern Europe are seeking to emulate the lower tax rates and higher growth rates shown by Ireland and, more modestly, Britain. Slovakia’s 19 per cent tax rate and accommodating regime is turning it into the world’s biggest per capita car manufacturer. Poland, in response, has decided to move towards an 18 per cent flat rate tax, not just for companies. Further east, Russia and Romania have opted for even lower tax rates to combat mass evasion. Such low rates do present a direct threat to investment in the UK but not necessarily a big one. Danuta Hubner, Poland’s EU Commissioner, asks: “Why should foreign investors come if they do not get tax benefits to compensate for bad telephone lines and pitted roads?” But high-tax Western Europe is having to respond. German corporation tax is to start at 19 per cent, the UK’s small company rate, and Austria is moving its main rate to 25 per cent. The UK may need to at least match that if investment in Britain is not to become a loser from tax competition.
Freedom and the EU in Slovakia A YEAR after entering the EU, it is clear that Slovakia has become more economically successful because of it, and possibly even gained some cultural benefits. There has been wide international acceptance of Slovakia as a small but equal country in the EU, which has allowed investors to evaluate Slovakia with respect to economic considerations. The internationally trumpeted flat tax rate (of 19 percent) has been a significant factor in increasing investor interest in Slovakia, as well as making all the Slovak reforms more noticed. The high value of Slovak workers, both knowledge workers and manufacturing workers, has been increasingly recognized. This value is based on good to very good quality of work, fairly easy training, and low wages. Good quality work for a lower wage is what employers look for to increase their own return on capital (ROC). A good measure of ROC would likely be in the automotive sector. Comparisons across Europe with Germany, France, Spain, the UK (Rover ending?), Sweden and the Czech Republic puts Slovakia in a good position. In comparing productivity as cars per worker per year, Slovakia seems to perform quite well; in calculating productivity as labour cost per car, Slovakia is one of the best. Labour cost per unit is the important productivity measure for manufacturing, even as the world shifts to custom-made mass manufacturing. Unfortunately, Slovakia has not been as successful at either investment or export promotion as it could be, or as the Czech Republic has been. This was due to many issues , though it seems that Slovakia is now moving forward with almost as much speed as the Czechs, although we will have to move faster to catch up. Thanks to the reforms of the government like the flat tax, Slovakia's gross domestic product (GDP) is growing well. GDP growth is the key variable to watch - and Slovakia IS catching up. The Wall Street Journal and Heritage Foundation put out a large Index of Economic Freedom for all the countries of the world. In 2004, Slovakia ranked 36, "mostly free", with a score of 2.43 (1 best, 5 worst) based on 10 items. Each of these shows an EU influence (and the Slovak score for that item will be noted in parentheses; sometimes my comments are not in sync with the scores): Trade policy (3.0) - the EU has made it easier to buy and sell inside the market, but this ease has often been compromised by new and onerous regulations controlling products and labeling, and requiring expensive tracking capabilities. Fiscal burden of government (1.8) - with support of the EU Maastricht Treaty as a guide and goal, the centre-right politicians have greatly reduced the tax burden; the 19 percent flat tax is good here. Relative to a populist desire for government programmes to solve every problem, this is excellent. Government intervention in the economy (2.0) - has been modified in the EU to be more efficient in many areas, rather than going down. Grain subsidies, like the Common Agriculture Policy, are a drain on the treasury and disrupt the trade policy. The availability of "free money" from various EU programmes has made grant writing almost an occupation by itself, and has certainly diverted a lot of brain power away from other productive uses. Monetary policy (3.0) - joining the euro zone is the most important and advantageous step for Slovakia's monetary policy, though over the prior ten years inflation has only been fair. A stable and predictable monetary value is a huge long-term benefit to the economy, despite the loss of potential advantage in retaining such control domestically. Accepting multiple currencies as legal tender also seems unrealistic, although many stores already accept euros as well as crowns. Capital flows and foreign investment (2.0) - have certainly increased with EU membership, although the huge US Steel investment was done long ago. The reforms have made such inflows easier, and more mutually beneficial. Of course there's no way of knowing for sure how much investment there would have been without the "EU seal of approval", but there certainly would have been less. Banking and finance (1.0) - the EU, and the whole financial industry, is struggling with Basel II and new International Financial Reporting Standards (IFRS) . While the new Slovak regulations are not so far from IFR Standards, there are important detail differences, which must be incorporated in the accounting practices. On the more macro-economic issues of providing loans, the practice continues of giving a loan officer a kickback after receiving a loan. Not always, and even perhaps not usually, but still far too frequently. Mortgages are big and getting bigger - big consumer loans with fine collateral in a Slovak real estate market that is taking off. Wages and prices (2.0) - remain mixed, with big ticket import items usually costing world market price, and local, poor distribution areas sometimes costing more, but more often costing less. Wages are way below world wages, implicitly subsidized by the prior Communist housing. With a still high 17 percent unemployment rate, the wages are not going up as fast in Slovakia as in surrounding countries. Property rights (3.0) - are strong and the EU hasn't seemed to make much impact, except the push to allow EU citizens to buy land. The Land Registries are computerizing and the ability of banks to use houses and flats as collateral has hugely increased. Intellectual Property is copied at rates similar to other EU countries. Regulation (3.0) - more regulation and bureaucracy is almost certainly negative due to too many EU attempts at controlling, monitoring, and requiring permits for everything. On the other hand, relative to only a few years ago, the efficiency of the Slovak bureaucrats has hugely increased, most likely because of better access to information technology. Informal market activity (3.5) - there continues to be fairly high demand for a cash economy with no paper trail. The small increase in transparency from joining the EU has almost certainly been overshadowed by the increase in paper requirements, and therefore the increase in convenience of some by not tracking the paper. While the lower tax rates should reduce tax avoidance desires, it seems the loyalty and friendship with business partners is continuing to provide reasons to pay cash. Slovakia has been constantly improving its Freedom score since 2001: 2.85, 2.76, 2.71, 2.44, 2.43. A much bigger jump than joining the EU in 2004 actually came the year before, in 2003, as the reforms were pushed "in order to join" the EU. Tom Grey has been a senior fellow/advisor to the Hayek Foundation and the Slovak free market movement since he came to Slovakia in 1991 as a government advisor.
Bratislava is a great place to buy - once you find it! Bratislava is the new Prague, and Irish people would love it if they knew where it was, says Derek Scally. Many who do are investing in apartments costing from around €35,000 that offer decent returns Bratislava is everything Prague isn't. While the Czech capital's city centre is a noisy, dynamic and dirty place, the Slovak capital is a quiet, clean, pleasant city. The 1993 dissolution of Czechoslovakia left Bratislava somewhat in the shadow of its larger brother to the north. But in hindsight, that may not have been a bad thing, considering present-day Prague's souvenir shop scars of mass tourism. The flourishing city on the Danube, long an insider tip, is finally emerging on the radar of tourists and investors alike. The property market here is smaller than in other central European cities like Budapest or Warsaw, but rising prices and a decent supply of new developments mean it's a good time to get on board. The Irish are the largest foreign investors in Bratislava, mostly due to the presence of Ballymore Properties, Sean Mulryan's development company. which is the driving force behind Eurovea, which it calls central Europe's largest mixed-use riverside development. The ambitious scheme will essentially give Bratislava an entirely new urban district - and a main shopping street the city lacks - with over 200,000 sq m (2.15m sq ft) of office, retail and apartment space. However the interest from Irish private investors in the residential market has been modest though agents say things have picked up significantly since the start of the year. "A lot of that is down to Irish ignorance. Lots of people don't know where Bratislava or even Slovakia is. They confuse it with Slovenia," says Billy Norton, founder of the Norco property agency. "But a lot of interest has moved down from Prague because property prices there have risen so much." Slovakia has a population of five million and is sandwiched in central Europe with five borders to the Czech Republic, Austria, Hungary and Ukraine. Bratislava, once the capital of the Ottoman Empire, has a population of 450,000 and is 30 miles, or an hour on the train, from Vienna - closer than Navan to Dublin. By the time the long-awaited intercity motorway opens in 2007, the commuting time for motorists will drop to just 40 minutes. There are no direct flights from Dublin but the city is served by low-cost airlines Easyjet and Slovakia's own SkyEurope. Slovakia spent much of the 1990s in political isolation thanks to the despotic prime minister Vladimir Meciar, whose openly corrupt privatisation drive and regular nationalistic outbursts alienated EU, NATO and the US. But the present centre-right government of Prime Minister Mikulá Dzurinda has pushed through necessary, if unpopular reforms, and last year lead the country into NATO and the EU. Slovakia has had a strong economic performance of late, with 5.5 per cent growth last year and forecast 5.8 per cent growth this year. Slovaks are among the lowest paid people in Europe with an average monthly income of around €500 a month. But the arrival of large multinationals in Bratislava has brought with it a growing expat community. "The rental market is very strong. All the properties we manage are fully rented and we deal with a circle of businesses which are looking to rent all the time," says Norton. "At the moment we are getting investors 8 per cent yield, sometimes 9 per cent." Properties sell within days of coming on the market in Bratislava. Apartments on Norco's books at the moment include a 34 sq m (365 sq ft) apartment for SKK1,300,000 (€35,000) up to a 100 sq m (1m sq ft) apartment for SKK 4 million (€104,000). Norco concentrates on apartments in the so-called "golden triangle" of the old town, saying that newer developments further out are less attractive. But Mayoman Pat Loftus, founder of the Slovak Real Estate Agency, is of another opinion. "Everyone wants to buy in the old town and there is a premium already. It's not impossible but it's a lot of work to find something reasonable at a reasonable price," he says. "Of course it's a trophy, but it's like Ireland where people didn't make less money by investing in the suburbs rather than in Temple Bar." Until recently Bratislava suffered from a shortage of apartments and developers were selling apartments from the plans by word of mouth. New developments have changed the market so that it's easier to find an apartment; however the days of 20 per cent annual property appreciation are also in the past. There's no stamp duty in Slovakia and apart from lawyer's fee of around €500, there are no hidden charges, says Loftus. Still, he says Bratislava is not necessarily the best place for first-time investors or investors looking for a quick return. "The people buying at the moment are more educated investors; 80-90 per cent are accountants or bank managers. For someone without a second property in Ireland it's too much of a jump," he says. "I wouldn't pay too much attention to talk of yields either. Capital appreciation would make me more excited than the rental returns. If the rent comes close to meeting interest you should be happy." Loftus is currently selling apartments in Axton, a new development due for completion in October in the Ruzinov area close to the old town. The development offers one- and two-bedroom apartments from 60-80 sq m (645-861 sq ft), with prices starting at €93,000 and €105,000 respectively. The apartments have a good quality finish including a tiled bathroom and video security phones but no fitted kitchen. The company website offers an excellent interface allowing browsers to explore the development floor by floor, apartment by apartment. The development is located next to a new business park with a large number of foreign companies. "I would be aiming to rent these apartments out to expats, as well as Slovak bank managers and company directors for anything from €400 to €600 a month," says Loftus, who is currently negotiating exclusive deals on other new developments. Irish agents say that when it comes to investing, cash is king in Bratislava, but special foreign investor mortgages with 4.5 per cent interest rates are available from banks such as Bank Austria-owned HVB.
There is a Reason Companies Keep Setting up Shop in Slovakia Insiders agree that the most important benefits of doing business in Slovakia are the low cost yet highly skilled labour force; a favourable 19-percent tax rate; and relatively low real estate prices with the added bonus of zero real estate transfer tax. But that's not all foreign investors are taking advantage of. Additionally, Slovakia's high unemployment rate easily accommodates the need for labour, which is generated by significant foreign direct investments (FDI). And the strategic central location of Slovakia in Central Europe with gateways to both the developed economies of Western Europe and the awakening economy of Ukraine is another draw. Furthermore, Slovakia has a strong industrial background, a crucial feature for certain types of manufacturing. So far, Slovakia has lured investments in manufacturing, the automotive sector, and call and service centres. In contrast to the Far East, which has unbeatable production costs for low-margin, low-tech products, Slovakia is suited to engineering centres. The country's large number of skilled labourers, machinists and engineers as well as a strong tradition in machinery ensures that value-added products can be built at a reasonable price. The availability of a skilled bilingual staff, the low cost of employment, tax incentives and ample quality office space has resulted in the development of call, outsourcing, administration and group service centres in Slovakia. Steve Gawronski and Stanislav Rusinko are tax partner and FDI manager, respectively, from Deloitte. They say that Slovakia has managed to position itself favourably by building up a critical mass of companies in a specific sector, which attracts other foreign companies in the same sector. According to them, Slovakia's automotive and electronics industries are surging ahead because of this. Clare Moger, senior tax manager, and Michaela Gábiková, tax consultant, both from PricewaterhouseCoopers, emphasize the corporate benefits of Slovakia's tax reforms. "In addition to the advantageous tax rate, dividends are not subject to Slovak tax. Corporate tax losses can be deducted without any significant limitations and tax-non-deductible items have been significantly reduced. Furthermore, there are thresholds for social insurance contributions in Slovakia, which is not the case in most European countries." The PricewaterhouseCoopers experts say that all of this makes Slovakia a popular location for investors. "Nevertheless, each potential investor should take various aspects into consideration. As well as tax matters, investors should also consider labour costs and availability, potential suppliers, the proximity of potential markets to the planned investment, and transport links." Mark Davidson, senior tax consultant with Ernst & Young, thinks Slovakia still has many investment and business opportunities left to exploit, compared with the more static and saturated markets in the EU-15. Davidson highlighted Slovakia as an investor-friendly business environment, mentioning the "the world's top reformer" status given to Slovakia by the World Bank in its "Doing Business in 2005 report". Apart from business benefits available to all foreign investors coming to Slovakia, special state assistance packages are available. These include corporate tax credits for up to 10 years and grants for retraining employees or employing those registered as unemployed at local labour offices. "The government may also help indirectly by providing funds to help obtain the desired plot and build the required infrastructure [electricity, gas or water connections]. In some cases, it may even be possible to negotiate the purchase or lease of a manufacturing site at a discount with a local municipality," added PricewaterhouseCoopers' Moger and Gábiková. Mark Gibbins, tax partner, and Van Mumby, senior tax manager from KPMG Slovensko Advisory emphasized that investors have a greater chance of obtaining these incentives if their investments are located in areas of higher unemployment. Experts emphasize that granting special state aid is at the discretion of the Slovak government, and in most cases the European Commission in Brussels must approve it. There is no automatic entitlement to state aid, even if the investor meets the prescribed conditions in the law. Whether, and in what amount, state aid is granted usually depends on the amount and nature of the investment, its location and the number of new jobs it will create. Investments into facilities that use new technology, attract other investors to Slovakia, or create a large number of jobs in regions of high unemployment tend to be viewed favourably. Analysts imply that in the future, Slovakia will cease its monopoly on business advantages when other countries step up - mainly Ukraine, the Balkan states and others. Additionally, as more FDI flows into Slovakia, state incentives for investors will likely decrease. "Romania has introduced a 16-percent flat rate for corporate and income taxes and a 19-percent standard VAT rate effective January 1, 2005. It also has generally lower labour costs than in Slovakia. In the medium term, Slovakia should seek a greater diversification of investments and expand, if possible, knowledge-based investments rather than those that are manufacturing oriented," explained KPMG Slovensko's Gibbins and Mumby. Davidson, from Ernst & Young, pointed out that the Far East, Romania and Bulgaria have had lower labour costs than Slovakia for a good while now and, in this respect, nothing has changed. He stressed that the key to Slovakia's future ability to attract investment cannot be solely cost-differentiation, but rather "cost plus x factor". This could be quality, technology, professional business culture, or, in the case of the tourist industry, natural beauty. Deloitte's Gawronski and Rusinko added: "It should not be overlooked that foreign investors value economic and political stability as well as transparency in legislation and in legislative procedures as much as other advantages. Certain investors remain unsure how certain areas of Slovak law will pan out, and how steps in the investment process are administered. "This is where Slovakia should focus if it wishes to join the more 'developed' countries in Europe." Moger and Gábiková from PricewaterhouseCoopers think Slovakia should continue to set the pace in making reforms and stay flexible enough to respond quickly to potential changes in the business environment. "Hopefully, Slovakia will also become a country that makes more outward investments, not simply a place in which foreign investments are made. If so, it could potentially benefit from the economic boom in countries with lower production costs and those offering attractive location benefits for foreign investors." Davidson from Ernst & Young agrees: "Slovakia offers three key benefits: EU membership, an investor-friendly environment, particularly with regard to taxation, and a skilled and highly educated workforce at very reasonable rates. Slovakia has to capitalize on these current competitive advantages by attracting as much investment as it can now, prior to any proposed EU-wide tax harmonisation and further EU enlargement. It must also continue to invest in education, particularly IT literacy," he said.
Once a Backwater, Slovakia Surges Legions of investors are, analysts say, turning Slovakia into one of the fastest-growing economies in Central Europe. An economic backwater in the late 1990’s, Slovakia has lately been dubbed the Tatra Tiger -- Tatra from the mountain range here and tiger after the Irish Tiger, the term used to describe Ireland’s economic transformation in the 1990’s. There are many similarities: both Ireland and Slovakia are small (Ireland’s population is 4 million, Slovakia’s 5.5 million). Both were traditionally reliant on agriculture, and even their quintessential foods, cabbage and potatoes, are the same. Both joined the E.U. (Slovakia last spring) with relatively underdeveloped economies. As Ireland did in the 1990’s, Slovakia’s government has lowered taxes and wooed investors. As a result, foreign investment is now pouring in. Direct foreign investment this year, at $1.1 billion in the last nine months, is already three times as great as in 2003. Economic growth is up 5.3%, to $33.3 billion in the last three quarters, outpacing growth in Hungary, Austria and the Czech Republic, and neck-and-neck with Poland. The biggest investments have been in automobile plants. Investors say Slovakia’s political stability, low labor costs and low taxes make it one of the most attractive economies in Europe. Slovakia replaced its income taxes, corporate taxes and sales taxes with a 19% flat tax this year. It also canceled its tax on dividends and simplified its labor laws, in part to make it easier to hire and fire workers. Slovakia’s recent economic success is especially significant given its reputation in the mid-1990’s, when Madeleine K. Albright, the U.S. secretary of state, called it a black hole in the middle of Europe. In that era, soon after Communism fell, the authoritarian prime minister, Vladimir Meciar, turned his back on the E.U. and NATO. At the same time, multimillion-dollar state companies were privatized for pennies. Not surprisingly, investors stayed away, the economy stagnated and unemployment soared to nearly 20%. In 2002, Mr. Meciar’s successor, Mikulas Dzurinda, was elected to a second term, this time with a coalition of parties that are, like him, right-leaning, paving the way for pro-business changes. Besides cutting taxes, the Dzurinda government brought the free market to health care and partly privatized the social security system. The average time it takes to set up a company has fallen from 90 to 50 days. Its labor costs, government officials said, are one-eighth those of Western Europe, with wages averaging $520 a month. By 2006, Slovakia is expected to leapfrog its neighbors, Poland and Hungary, in foreign direct investment per capita. Still, it is unclear whether the government has the support of its poor and middle class. About 21% of Slovaks live in poverty, an unemployment, though falling, remains above 17% and is even higher in the country’s underdeveloped east. At the moment, the country’s most popular politician is Robert Fico, who has criticized the tax cuts for industry and the wealthy and vowed to roll back the health care changes.
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