BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Slovakia's overall CBBER is 47.0. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. This places Slovakia in the bottom quartile of countries in Central and Eastern Europe that are surveyed by BMI. Within the CBBER, the most important aspect is the banking market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Slovakia's (43.4) is lower than the overall CBBER and also lower than the country element of the limits of potential returns (45.7). While having a relatively good GDP per capita relative to its region, Slovakia has a low total asset base and weak estimated growth in total assets and client loans.

After expanding by 9.4% y-o-y in Q207, we are forecasting the Slovak economy to slow steadily over the long term, as an anticipated decline in investments and manufacturing weighs on growth. That said, investment levels should remain relatively robust and the acceleration of private consumption indicates that Slovak economic growth should still outpace the rest of Central and Eastern Europe until 2009.

The Slovak economy continues to boom, with Q207 real GDP growth coming in at an impressive 9.4% year-on-year (y-o-y), up from 9.0% y-o-y in Q107 and 6.7% y-o-y over the same period a year earlier. This brings total H107 growth to 9.2% y-o-y, in line with our estimate for a 2007 real expansion rate of 8.5%. Quarterly GDP growth was expected to slow through the latter half of 2007, weighed by high base effects from the above-9.0% growth in H206 resulting from the opening of two new large automobile factories. After hitting a record monthly high of 18.9% in July, we expected that industrial output growth would peak in the third quarter and proceed to fall steadily after that. This will tie into the country's exports, with real export growth having already slowed from a record high of 24.1% y-o-y in the first quarter to 18.0% y-o-y in Q207.

Indeed, in addition to base effects, we are also concerned about a potential slowdown in external demand weighing on the country's export growth. Q207 eurozone growth slipped to 2.5% y-o-y, down from 3.1% y-o-y in the previous quarter, with strong signs suggesting that growth in the developed EU markets has peaked. A global monetary tightening cycle will likely weigh on growth, while an international credit crisis stemming from the US housing market will further add to consumer pessimism. This is of particular concern for Slovakia, whose exports are dominated by high-value consumer products, notably automobiles and home electronics.