Weak economic growth and high inflation may increase political instability
Slovakia’s September 2023 election will have big implications for MNCs; if a working majority is reached, we are likely to see the hasty implementation of impactful policies to counteract the previous year of inaction. B2Gs should be cautious leading up to the election, with austerity-focused policies likely, as the national debt and budgetary deficit have increased.
MNCs should also review their scenario planning, as Slovak food price inflation is among the highest in Europe and is likely to strain the consumer’s bottom line. Further susceptibility lies within the pharmaceutical, recreation and culture, and communication sectors, which all have inflation at rates significantly higher than the EU average, likely to result in decreased demand as discretionary spending decreases.
Overview
- Slovakia sees its third prime minister since September 2022, as a grid-locked coalition government agrees to elections on September 30, 2023.
- Corruption continues to plague the political system, with three of the top 5 polling parties facing corruption probes and arrests since 2018.
- Euroskepticism is on the rise, as the Russophile Republic Party, a 2020 breakaway of the far-right L’SNS party, closes in toward the 10% coalition threshold.
Our View
Weak economic growth, twinned with high inflation, will place renewed pressure on consumer demand, which would exacerbate wealth divides in the country and potentially lead to increased rates of civil unrest, furthering political instability.
Following half a year of political wheel-spinning, a vote of no confidence, and a third prime minister in eight months, the coalition government will take the country to an election in September 2023, which will spotlight issues of inflation and curtailing Ukrainian aid. Slovakia has become increasingly politically fragmented in recent years, with 12 parties running, eight of which are polling above the 5% threshold required for proportional representation.
We predict the SMER party will win the election with 30% of the vote, led by former Prime Minister Robert Fico, who previously resigned amid a scandal that implied ties to Italian organized crime and the murder of a prominent journalist. A coalition partner will likely be needed to secure a majority, with HLAS, the party Fico previously presided over, being a potential partner with similar ideologies. The neo-liberal PS party has further gained traction over the previous year, growing to be the third-largest party, but has ruled out working with any of the major parties, effectively relegating themselves to the opposition.
The government deficit has increased to 6.5% in 2023, up from 5% in 2022. This comes as the Slovakian national debt-to-GDP ratio remains nearly 10% higher than its pre-pandemic levels. The likelihood of a rating downgrade from A is high, with increased debt to GDP, escalations in the Ukraine war (particularly energy related), or weakened EU relations all part of potential scenarios. If this occurs, financing costs will increase, which along with higher debt levels will place serious strain on government budgets. To counteract this, fiscal spending is likely to be tightened in both eventualities, damaging consumer spending further.
Rising inequality and wealth disparity will likely lead to further civil support for extreme parties, which may result in the implementation of more polarizing policies. The breakaway Republic party is threatening the status quo, as it polls close to 10% of the vote, reflecting the rise of increased nationalism, Euroskepticism, and xenophobia in the nation.
Should extreme voices from the far left or right receive an increased platform in the September election, tensions between the EU and Slovak government could be exacerbated. Slovakia is among the most Euroskeptic countries in the EU, with 47% of Slovaks seeing EU membership negatively, compared to 44% positively. This Euroskepticism will likely be used as a political football, especially among more nationalistic parties. This scenario, while unlikely, raises the risk to the base case whereby the EU reins in populist movements through funding mechanisms, of which Slovakia is a notable net beneficiary. The new government will have to navigate economic headwinds and rising fringe political pressures while balancing the domestic economy and fiscal spending. With a history of failed coalitions and infrequent one-party majorities, the next government will be welcomed with a baptism by fire.
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