The year 2012 was an election year in Slovakia. Early elections in March determined a clear winner, the centre-left oriented party SMER, who, for the first time in Slovak history, set up a government created from one political party only. By doing so, the new government certainly took the full political responsibility for the implementation of fiscal targets. Although the deficit in 2012 reached 4.6% of GDP, the new government set the clear goal of consolidating public finances to return to a public deficit below 3% in 2013. As part of its budget consolidation package, the government approved the increase of the special bank levy and the extension of the base for paying the levy. As a consequence, Slovak banks suffered a substantial drop in their net profit in 2012. With 0.4% of all deposits in the banks this tax is the highest in the euro zone.
In addition to taxation on banks the government imposed a special tax on regulated industry sectors such as energy, electronic communications, insurance, railway and air transport, as well as pharmaceuticals.
Further measures of the new government aimed at the recovery of state finances. Investors criticise in particular the abolition of the flat income tax and the increase of the tax on corporate profits in Slovakia. As of this year, the corporate tax stands at 23%, whereas before it was at 19%.
Further changes were made to the Slovak pension system. Employees who participate in Slovakia’s second, privately administered pension pillar are limited to contributing 4% of their salary to this old-age savings plan as opposed to the previous 9%.
The new centre-left government also halted all privatisation efforts of the former government, including the sale of a 15% stake of Slovak Telecom, which the Bratislava Stock Exchange was hoping to transact with the aim to improve the poor liquidity of the Slovak equities market. Thus the Slovak capital market once again failed to attract new equity issues. Bond transactions generated 98.51% of the total achieved financial volume on the stock Exchange in 2012. As in previous years, OTC transactions represented more than 90% of the total volume.
As for traded instruments, government bonds dominated the market. During the year 2012 Slovakia issued state securities in the total volume of EUR 10.8 billion, representing 125% of the original gross plan of issue. The main aim of the Debt and Liquidity Management Agency (ARDAL) was investor base diversification. The Ministry of Finance for the first time in history issued government bonds in foreign currencies, namely USD, CZK and CHF. Unfortunately a settlement infrastructure that would allow settling these instruments against payment is missing on the side of the central securities depository.
This year, ARDAL plans, on behalf of the Ministry of Finance, to issue securities with a total value of approximately EUR 8.3 billion. In January ARDAL introduced a primary dealership concept and moved to a new auction system running in Bloomberg. So far, 12 banks signed the Primary Dealership Contract. The great challenge that remains is the diversification of the existing investors’ portfolio. In addition to the European market ARDAL is also planning to reach out to investors from other global markets in 2013.
Last year’s major improvement in settlement infrastructure was the introduction of T+0 real time settlement of bonds and T-Bills. T+0 trades now settle immediately after they are matched in the stock exchange system and waiting for the end of trading is no longer necessary. It reduces the operational risk connected with settlement of back-to-back trades and allows clients to manage their cash liquidity better.
As for the Central Securities Depository (CDCP), it signed the T2S Framework Agreement in June 2012. It is predicted that CDCP will join T2S in the last wave in February 2017. CDCP’s plans for this year are the implementation of certain Swift messages and the introduction of settlement in foreign currencies (CZK).
Slovakia has decided to join those EU countries which want to introduce a financial transaction tax, with no details disclosed so far. Implementation is expected for January 1, 2014.
Despite the fact that no favourable breakthrough events happened on the Slovak capital market last year, we can assume that sooner or later this market will also be incorporated into one of the regional trading or settlement capital market structures.
Zuzana Milanova
Head of GSS Slovakia