NOVEMBER 16 ECONOMIC ROUNDUP

UNCLAS SECTION 01 OF 02 BRATISLAVA 000913 SIPDIS SIPDIS DEPT FOR EUR/NCE DEPT FOR USAID TREASURY FOR AALIKONIS USDOC for MROGERS E.O. 12958: N/A TAGS: ECON EFIN EAID PGOV LO SUBJECT: NOVEMBER 16 ECONOMIC ROUNDUP ¶1. The following are recent noteworthy events in the Slovak economy: SLOVAK ECONOMY EXPANDS AT HISTORIC PACE -------------- ¶2. The Slovak economy grew by a real annual rate of 9.8 percent in the third quarter, its fastest-ever expansion, up from 6.7 percent in the previous three months, the Statistical Office said on November 15. Final figures will be published on December 7, but the office noted that "on the consumption side, GDP growth was influenced mainly by continued foreign demand and growth in inventories of materials and finished products." Much of the increased growth rate can be attributed to Kia Motors starting auto production in Zilina during the quarter, and Peugeot preparing to start production at its Trnava plant early in the fourth quarter. ¶3. The Slovak central bank called the economy's strength "surprising yet trustworthy" and expressed its belief that healthy growth is likely to continue at least up through the first half of 2008. "We haven't noticed any signs of overheating and we don't consider the domestic demand growth to be a threat at the moment (in terms of inflation)," central bank governor Ivan Sramko said. According to some economists, however, strong growth may force the bank to tighten its monetary policy further to tame upward pressure on shop prices. Slovak interest rates were already raised by 175 basis points in four steps this year (to 4.75 percent) to fend off inflation risks stemming from high energy prices and rising domestic demand. WE NEED A HIGHER COLA -------------- ¶4. As result of the bullish economic performance and positive regional mood, the Slovak currency unit, koruna, appreciated to its strongest-ever level at 35.690 SKK/EUR on November 15. This is more than seven percent above its ERM-II (NOTE: European Exchange Rate Mechanism II) central parity of 38.4550 SKK/EUR. The currency's strength shows no signs of abating in the future, leading to discussion among economists of whether Slovak's central parity rate needs to be adjusted before entering the Eurozone in 2009. (Ireland and Greece provide precedent for such a move.) A bigger revaluation appears justified because of Slovakia's export prospects, and would dramatically improve its current account picture. Some economists worry, however, that revaluation could complicate prospects for Euro adoption in 2009. ¶5. Transport Minister Lubomir Vazny announced that the privatization of railway freight transport company Cargo Slovakia will be discontinued. As he explained, certain consolidation measures will be needed to stabilize company's performance, but the 2007-2010 business plan drawn up by the current management assured him that "the company will manage the situation". The previous government launched a tender to sell Cargo Slovakia, but postponed its final decision for the new GOS due to an early elections. In February 2006, the tender commission recommended the consortium of Austrian Rail Cargo Austria AG and J&T Finance Group as the preferred investor. Two other bidders were Cargo Central Europe consortium, consisting of the Chicago-based investor Rail World Holding LLC, Penta Investments, and MID Europa Partners LLP, a venture capital fund with offices in London, Warsaw and Budapest; and Carpatian Cargo, uniting the MAV Hungarian railways firm and the Slavia Capital group. Cargo Slovakia owns approximately 800 locomotives and about 16,000 cargo wagons, as well as attractive pieces of land. US COMPANY OPENS R&D FACILITY -------------- ¶6. ON Semiconductor Slovakia, a U.S.- based supplier of power components and systems headquartered in Piestany, opened a new research and development facility in Bratislava on November 9. The new Bratislava Development Center builds on an existing relationship with Slovak Technical University. The 30 researchers will focus on the design of integrated circuits, characterization of semi-conductor devices, and modeling. ON is also investing in a USD 10 million expansion of its manufacturing facility in Piestany which will create 200 new jobs. FIRST GM CORN HARVESTED IN SLOVAKIA, FUTURE UNCERTAIN -------------- -------------- ¶7. In early November, Monsanto announced the harvest of its first three test fields for genetically modified corn. Two of these were grown by private farmers of Hungarian ethnicity in western Slovakia, the third in eastern Slovakia. In all cases yields were above average for Slovak farmers in the region. These results pave the BRATISLAVA 00000913 002 OF 002 way for broader planting of genetically modified corn in 2007, in accordance with the new co-existence legislation signed into law earlier this year. Unfortunately, however, the Ministry of Agriculture has not drafted regulations for this law. The situation is further complicated by the November 2 resignation of Agriculture State Secretary Marian Zahumensky, who was favorably inclined to GM production. Since GM corn production will not be accepted for human consumption in Slovakia, farmers interested in growing GM corn will be looking to the biofuels market, and more specifically to the Enviral factory under construction in Leopoldov. This factory is is slated for completion by summer 2007, but construction is slightly behind schedule and it is unclear if the plant will be ready in time for next year's harvest. Silverman