JAN POCIATEK Minister of Finance	IGOR VIDA Chairman and CEO of Tatra Banka

Foreign companies choose predictability over high-risk growth as sound policies make economy a regional winner

At the Slovak Finance Ministry, officials work within sound and prudent limits. When they have a program, they follow it. The introduction of the euro, which is scheduled for 2009, is expected to run smoothly, signaling the end of the 16-year stint of the koruna (SKK). After tweaking parity issues, the European Central Bank has approved the SKK’s track record for 2007. Meanwhile, the structure of GDP growth is healthy, with output set to reach 7.3% in 2008. Inflation is projected to fall to 2%. Does all this mean that there is little of note in Slovakia’s transition to an open economy?

Not exactly. This is the country, after all, that did away with 21 categories of personal income tax and replaced them with a flat tax of 19% in 2004. As a result, $13.6 billion of FDI flowed into domestic industry. The surprising fact is that even with middle-of-the-road policies, it still manages to outperform its competitors. Samsung, Peugeot, Hyundai and Volkswagen have opted to establish factories in Slovakia because of its level of transparency, ease of doing business and quality workforce.

“We are developing pretty fast and we’re very different from other nations,” says Minister of Finance Jan Pociatek.

Overall, the country’s competitiveness has more to do with European integration than with low taxation. By locking in the reforms, the previous government bought precious time. Pociatek thinks the current account deficit, at 6.5%-7.5% of GDP, will drop to 4% as Slovakia rolls out new products. He points at a Samsung factory specializing in LCD modules as an example. Managers there have already extended contracts to sub-suppliers in the region.

In the financial system, the three largest public banks were privatized in 2000-2001. Together, they amassed two-thirds of the sector’s total assets. Foreign investors have not only re-capitalized banks, but have also engulfed the insurance sector. With the exception of Postova Banka, nearly 100% of banking institutions are now foreign-owned. Credit growth, meanwhile, has come down to sustainable levels as people adjust to the entry of the euro. For Central Bank Governor Ivan Sramko, things could not be better. “The banking structure is OK, performance is OK and there are no special risks in the industry,” he says.

Igor Vida, Chairman and CEO of Tatra Banka, believes it all hinges on the inflows associated with government reforms, a combination that was crucial for Slovakian banks. With the changeover in management came a more aggressive strategy for market share. Many banks refocused their energy on retail because of the growth in purchasing power.

“It’s a very competitive environment today. There are a lot of banks, maybe too many. Whether there will be consolidation in the future is questionable,” says Vida. Nominated the Best Bank in Slovakia in 2006, Tatra Banka is a greenfield investment by Austria’s Raiffeisenbank. Vida’s strategy of building the retail segment and being inventive with products has paid off handsomely. In 2006, the bank opened eight new branches and profits after tax were up 27.5%. Earnings per share also grew by 19.1%.

Tatra Banka was the first financial institution in the country to introduce Internet banking and call centers. About 83% of transactions these days are electronic, with more than a third of the bank’s 600,000 customers transacting online. By setting up a virtual bank as a subsidiary early on, it tapped a niche segment.

“We did it as a defensive move to dissuade others from moving into Slovakia. After five years of existence, we migrated customers to the main bank and shut it down. The mission is complete,” comments Vida.