Slovak Bonds May Rise as Deficit-Cutting Parties Seek to Form Government

Slovak assets may rise as parties that pledge to cut the budget deficit and attract foreign investment hold a second day of coalition talks today after taking a majority of seats in weekend parliamentary elections.

SDKU, Freedom and Solidarity, the Christian Democrats and Most-Hid seek to form a government with 79 seats in the 150- member legislature. While Premier Robert Fico’s Smer won the most votes, opposition politicians say they won’t work with a party that failed to control spending and pursued nationalist policies.

“The coalition that is emerging will be more favorable for sustainable fiscal consolidation, so the markets may appreciate this,” said Jaromir Sindel, an economist at Citibank AS in Prague. “The situation may calm now, and there may be a positive reaction.”

Slovakia, a euro-member nation, will see its budget deficit swell to 7.4 percent of gross domestic product this year compared with a target of 5.5 percent, unless the new government takes “significant” steps to reduce the shortfall, according to a survey of economists by the Club of Economic Analysts in Bratislava, the nation’s capital. Fico had promised not to raise taxes and keep the welfare state intact.

Fico Chance

While President Ivan Gasparovic, who will appoint the next premier, said yesterday the party that won the most seats “deserves” the chance to form a government, he also said he wanted to guarantee a majority administration. Fico said he may try to form a government, though he will step aside if he can’t get a majority.

SDKU, which finished second in the election with 15.4 percent of the vote, has called for a constitutional law to prevent state debt from rising above a certain level. The party ruled together with the Christian Democrats before Fico took power in 2006 and introduced a 19 percent flat-tax that helped attract investment from companies such as KIA Motors Corp.

The two other parties in the proposed coalition were created in 2009 and pledged to keep Slovakia from sliding into a Greek-style debt crisis.

The Slovak economy is emerging from recession, with the Finance Ministry forecasting economic growth will reach 3.2 percent this year after a 4.7 percent contraction in 2009. The revival is being driven by exports, such as cars made locally by Kia and Volkswagen AG.

Room For Investment

“There is quite a lot of room for non-residents to invest into Slovak securities,” said Juraj Kotian, an economist at Erste Bank AG in Vienna. “Slovakia will offer a unique combination of having the euro and fast economic growth. It should be one of the most attractive countries for investors in the region.”

Slovakia plans to sell as much as 8 billion euros ($9.65 billion) of debt this year, the most since at least 2004. Slovakia is rated A+ by Standard & Poor’s, the agency’s fifth highest grade and on par with Italy. Moody’s Investors Service rates it A1, also the fifth-best assessment.

The benchmark 4 percent Treasury bond maturing in 2020 yielded 3.887 percent on June 11, 142.5 basis points more than German debt with a similar maturity. The spread on a similar security issued by Slovenia, which adopted the euro in 2007, was 134.2 basis points. A basis point is one-hundredth of a percentage point.

Popularity Slips

The popularity of Fico’s government began to slip this year as unemployment rose to a five-year high of almost 13 percent, and debt swelled. The European Commission estimates Slovakia’s debt will increase to 44 percent of GDP in 2011 from 35.7 percent last year.

Some voters were put off by perceptions of rising corruption and Fico’s confrontational style, said Grigori Meseznikov, head of the Institute for Public Affairs in Bratislava. Slovakia fell to 56th among 180 countries in the 2009 corruption perceptions index compiled by Berlin-based Transparency International. The country ranked 49th when Fico took power in 2006.

Companies that once clamored to invest in Slovakia because of its cheap labor force and location linking the European Union with markets further east have cooled on the country.

Fico raised the minimum wage and criticized utilities controlled by Rome-based Enel SpA and Dusseldorf-based E.ON Ruhrgas AG for overcharging citizens. Foreign direct investment fell to almost zero in 2009 from 3.7 billion euros in 2006, according to the Vienna Institute for International Economic Studies.

Agenda Unaffordable

Business-friendly measures such as restoring independent regulation will fuel investment, said Marian Jusko, chairman of the Employers’ Union and a former central bank governor.

“Fico’s government pushed a social agenda when the economy couldn’t afford it,” said Jusko, whose group represents some 1,300 businesses including a factory owned by Pittsburgh-based U.S. Steel Corp. “We expect the new government will take measures to improve the business environment.”

The strong performance of Smer in the weekend vote means Fico is likely to keep a new administration from carrying out more radical fiscal measures, Citibank’s Sindel said.

“Fico will be a tough opposition and the governing parties will be aware of the political consequences if their measures are too tough, or too unpopular,” he said.

To contact the reporters on this story: Peter Laca in Prague at placa@bloomberg.net; Radoslav Tomek in Bratislava at rtomek@bloomberg.net.

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