Slovakia - Country Risk Report

SLOVAKIA

COUNTRY BUSINESS RISK ASSESMENT WITH AN INTEREST IN INVESTMENT IN

REAL ESTATE INDUSTRY

INTRODUCTION - Presumptions used in this analysis

This analysis is done in order to simulate country risk assessment for a western European, well established company in real estate business (further on: The client).

The Client is interested in investment abroad due to a surplus in current and future cash flows and limited growth in the mature market of the country of origin.

The client is interested in getting all kind of information about Slovakia, as he is absolutely unfamiliar with this particular country.

His ultimate interest is in looking for possibilities to do investment in real estate sector, with limitation that the Client does not require us to do full corporate strategy analysis for entering and handling the market, as he believes that his company has unique corporate strategy which „works for sure“, if they decide to enter the market.

SLOVAKIA

COUNTRY BUSINESS RISK ASSESMENT

WITH INTEREST IN INVESTMENT IN

REAL ESTATE INDUSTRY

Geographical position National Flag

BASIC COUNTRY INFORMATION

Slovakia is a Central European country, located south of Poland and north of Hungary. It covers the territory of 48,845 sq km and its population is approximately 5.5 millions citizens

Slovaks represent 85.8% and Hungarians 9.7% of total population. Major religion groups are Roman Catholic 68.9% and Protestant 10.8%. Official language is Slovak.

Country Map

Slovakia’s climate is characterized by cool summers and cold, cloudy, humid winters. This climate is mainly influenced by the geographical configuration of the country. Country has mountains in the central and northern part, and lowlands in the south.

Country's natural resources are consisted of brown coal and lignite; small amounts of iron ore, copper and manganese ore; salt and arable land.

BASIC HISTORICAL, POLITICAL AND LEGAL INFORMATION

After being a part of the Austro-Hungarian Empire, the end of World War I brought unification of Slovak and Check people into a newly formed country -Czechoslovakia. End of World War II, marked new chapter in the history of Czechoslovakia. It became a Communist country within Soviet-ruled Eastern Europe. Soviet influence collapsed in 1989 and Czechoslovakia once more was able to exercise its sovereignty. The Slovaks and the Czechs agreed to separate peacefully on 1 January 1993.

Slovakia joined both NATO and the EU in the spring of 2004.

Slovakia is a republic with parliamentary democracy.

Chief of State is the President Ivan Gasparovic (serving 2004 вЂ" 2009 term). Prime minister is Robert Fico (serving 2006 вЂ" 2010 term)

Legislative branch is represented by unicameral National Council of the Slovak Republic with 150 seats. Major parties in the National Council are Smer (50), SDKU (31); SMK (20), SNS (19).

Legal system is established on Austro-Hungarian codes and principles. Through the transition period, Slovakia significantly changed its laws to comply with EU regulations and standards.

BASIC INFORMATION ON ECONOMY

Slovakia has mastered much of the difficult transition from a centrally planned economy to a modern market economy.

The biggest progress in macroeconomic stabilization and structural reform is made in 2001-04 period. Major privatizations are nearly complete, the banking sector is almost completely in foreign hands, and the government has helped facilitate a foreign investment boom with business friendly policies such as labour market liberalization and a 19% flat tax.

Slovakia's economic growth exceeded expectations in 2001-06 despite the general European slowdown.

The biggest issue, Slovakia currently has is unemployment. There is a clear tendency in decrease of unemployment (from 18% in 2003-04 to 10.2% in 2006). Current estimate for 2007 is 9%, but it still remains the economy's number one concern.

GDP per capita ranges from 120% of EU average in Bratislava to only 39% in Eastern Slovakia (minimum wage is set at EUR 240 per month, average salary is around EUR 600 per month). In terms of unemployment, one of the principal tasks of the new government is to reduce the difference in distribution of both wealth and employment across the country.

On the other side, Slovakia has continuous high economic growth. In 2006, Slovakia reached the highest economic growth among the members of OECD and the third highest in the EU (just behind Estonia and Latvia).

Consumer price inflation is well stabilized and it is projected at 4% in 2006. This is a significant achievement considering 26% inflation rate in 1993. The lowest inflation rate, 2.0%, was recorded in July 2005.

“The current account deficit from its recent peak at $1.9 billion (8.8%) of GDP in 2001 shrank to $1.4 billion (3.4%) of GDP in 2004. A drop in the trade deficit accounted for most of the improvement. The foreign trade balance is now largely influenced by strong growth in capital good imports related to foreign investments in the country. Slovakia’s total foreign debt was $23.7 billion at the end of 2004, up $5.4 billion from the 2003. The increase in the level of debt was caused largely by exchange rate losses of the dollar. Budget performance in 2005 was strong, as the government aimed to implement fiscally responsible policies to drive the budget deficit below the Maastricht-defined ceiling of 3% of GDP by 2007 in order to qualify for euro adoption. The government's budget for 2006 targets a general government deficit of 2.9% of