#1# Slovak Republic Investor Presentation May 2009 H#2Outline Slovakia - fully integrated EU member Strong economic and fiscal performance Debt management and funding strategy H 2#3Key considerations ■ Slovakia joined smoothly the eurozone on January 1, 2009 ■ Slovakia is quickly catching up on the eurozone (GDP growth 10,4% in 2007 and 6.4% in 2008). The IMF forecasts for GDP growth is -2.1% in 2009 vs. -4,2% for eurozone ■ Slovakia had a relatively low deficit (2.2% of GDP) and debt (27.6% of GDP) level in 2008. Despite the impact of financial crisis, the principal aim is to continue again with fiscal consolidation from 2010. ■ Excellent business environment ■ Healthy banking sector H 3#4H Key Credit Highlights + Strong Ratings Moody's: A1 stable outlook Fitch: A+ stable outlook S&P: A+ stable outlook + International Integration + High GDP Growth Euro zone member (2009) EU member (2004) OECD member (2000) 6.4 % in 2008, vs 0.8% for Euro zone, one of the highest in the World Low Debt Levels General government debt reached 27.6% of GDP (2008), compares favourably with peers (Euro area debt reached 69.3 % of GDP in 2008) 4#5Long-term public finance sustainability Pension reform: + Radical reform of 1st pillar (pay-as-you-go pillar) in 2004 Introduction of a strong 2nd pillar (private pension accounts invested in capital markets) in 2005 - contribution rates on pension insurance divided equally between the 1st and 2nd pillar (9% each) Improving the regulatory environment for efficient functioning of the 3rd pillar Introduction of the 2nd pillar - in the short-to-medium run lower revenues of the general government (GG), in the long-run lower GG expenditures on pensions + Key fiscal medium-term goal - to reach a balanced GG budget H Introduction of the 2nd (fully-funded) pillar of pension scheme (ESA95, in % of GDP) 2005 2006 2007 2008 2009B 2010B 2011B 2012B Impact of 2nd pillar on GG balance 0.8 1.2 1.3 1.3 1.1 1.1 1.1 1.2 Note: B budget 5#6Radical simplification of the tax system from 2004 Flat Rate Tax + elimination of virtually all exceptions, exemptions, deductions, special rates, and special regimes + elimination of dividend, inheritance, gift taxes, and real estate transfer tax Introduction of low nominal rates 19% flat individual income tax 19% corporate tax 19% unified VAT on all goods and services (since 2007 VAT rate 10% applied on medicine and medical tools and since 2008 on books) Shift from direct to indirect taxes Slovakia has the lowest tax quota II in EU, in 2007 it reached 29.7% of GDP H 6#7Taxation of corporate income Effective Corporate Tax Rate in Slovakia (%) 60,0% 49,0% 49,0% 49,0% 49,0% 49,0% 50,0% 39,7% 39,7% 40,0% 36,3% 36,3% 30,0% 20,0% 10,0% 19,0% 19,0% 19,0% 19,0% 19,0% 0,0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Effective corporate tax rate = statutory corporate tax rate x dividend tax rate Source: Ministry of Finance H + Top statutory tax rates on corporate income in V4 (2008): 18.6% in HU, 19% in SK and PL, and 21% in CZ + In Slovakia, since 2004, dividends are exempt from taxation 7#8Business environment improvement Index of Economic Freedom (score, max. 100) 2002 69 2008 66 9 63 60 - 57 T SK Source: The Heritage Foundation H CZ HU PL Doing Business Index (ranking, 2009) HU CZ PL SK 1 21 H 41 61 81 36 Source: World Bank 41 11 75 75 76 + Index of Economic Freedom measures the economic freedom of 183 countries in the world. Slovakia scored much better than all other Central European countries both in 2002 and 2008. + Doing Business Index prepared by the World Bank provides an objective measure of business regulations and their enforcement across more than 180 economies. Slovakia achieved the 36th, best among the Visegrad countries. 8#9H Radical rating improvement S&P Rating Slovakia A+ + Slovakia has the highest rating of the V4 countries Radical rating improvement since 2000 (from BB+ in 2000 to A+ in 2009) + Slovak government has the highest credibility confirmed by the independent, unbiased < A- BBB+ BBB BBB-- BB+ BB < subject 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 S&P rating in countries V4 401 A+ A+ A0 A- BBB+ BBB BBB- BB+ 4,0 + A A- BBB- III: SE SK CZ PL HU 2008 9#10Building the knowledge economy Conditions for strong growth are in place after recovery of the world economy + Slovakia is highly attractive for export oriented production Focus on the knowledge economy through the national Lisbon strategy + highly focused on priorities most relevant for Slovakia strong Government commitment: + Modernization Programme Slovakia 21 (June 2008) + National Reform Programme for 2008 - 2010 (October 2008) Reforms of the knowledge infrastructure + reforms of the education system and R&D infrastructure + major investments from national and EU funds H 10#11R&D and innovations Five priority areas for the coming years + support of high quality research, R&D and business innovations Education + modern education, training, and student mobility Employment inclusion of the long term unemployed into the labour market, improved quality of human capital Business environment + less and better regulation, e-government, and wider internet access Climate Change and Energy Industry + low-carbon and energy efficient economy H 11#12Outline Slovakia - fully integrated EU member Strong economic and fiscal performance Debt management and funding strategy H 12#13H 主 Excellent macroeconomic development (growth in %) 2002 2003 2004 2005 2006 2007 2008 Real GDP 4,8 4,7 5,2 6,5 8,5 10,4 6,4 Real wages 5,8 -2.0 2,5 6,3 3,3 4,3 3,5 Employment (LFS) 0,2 1,8 0,3 2,1 3,8 2,4 3,2 Unemployment rate 18,5 17,4 18,1 16,2 13,3 11,1 9,6 (LFS) Inflation (annual 3,3 8,5 7,5 2,7 4,5 1,9 4,6 average) Current account -7,9 -5,9 -7,8 -8,5 -7,5 -5,3 -6,1 balance (% of GDP) 13#14H 80% 75% Real convergence GDP per capita in PPS in V4 countries (EU15=100) Czech Rep. Hungary Poland Slovakia 70% 65% 60% 55% 50% 45% 40% 35% 30% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Eurostat + Increase in GDP per capita from 41,1% of EU15 average in 1995 to 64,1% in 2008 + The fastest rate of convergence among the V4 countries + Since 2007 second among the V4 countries 14#15Economic growth still at the strong rates 6% 5% 4% 3% 2% 1% ៩ ៩ ៩ ៖ ៖ សំ ៖ ៖ 7% 2008 Real GDP Growth, Peer Comparison 0% Portugal Eurozone Czech Slovakia 12% 10% 8% Slovakia Real GDP Growth الس 6% 4% 2% 0% H + Second highest growth in Europe Top performer in the OECD + Sustained robust growth + Driven by both domestic and external demand + Stimulated by significant FDI + Economic growth expected to accelerate again after crisis H 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ministry of Finance, NBS, European Commission 15#1630000 25000 20000 15000 10000 5000 H Total FDI Stock (US$ million) 0 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ministry of Finance, NBS Strong FDI inflows FDI Stock by Country of Origin, 2007 USA, 2.10% Others, 7.6% Luxembourg, 2.30% Korea, 2.80% Cyprus, 3.10% Czech republic, 5.30% Hungary, 6.60% Italy, 8.50% Austria, 16.00% Germany, 16.30% Netherland, 28.90% 16#17Trend in the current account Slovakia Balance of Payments Components H + Exports of cars and durable consumer goods continued in the increasing trend 2008 7000 6000 in 5000 4000 3000 2000 1000 0 2001 2002 2003 + The current account deficit worsened to 6.1% in 2008 compared to 5.3% in 2007 due to slowdown of main trading partners In 2008, EU countries represented 85,2% of total exports and 67,1% of total imports of goods m Current account deficit 2005 2004 2006 FDI 2007 2008 Dynamics of the Current Account Deficit as % of GDP 2005 2006 0,0% -1,0% -2,0% -3,0% -4,0% -5,0% -6,0% -7,0% -8,0% -9,0% -8.5% -7.5% * Forecasts 2007 -5,3% 2008 -6,1% Source: Ministry of Finance, NBS, European Commission 17#18Unemployment continued to decrease in 2008 Slovak Unemployment Rate 20% 18% 16% 14% 12% 10% 8% 2001 2002 2003 2004 2005 2006 2007 2008 Source: Eurostat Development of the Unemployment Rate, Peer Comparison 2002 2008 Change in p.p. Slovakia 18.7% 9.5% -9.1 Czech 7.3% 4.4% ↓-2.9 Greece 10% 7.7% -2.3 Portugal 5.1% 7.7% ↑ +2.6 Eurozone 8.3% 7.5% ↓ -0.8 + Strong employment growth as the main factor behind declining unemployment + Employment grew at 2.4% in 2007 and 3.2% in 2008 + In the European Union, Slovakia compares very favourably in the reduction of unemployment + Good prospects to recover employment due to relatively flexible labour market and low wage costs H Source: Eurostat 18#19Secondary school education is widespread 100 90 80 70 60 50 40 Youth education attainment level (%, 2007) CARLINHON Source: The Heritage Foundation 432250 15 10 5 0 Early school leavers (%, 2007) In Slovakia 91.3% of the population aged 20 to 24 have completed at least upper secondary education An upper secondary school education is generally considered the minimum for taking part in a knowledge-based society, either for entering the labour market or higher education. + Only 7.2% of the population aged 18-24 have completed lower secondary education and are not continuing with further education or training H MANKETEXT Source: World Bank 19#20Rising number of tertiary graduates Number and share of tertiary students in Slovakia 250 000 number of tertiary students (left axis) share of tertiary graduates (right axis) 50% 200 000 40% 150 000 30% H 100 000 50 000 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Source: Ministry of Finance Tertiaty graduates (%, 2006) 20% 10% 0% The number of students in tertiary education in Slovakia has significantly increased in the last decade Tertiaty graduates in engineering, manufacturing and construction (%, 2006) 20 50 45 15 40 35 10 30 5 25 20 0 PL SK CZ HU CZ SK PL HU Source: OECD Source: OECD 20 20#21General government deficit 4,5% 2008 General Gov. Deficit (% of GDP), Peer Comparison Slovakia General Government Deficit (% of GDP) 9,0% 8,2% 8,0% 4,0% 7,0% 3,5% 6,0% 3,0% 5,0% 2,5% 3,5% 4,0% 2,0% 3,9% 2,7% 2,3% 2,8% 3,4% 3,0% 1,5% 1,9% 2,2% 2,0% 1,0% 2,2% 1,5% 1,0% 0,5% 0,0% 0,0% 2002 2003 2004 2005 2006 2007 2008 Slovakia Czech Rep. Hungary Poland H Source: Eurostat + Reductions in GG deficit with the aim to meet the Maastricht fiscal criterion in 2007 and creating conditions for long-term fiscal sustainability General government deficit of Slovakia reached 2.2% of GDP in 2008 (net of the pension reform costs it would be 0.9% of GDP) 2 21#22Gross general government debt Slovakia General Government Debt (% of GDP) 2008 General Gov. Debt (% of GDP), Peer Comparison 50,0% 43,4% 42,4% 41,4% 45,0% 40,0% 34,2% 35,0% 30,4% 30,0% 25,0% 20,0% 15,0% 10,0% 5,0% 0,0% 80,0% 70,0% 40,0% Illim.. 60,0% 29,4% 27,6% 50,0% 30,0% 73,0% 47,1% 20,0% 27,6% 29,8% 10,0% 0,0% 2002 2003 2004 2005 2006 2007 2008 Slovakia Czech Rep. Hungary Poland Source: Eurostat - + Significant reduction of debt – consolidation, privatisation proceeds, establishment of State Treasury System (centralisation of funds and debt and liquidity managment + Lowest general government debt among V4 countries H 22#23Tax quota II in Slovakia (% of GDP) Tax quota II 2008 Tax quota II (% of GDP), Peer Comparison 45,0% 40,4% 39,5% 37,4% 40,0% 36,8% 35,5% 34,2% Indirect taxes Direct taxes 33,3% 33,2% 33,2% SC Other 45,0% 40,0% 35,0% 31,8% 31,6%. 29,6% 29,7% 35,0% 30,0% 30,0% 25,0% 25,0% 20,0% 20,0% 39,9% 36,9% 34,6% 15,0% 15,0% 29,7% 10,0% 10,0% 5,0% 5,0% 0,0% 0,0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Slovakia Czech Rep. Hungary Poland Source: Eurostat H + Significant decrease in tax burden between 1995 and 2007 by 10.7 p.p. (highest in the EU27) + Shift from direct taxes towards indirect taxes + Lowest tax burden in V4 and in the whole EU27 23#24General government expenditures 2008 GG Expenditures (% of GDP), Peer Comparison Slovakia General Government Expenditures (% of GDP) 53,7% 60,0% 60,0% 49,0% 50,9% 48,6% 50,0% 47,8% 45,8% 45,0% 44,5% 50,0% 40,1% 38,2% 40,0% 37,6% 36,9% 34,9% 34,4% 40,0% 30,0% 30,0% 49,8% 20,0% 20,0% 42,4% 43,1% 34,9% 10,0% 10,0% 0,0% 0,0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Slovakia Czech Rep. Hungary Poland Source: Eurostat + Fiscal consolidation after 2002 - driven by decrease in expenditures + Key sources: interest payments, state benefits and social assistance + Lowest redistribution among V4 countries H 24 24#25Outline Slovakia - fully integrated EU member Strong economic and fiscal performance Debt management and funding strategy H 25#26Active debt and liquidity management Debt and liquidity management strategy + refinancing risk (average maturity) + refixing risk (average duration) Three pillars system: + domestic capital market (primary dealership) + international capital market (syndicate) + State Treasury ● Instruments Market Non-market T-Bonds (domestic and international) State Bank T-Bills Treasury Loans MM operations sources H 26#27Government debt General government debt + EUR 21.5 bln. + of which EUR 4 bln. is State Treasury resources + of which EUR 16.5 bln. is tradable debt Average annual financing needs lower than EUR 4 bln. + debt roll-over lower than EUR 3 bln. + budget deficit usually up to EUR 1 bln. H 27 22#28H 0,0 0,5 1,0 2,0 w 1,5 2,5 3,0 2 009 2 010 2 011 2012 2013 2 014 Source: ARDAL 3,5 Favourable government debt portfolio Debt redemption profile Debt profile of the Slovak Republic (domestic and international debt) Bond portfolio 9.2% 2015 2016 2017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 2 026 90.8% Fix 90,8% Float 9,2 % Debt currency composition. 99,54 % EUR 0,46%JPY Source: ARDAL 28#29# International issuance • Annual issue of syndicated Slovak bond (benchmark size and ● maturity) Newly issued bonds to trade on major international trading platforms Euro MTS, TradeWeb, Bondvision, Bloomberg + Bigger size (minimum €1 bn) of new issues to ensure liquidity • Broaden investor base to increase integration of Slovakia's sovereign debt in the Euro area 29#30Main terms and conditions Issuer Rating Rating Outlook Currency Amount Coupon Format Issuance Format EMTN Programme Size Issue date Slovak Republic A+/A1/A+ Stable (Moody's, S&P, Fitch) EUR Benchmark size Fixed Rate EMTN Programme EUR 2 bn May 2009 5 yr H Maturity Listing Governing Law Joint-Bookrunners London Stock Exchange English Law HSBC, SG 30#31Additional details Debt and Liquidity Management Agency - ARDAL Radlinskeho 32 813 19 Bratislava Slovak Republic Telephone +421 2 5726 2513 Fax +421 2 5245 0381 e-mail: ardal @ardal.sk web: www.ardal.sk Reuters code and pages: DLMA H 31#32• Additional details Ministry of Finance: www.finance.gov.sk All available data on state debt on the website: www.ardal.sk Statistical Office of the Slovak Republic: www.statistics.sk National bank of Slovakia: www.nbs.sk State Treasury: www.treasury.sk H 32