Slovakia to Unveil Austerity Package to Win Bond Investors

(Bloomberg) -- Slovakia’s new government is working on a €1.5 billion ($1.6 billion) package of measures to cut spending and increase revenue next year as it reins in the widest budget deficit in the European Union.

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Finance Minister Ladislav Kamenicky said the government aims for a reduction in the budget deficit by the equivalent of about 1% of gross domestic product annually in the next few years. Winding down energy subsides and overhauling the health-care system to boost efficiency will yield budgetary gains, he said.

“We want to show investors that we have a clear consolidation trajectory and that our plan to reduce the budget deficit is credible,” Kamenicky told Bloomberg in an interview in Bratislava.

In December, Fitch Ratings lowered Slovakia’s credit score on concerns about sustainability of financing. The nation of 5.4 million is set to run a budget deficit of 6% on GDP this year, down a half-percentage point from 2023.

Despite the downgrade, investors have kept piling into the euro-area member’s debt to lock in yields before the European Central Bank pivots to monetary easing. Slovakia on Monday completed the second bigger-than-planned bond sale this year.

Prime Minister Robert Fico, who returned to power last year promising to halt military aid to Ukraine, has riled European partners and triggered street protests with plans to scrap a special prosecutor’s office and change the criminal code, threatening the rule of law in Slovakia.

On the fiscal front, the premier pledged to cap energy prices and introduce special aid for pensioners and households with mortgages. The government approved a 30% bank tax — a move that prompted lenders operating in Slovakia to plead for a re-think — and others measures to shore up the budget.

To improve the country’s image, the Finance Ministry is preparing presentation to investors in the first half of the year to pitch Slovakia as a “very credible partner,” Kamenicky said. He pledged to adhere to EU fiscal rules. The reduction in subsidies, as slowing inflation blunts the pain for consumers, could tame spending by 1% of GDP, budget figures show.

“The inflation outlook and the energy-market development suggest that energy subsidies may not be necessary next year,” Kamenicky said. Fico’s ruling coalition will finalize the fiscal package over the coming months.

Investors so far have shrugged off fiscal concerns. Slovakia raised €1.4 billion in an auction of two bonds on Monday, with the demand exceeding €2 billion, according to the Debt Management Agency. The sale followed issuance of €1.3 billion worth of notes last month, and the country has now covered almost 30% of the €10 billion funding needs for 2024.

--With assistance from Peter Laca.

(Updates with the bond auctions starting in fifth paragraph.)

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