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Despite growing debt levels, the debt servicing capacity of households is

manageable. The ratio of household debt to GDP, while steadily increasing, is still relatively

low (22 percent in 2005).6 Most of the increase in household credit has been for mortgages, especially in the Bratislava region where household incomes have traditionally been the highest in the country. Coupled with the low exposure to foreign currency borrowing, the probability that a shock (e.g., an increase in unemployment) would significantly affect the debt servicing capacity is unlikely in the current environment.

Corporate sector


Growth in lending to the corporate sector was sluggish from 2003 to early 2005,

but has picked up more recently. The period of slow growth in corporate loans reflected, to some extent, banks’ caution about lending to enterprises due to their previous experiences with corporate NPLs. Further, many Slovak enterprises had been able to self-finance their activities during the recent period of strong economic growth, while some of the larger enterprises (e.g., car plants, steel plant, electronics, chemical factories, etc.) have multinational owners that arrange the enterprises’ financing needs from offshore. As a result, the leverage ratio of Slovak non-financial enterprises has been declining in recent years (Table 3). More recently, however, there are signs that some banks have begun lending to the

mostly untapped SME market. Around one third of loans to corporates are denominated in foreign currencies, but a majority of these loans are reportedly to exporters so the loans provide a hedge to their foreign currency revenues.

International exposures


Slovak banks’ currently limited reliance on their foreign owners for funding

reduces their direct exposure to external developments and risks. Domestic deposits in

Slovak banks are growing strongly (at an annual rate of 9 percent as of October 2006) and, in

contrast to the situation in some other CEE countries, banks have relied only to a limited extent on funds from foreign banks for financing domestic loans.

6 While average debt levels are low, anecdotal evidence indicates that a small proportion of households has much higher indebtedness. However, this does not present a significant source of risk.

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