By Gunter Deuber and Oliver Marx, RBI Vienna |
Slovakia is a country where digitalization will have a strong impact on the future economic development. Digitalization is affecting and changing all industries. The automotive industry is surely no exception where the trend goes beyond the topics of Industry 4.0, i.e. there are strong industry-specific trends towards electric drive and smart vehicles. This shifts the value-adding in the car industry more to digital components. As in Slovakia every tenth employed person is working in this industry, digital transformation in the car manufacturing value chain will have a notable impact. Digital readiness of the workforce will be a key feature to ensure no losses in this sector. The good digital skills of the young Slovaks at euro area average levels are a supportive argument here. Moreover, there are selected areas where Slovak companies have achieved remarkable successes in implementing new ways of digital work into everyday business practices. But is Slovakia ready to embrace the challenges arising from the digital transformation?
Many digital active consumers and bank customers…
Slovakia’s overall digitalization level, measured by the Digital Economy and Society Index “DESI” from the European Commission, is about that of an average Central European country. Poland and Hungary are a bit behind, whereas the Czech Republic and Slovenia are higher ranked in the DESI than Slovakia. Core European countries (like Austria or Germany) and Northern European countries (like Sweden) score top positions here, the latter ones having a considerable lead.
With regards to the DESI subcomponents, Slovakia achieves relatively weak scores in the category Connectivity, showing a lack in general broadband accessibility. In this category it scores the lowest value in Central Europe and there is for instance still a substantial gap vis-à-vis Austria, a country that is also no true digital leader in Europe. However, in case of a rather monocentric country like Slovakia one must be cautious that such country-wide digital infrastructure assessments must not reflect the conditions in the major agglomeration area (i.e. Bratislava).
Slovaks overperform in usage of internet services, e.g. when it comes to entertainment, communication or transactions such as shopping or banking. Around 80 percent of the population are already actively using digital payments, which is rather high reading from a regional perspective. Moreover, this ratio has increased by some 10 percentage points over the last few years. Therefore, it seems that by 2020 around 90 percent of the Slovak population may be actively using digital payments. The ratio of the population actively using the internet to pay bills and to go for shopping has also increased from some 37 percent to 57 percent over the past few years. Therefore, in the fields of banking and payments the Slovak market is growing rapidly at an already decent level of digital maturity.
In terms of digital maturity in the banking sector and the acceptance of digital services by the population, Slovakia scores equal with the leading regional banking sector of Poland, regarding some indicators Slovakia is also outpacing neighboring Czech Republic. Hence, it comes as no surprise that Slovak banks – despite operating on a rather small market, with an estimated three million of active digital customers – usually score well in regional and/or European rankings when it comes to the usage of innovative digital services. Relevant public actors are also strongly supporting the innovativeness of the banking sector (e.g. the Slovak Ministry of Finance has established a Center for Financial Innovation). That said, the banking sector shall be also seen as an important means to support the overall digitalization of the country. This aspect is of importance, as not all parts of the economy and digital ecosystem are equally developed yet.
But even in the digitally mature banking sector one can see a certain distance to the leading European countries. Some indicators of the degree of digital maturity of the local banking market (e.g. usage of internet to pay bills, to shop or for digital payments) show good levels compared to regional neighbors, and in some cases also compared to Austria. However, there is still considerable potential to catch up with leading European countries such as Sweden, Finland and Estonia. In Estonia well over 90 percent of the population now use digital payments, in Slovakia the figure is “only” 80 percent. And it is precisely this example that shows that a country’s digital maturity is not per se dependent solely on income levels.
… possibly not enough for a successful country-wide digital transformation
Like with the DESI, Slovakia occupies only a mediocre position in the “Knowledge and Economy Index” of the EBRD. In contrast to the DESI, the latter does not only focus on digitalization but on innovation and knowledge in general. In the 2018 results Slovakia ranks a bit lower compared to its CE peers, only beating Hungary, being far behind Austria. Rather weak ICT-Infrastructure scores here also support the mediocre Connectivity results in the DESI mentioned previously.
Although the assessment of innovation capabilities is at average CE levels in Slovakia, they have shown improvement in recent years. Compared to 2011 results Slovakia was the central European country with the highest gains which led to the surpass of Hungary. Important skills for innovation have shown strong relative improvement. This includes the quality of the educational system. As for future improvements Slovakia’s regional demographic advantage should be of help. It has the youngest population in CE and is among the youngest in Europe with a median age of just 40.2. Moreover, Slovakia has had a positive net migration since 2011, while the biggest group of inflow is coming from Ukraine in recent years. This is of importance, as younger Ukrainians are usually characterized by a decent degree of digital competences and affinity. The combination of a young population, which is more eager to accept changes than an old one, and no expectations of a future “brain drain” are good preconditions for future improvements in digital maturity.
Digital infrastructure investments will be key
In summary, Slovakia’s economy has some more and some less developed areas when it comes to the degree of digital readiness. The banking sector is surely one of the more digital developed areas and has shown steady improvement. The overall digital maturity level of Slovakia is at a moderate level, i.e. at an average Central European peer level. The gap to core euro area countries such as Austria or leading European economies in the digital space or in digital banking (Sweden, Finland) though is still considerable. Especially the digital and ICT infrastructure seem to need tangible improvement, especially broadband accessibility. Although demographic factors will help to improve digital maturity of the population in the future, the deficit in digital infrastructure will need substantial investments. Such investments will also be key to support the rather strong competitiveness position of the banking sector in the digital space going forward.
Gunter Deuber is Head of Economics, Fixed Income and FX Research at Raiffeisen Bank International in Vienna.
Oliver Marx is an analyst for Central and Eastern Europe in the Economics Department at Raiffeisen Bank International in Vienna.