Slovak interbank money market rates soared to high levels during the last two weeks of October. The main events on the market were the two auctions of state securities by the Finance Ministry. The yields from state treasury bills (T-bills) have skyrocketed, reaching record heights on October 16, averaging a 30.617 percent yield at an auction of 34-day T-bills.
The money market crunch, resulting partly from the late May attack on the crown, has made refinancing of the state budget shortfall more expensive and boosted local interest rates. This prompted Finance Minister, Sergej Kozlík to hold talks with the central bank and commercial banks on October 22 and request the commercial banks to stop the trend of unacceptably high yields they demand from state securities.
This has brought positive results, since a consensus was reached that interest rates should go down to slightly lower levels. Kozlík didn't specify in what way or who exactly should cut rates but he said he foresaw a decline in yields to around 25-26 percent.
The next ministry's auction of 202-day treasury bills on October 23 set the further direction for interbank rates. The average yield at the auction fell to 26.58 percent, with the minimum accepted yield being 25.00 percent. However, the maximum yield still hit 31.00 percent, much to the surprise of traders who had expected that the ministry would not accept yields much higher than 26 percent. The ministry accepted bids worth 5.436 billion crowns out of the total demand of 5.656 billion.
Even though there was apparent liquidity surplus in the banking sector during the two-week period, the National Bank of Slovakia (NBS) held three 7-day refinancing repo tenders to pump up liquidity to the market in order to calm down the sector and interest rates. However, short term rates hovered at around 29 to 32 percent during the most of this period, which preceded the deadline for fulfilling the NBS-prescribed minimum reserve requirement (PMR). Longer-term deposits were traded between 25-28 percent interest.
There is still no obligation to quote the longer-than-two-weeks deposits, making the market lack liquidity and spreads remain very wide. At the next ministry's auction of 35-day T-bills on October 29, the average yield dipped to 26 percent. The ministry accepted bids worth 1.0 billion crowns, with the minimum, maximum and average yield being the same, indicating that the ministry accepted only one bid.
During the last days of the month, short-term rates eased to 18.00 percent, a consequence of surplus liquidity and last days of PMR period. In the following seven weeks, the ministry is planning to hold seven auctions of longer state T-bills (224-280 days). We expect the average yield at these auctions to be at 22-26 percent, which will keep short-term interest rates well above 26 percent and longer periods between 24 - 26 percent.
On the forex market, the Slovak crown was traded within a narrow margin between 0.9970 and 1.0050 of the currency basket index. The average trading volume was thin and the market lacked a stronger impetus to move the rate in either direction. The NBS seems determined not to fix the currency on the appreciation side of dollar-mark basket band. High yields and less liquid money market support the currency very well.
On the other hand, continuing current account deficit and growing external debt leave Slovak crown vulnerable. The trade deficit grew by 1.695 billion crowns in September, widening the trade gap for the first nine months of the year to 39.236 billion crowns. The September increase was only minor but was expected, since the administrative measures to limit imports imposed last summer appeared to be bringing desired effects. The Finance Ministry said it has already repaid the loan principals planned for this year, pushing the total deficit shortfall at 27.9 billion crowns for the first nine months of this year.
The Central European economies are not expected to be directly affected by the Asian currency turmoil during the last week of October which caused concerns on all emerging markets. It is believed that relatively low capitalization of these markets, their lesser transparency and lower stage of development will protect them.
