The last two weeks of February were fairly quiet on the foreign exchange market, but the money market recorded an interesting development. The Slovak crown slightly firmed during the period, entering a consolidation phase after somewhat unstable developments in January.
The foreign exchange market is currently so illiquid that even significant moves of the Czech crown against the Deutsche mark have no impact on the Slovak crown. Most forex market players follow the National Bank of Slovakia's (NBS) fixing. As a result, the NBS is finding it difficult these days to manage its goal of establishing a realistic value for the Slovak crown against both the mark and the dollar.
Unlike the forex market, the money market is experiencing a quite exciting period. Until mid February, interbank rates had been continuously falling. This should be attributed to a slight change in the NBS's monetary policy. Through two repo tenders held over the period, the NBS added surplus liquidity worth 5 billion crowns to the sector. As a result, the sector's liquidity in mid February was 3.7 higher than the minimum reserve requirements set by the NBS, but as the deadline of February 13 approached, the NBS didn't hold any reverse repo tenders in order to drain the surplus liquidity.
The following week, the head of the NBS's Open Market Operation Department, Peter Andresič, announced that the NBS would try to achieve lower rates, especially long-term ones. "Using long-term repo tenders and fewer sterilization operations could contribute to the rates' decline," Andresič said, but added that a fast decline was unlikely.
Given the current situation, in which short-term rates are fluctuating between zero and 30 percent (last week the band was between 15-17 percent), probably the best way to stabilize the money market and to pull the rates down in the long run would be through pumping long-term liquidity into the sector via long-term repo tenders. Using short-term repo tenders will barely push long term rates under the current 20-percent level.
In contrast to last year, when due to a huge current account deficit the NBS was forced to tighten its monetary policy through reducing the M2 aggregate's annual growth from 16.5 percent in December 1996 to 8.8 percent in December 1997, this year the NBS may be able to ease its monetary policy a bit. This will give the corporate sector better access to funds.
However, lower rates may not automatically mean easily-accessible funds for the Finance Ministry (FM) while selling their T-bills and state bonds. The ministry announced the repayment of the debt principal will amount to 46.3 billion crowns this year. After adding a planned 1998 fiscal deficit of 5 billion crowns, the FM must place T-bills and bonds worth more than 51 billion. Knowing this, the money market players will undoubtedly try to attain the best yield. In order to prevent this, the government has tried to amend the NBS Act to allow the FM to refinance a larger part of the deficit by the NBS, or at least to have an open door in case the market doesn't allow the accessing of funds at reasonable conditions. Last year set a valuable precedent, when the ministry was forced to accept almost any yields.
During the past two weeks, the FM has held two T-bill and two bond auctions. No bids were accepted, partly due to high yields requested by banks and partly due to the state budget's current surplus. However, the showdown between the ministry and market players is bound to happen sooner or later, as the budget usually shows a surplus during the first two months of the year.
Author: Andrej Hronec
