Money mirrors forex
The situation on the Slovak money market mirrored the forex market, with low trading activity. Liquidity on the market has increased in the last several weeks, so most traders now estimate that the banking sector will again fulfill its minimum reserve requirements (PMR) after missing it five consecutive times in the beginning of the summer. Also, the banking sector is not dependent on support from the central bank, a fact seen by the slide in short-term deposits from 23/25 percent on August 11 to 16/20 percent on August 15.
An auction of three month treasury bills on August 13 saw yields surpass the magical 20 percent barrier, bearing yields of 22.5. Outstanding yields were also registered from 2.4 billion Sk in Ministry of Finance auctioned 1-year state bonds, with bids accepted at 21.4 percent yield.
The auction only makes it clearer that the government is forced to take even more desperate measures to cover the state budget deficit. It also unmasks the unpleasant fact that the central bank cannot cover the budget shortfall from its own sources because the bank already has the maximum 5 percent in reserves of revenue from last year's budget and refuses to cross this line.
We do not expect that the budget deficit will improve drastically in the coming months. As we wrote in the last issue, we expect that yields of new T-bill auctions will reach levels well above 20 percent for at least the next period.
The government's attempt to cover the budget with these rates does not make us very confident about future developments concerning the state's money supply, and we think the cabinet will be forced to look for new sources from abroad. If that happens, we can expect the economy to overheat, with an increase in the consumer price index to be the first signal.
We expect a meeting of reference banks in the first half of September, where leaders may come to agreement on creating new rules for trading Foreign Rate Agreement (FRA) contracts, especially shorter FRA contracts and minimum amounts per deal. Bank leaders could very well shy away from forging a deal due to their nervousness that the money market will again be weak if another attack on the Slovak currency occurs as it did last May.
Prepared by Braňo Matušek from the dealing department at Slovenská Sporiteľňa, a.s. Bratislava.
