The Slovak foreign exchange market experienced another calm period compared to neighbouring markets where we saw sharp movements and highly volatile trading. The Slovak crown (Sk) tested the level of 43.000 against the Euro again. However the crown was well bid at that level, supported mainly by high interest rates.
The crown was less sensitive compared to the other emerging market currencies and thus was well supported by speculative safe-haven buying by foreign financial institutions, as the Brazil problems still cast a cloud over emerging markets. Thus the exchange rate against the Euro moved lower and reached 42.780/830, the closing level on January 27.
Regional interest rates down; interest in Slovak markets up
The high interest rates on the Slovak money market are becoming ever more attractive, as the Polish and Czech money markets experienced a series of interest rate cuts during the last few weeks. The short end of the Slovak yield curve remained at high levels - well above 17.0%.
More than 50% of cumulative funds in the banking sector came from the central bank's 14-day refinancing repo-tenders. Yields between 14.05 and 15.00% were accepted in the last two repo-tenders. The longer end of the yield curve remained stable with three months and six months money quoted between 16.6 and 17.6%. The Finance Ministry did not accept any bids in the two-year state bond auction organised on January 26. The results have not affected interest rates.
A decrease in longer term interest rates is not expected as the market's appetite for central bank refinancing is very high. However, short term funds could move in either direction according to whether the sector experiences an actual surplus or lack of short term liquidity.
The future state budget balance will be crucial for the upcoming developments. Burgeoning state guarantees on corporate loans inherited from the former government may pose a threat to the state budget. The country's foreign trade deficit reached 80.8 billion Sk in 1998, which is the third year that we have had a deficit over 10% of GDP. However, the crown is expected to benefit from high interest rates for some time to come.
Author: Roman Petransky
