New NBS Governor Marián Jusko (left) took over his post from the outgoing Vladimír Masár on July 28.
"If the difference in the development of the currency and the economy becomes significant, I see space for correction of the Slovak crown exchange rate," Masár said.
The Slovak crown strengthened to 44.700 SKK/EUR in a mid-July lull from a May trough of 48.300 SKK/EUR. But analysts pointed out that the crown's recent strength reflected a recent excess of foreign currency liquidity rather than an improvement in economic fundamentals.
Slovakia issued 500 million euros worth of five year bonds at the end of June, while the International Finance Corporation launched a one billion crown bond in mid-July.
"This firming is not a lasting phenomenon. The fundamentals are not that great, and the crown could still weaken," said Martin Barto, chief strategist at state bank Slovenská Sporiteľňa (SLSP).
Masár agreed that Slovakia's macroeconomic situation had improved only marginally since the beginning of the year. Preliminary results indicate that the trade gap for 1H99 was 27.3 billion crowns, which is fully 70% of the trade deficit during the same period last year.
"Fiscal developments were not entirely positive either, although the government took certain steps towards the consolidation of public finances," added Masár. "The need for refinancing is depressing interest rates on the domestic interbank market."
Masár also cited concerns with Slovakia's foreign debt, which although improving through the first quarter of the year (see Economic Briefs, this page), had been inflated by the recent eurobond issue and the IFC bond. The recent issues, he said, had also decreased the volume of foreign loans available for other Slovak entities.
The NBS is critical of the slow pace of economic restructuring in the first half of 1999, and is particularly unhappy that no progress has been made with the banking sector. Masár linked these deficiencies to a lower-than-anticipated influx of direct foreign investments. In the first four months of 1999, he said, foreign investments totaled 2.2 billion crowns, only one-third of the volume in the same period of 1998.
The NBS revised its monetary program for 1999 earlier this year, in particular with regard to projected GDP growth and the fiscal deficit. The central bank now expects GDP growth to 2% and a fiscal deficit of below 3.3% of GDP. The current account deficit is now set for between 5 and 6% of GDP, while net inflation should be 13.5 to 15.5%.
However, Masár said that government guarantees for corporate loans, as well as the increased cost of financing the foreign debt (the crown has fallen 4.5% since January) have shaken the central bank's confidence in its fiscal deficit projections.
If the current account deficit and the state budget deficit remain above projected levels, Masár said, the NBS will keep interest rates high in order to limit domestic demand.