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Stock market wearily pegs another record low on loss to Slovnaft stock

The equity market was very gloomy over the last two weeks. The official SAX index fell under the 75 point level on 20 April, setting another all time low. In spite of that, trading activity did not slow down, and average daily turnover in April actually increased to 105.9 million Slovak crowns.
The significant drop in the SAX index was prompted by the price decline of its major constituent, oil refiner Slovnaft, which has an almost 50% weighting on the index. Market players have long asked themselves whether the SAX, with its heavy Slovnaft bias, really reflects stock market activity, but over the last two weeks there was no mistaking the overall bad signs. The prices of all main blue chips fell, with VÚB state bank posting a major loss as its shares were traded around 480 crowns. State insurer Slovenská Poisťovňa and steel producer Železiarne Podbrezová were the only issues which appreciated.

The equity market was very gloomy over the last two weeks. The official SAX index fell under the 75 point level on 20 April, setting another all time low. In spite of that, trading activity did not slow down, and average daily turnover in April actually increased to 105.9 million Slovak crowns.

The significant drop in the SAX index was prompted by the price decline of its major constituent, oil refiner Slovnaft, which has an almost 50% weighting on the index. Market players have long asked themselves whether the SAX, with its heavy Slovnaft bias, really reflects stock market activity, but over the last two weeks there was no mistaking the overall bad signs. The prices of all main blue chips fell, with VÚB state bank posting a major loss as its shares were traded around 480 crowns. State insurer Slovenská Poisťovňa and steel producer Železiarne Podbrezová were the only issues which appreciated.

Corporate results come in

Pharmaceuticals company Slovakofarma announced its financial results for 1998. Sales remained flat and reached 5.361 billion crowns ($127 million). Gross profit totaled 1.805 billion crowns compared with 2.165 billion in 1997. This decrease was caused mainly by an overall decline in gross margins as Slovakofarma's high margin products were pushed off store shelves by the products of consolidated companies with lower gross margins. The Russian crises have seriously hurt the firm's exports to Russia and the Ukraine, while significant provisions had to be created to cover receivables from eastern Europe. Net income was 227 million crowns compared with 403 million in the previous year. Earnings per share declined from 2,687 crowns in 1997 to 137 crowns in 1998.

Telecom sales mania

Telecommunications Minister Gabriel Palacka announced that a 34-49% stake of fixed line monopoly Slovenské Telekomunikácie (ST) will be available to strategic foreign partners after a capital increase in the second half of this year. The tender for the selection of the investor will be called on July 1.

The ministry received no bids in a tender for a mobile phone network operating in the 1800 MHz frequency band and using the GSM technology standard. Slovakia's two existing GSM mobile network operators, which use the 900 MHz band, were excluded from the tender.

The Slovak government is considering a sale of its 36% stake in Globtel GSM, which the Telecom Ministry owns through several Slovak utilities. Globtel's other shareholders are France Telecom, with 35%, and Slovak holding company Slovtel with 29%. All current shareholders have pre-purchase rights on Globtel shares. The Telecom Ministry has set the condition that 25% of Globtel remain owned by a Slovak entity. Globtel GSM is one of two Slovak GSM operators; the firm has more than 375,000 mobile subscribers, compared to Eurotel's 265,000. The ministry expects to get at least 3.6 billion crowns for its 36% Globtel stake, which might be unrealistic.

CPI positive, but industry in slump

The consumer price index rose 0.3% month-on-month in March, bringing year-on-year inflation to 7%. In comparison with the same period last year, the prices of housing, water and energy have risen the most (by 17.2%), followed by hotels and restaurants (7.8%); the prices of foodstuffs have grown only slightly, by 2.3%.

The March inflation rate is a pleasing result, and it is a return to the standard monthly level of inflation which has been seen in recent years. The increase in state-regulated prices from the beginning of this year had only a limited impact on prices in other sectors.

Slovak industrial production fell 12.9% in February compared to the monthly average in 1998. During the first two months of this year, sales from industrial activity grew 4% year-on-year. The unemployment rate was 17.6% at the end of March 1999, up from 16.5% in the previous month. The total number of unemployed increased to 470,000. The National Labour Office estimates that 130,000 of those people receiving unemployment benefits are working illegally, which points to weak control of the present social system.

Average nominal monthly wages in February rose by 8.6% year-on-year in industry (to 10,037 crowns), 1.8% in wholesale, 3.9% in retail and 1.9% in transport. Wages in the construction sector declined for the second consecutive month and fell 4.6%. Slovak retail sales rose by 3.1% in February 1999 year-on-year, compared with a 9.9% increase in January. The private sector contributed 97% of the total. During the first two months of this year, retail sales swelled 6.4% year-on-year to 61.7 billion crowns.

As no agreement was reached in a dispute over whether to increase VAT rate or impose an import surcharge, the cabinet decided to raise the consumption tax on hydrocarbon fuels and lubricants by 1,000 crowns ($24.1) per tonne.

Tomáš Kmeť is an equity analyst with investment bank ING Barings

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