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Slovnaft reports troubling 1998 results, Slovak income tax laws modified

Investors moved with caution during last week of March and the first week of April on the Slovak equity market. Trading activity was low, although a few, larger direct trades somewhat inflated market statistics. Average daily turnover during the two weeks reached 92.4 million crowns. The SAX index hovered around 83 and closed at 83.11 on April 6. Biotika gained over 65%, soaring to a value of 320 crowns per share, while Slovenske Lodenice shares dropped to 255 crowns.

Investors moved with caution during last week of March and the first week of April on the Slovak equity market. Trading activity was low, although a few, larger direct trades somewhat inflated market statistics. Average daily turnover during the two weeks reached 92.4 million crowns. The SAX index hovered around 83 and closed at 83.11 on April 6. Biotika gained over 65%, soaring to a value of 320 crowns per share, while Slovenske Lodenice shares dropped to 255 crowns.

Slovnaft limps through 1998

In what was not an unexpected proclamation of bad news, Slovak oil refiner Slovnaft a.s announced 1998 gross profits of 909.6 million crowns ($26.1million), less than a third of the 3.113 billion crown gross profit it posted in 1997. Its net income was only 11 million by Slovak accounting standards and 70 million crowns by international accounting standards. The company's profit crash was in large part caused by a substantial fall in the world crude-oil price and significant devaluation of the crown over the year. In connection with the gradual devaluation of the crown, the refinery had to create reserves totalling 1.6 billion crowns.

Slovnaft also announced that it had contracted Salomon Smith Barney to advise it on a strategic partnership with a foreign oil company. Slovnaft President Slavomir Hatina told journalists that the partnership would be conducted via a basic capital increase. Slovintegra, the current majority shareholder, is prepared to give up its majority stake to the foreign partner. The EBRD, which currently holds 10.5% stake in Slovnaft, also said it is willing to sell its share after a strategic investor steps in Salomon Smith Barney said that potential investors have already expressed an interest to buy a strategic stake in Slovnaft, but added that no discussions have been initiated yet.

Slovnaft intends to hedge out three loan contracts worth a total of $150 million, which it took out on 1996-1997. They are inversely linked to the price of oil, which collapsed in 1998, resulting in substantial interest payments. The cost of these loan agreements to Slovnaft was $19 million in the first quarter of this year, based on $10.50 Brent crude oil prices. Salomon said that on an annual basis this would amount $67.5 million at $10.50 oil, but that figure would fall to $36 million at $13.60 crude. Slovnaft and its advisors said they may consider seeking compensation from Merrill Lynch, which has 'lead managed' a total of four loans for Slovnaft.

State budget predictions

The parliament finally approved the state budget for 1999, after 25 hours of unproductive discussions with more than 300 comments, most of which came from the opposition Movement for a Democratic Slovakia (HZDS) and Slovak National Party (SNS) parties. The budget forcasts a deficit of 15 billion crowns ($365.2 million), which corresponds to 2% of GDP, with revenues of 179.9 billion crowns and expenditures of 194.9 billion crowns. The government's budget assumes a gross domestic product growth of 3% and an unemployment rate of 15%.

In the first quarter of 1999, the state budget posted a surplus of 1.03 billion crowns ($24.6 million). Budget revenues were 40.89 billion crowns and expenditures were 39.86 billion crowns, or 2.97 billion crowns less than in the same period of 1998. Revenues fell by 470,000 crowns. Slovakia was running on the provisional budget in the first quarter of the year, which was based on the first quarter budget last year.

Personal and corporate income tax laws changed

The government also approved the amendment on Personal and Corporate Income Act, which was due to come into effect on April 1. Foreign investors will be able to use higher depreciation rate, such as a rate of 5% for real estate and 30% for machinery. The amendment also reduces the tax burden of households with a monthly income lower than 7,000 crowns and increases personal income tax of high income earners (those with an annual income higher than 3.240 million crowns) to 46%.

Producer price index remained unchanged

The Slovak producer price index (PPI) remained unchanged on a month on month basis in February. An 0.8% increase in electricity, gas and water prices was offset by a 0.1% drop in the prices of industrial products. On a yearly basis, PPI rose by 1.4%. Industrial production in January fell by 10.4% compared to the average month of 1998.

Since January 1999, the Slovak Statistical Bureau had changed the methodology for calculating the industrial production index (IPI). From now on, the basis period to which the monthly industrial output will be compared is the average month of the previous year. Comparative data have not yet been released.

Construction output continued in its downward trend and decreased by 21.2% year-on-year in January 1999, after an 18.2% drop in December 1998. The figures were moderated, however, by the fact that construction output had leaped 15.2% in January 1998 compared to January of the previous year, due to the substantial highway and water dam programs of the previous government.

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