In the wake of a sharp weakening of the Slovak crown in late February, money market players were predicting that the currency would fall another 5-10% in the coming months.
The analysts said the weakening was due to specific recent market developments - poor country ratings from two major ratings agencies and the sudden decision by a major money market player to close its crown position. Central bank and Finance Ministry officials, meanwhile, said they were comfortable with the crown's performance and would not intervene to either protect or devalue the crown, for the time being.
On February 22, the Slovak crown (Sk) weakened to 45.70 Sk against the euro, its lowest level since the National Bank of Slovakia (NBS) cancelled the plus/minus 7% fluctuation band for the currency last October. The crown opened on February 23 at 39.94 Sk to the dollar, a fall of approximately 15% from its level of 34.70 Sk against USD on October 1.
"It's a natural development of the currency," said Ivan Chodák, an analyst with Creditanstalt Bank.
Chodák said that the crown had been falling since it was floated by the NBS last October. "Basic economic figures proved that the exchange rate was inflated and made the fall inevitable. Sooner or later, it will fall even lower," Chodák said, adding that he expected the crown to fall to 20% below its October level by the end of 1999.
Niels Landorff, an analyst with Bank Austria, said "[the crown] climbed down the ladder, but I wouldn't expect it to go more than 5% further [making 20% in total since October]."
In response to the drop, central bank officials said they would not intervene to protect the currency.
NBS Vice Governor Marián Jusko, in an interview for the Reuters news agency on February 19, said that since the flotation of the crown on October 1, the central bank had abandoned the idea of using interest rates to defend the crown as a matter of course.
"The central bank, when it abolished the bands [within which the crown was fixed], said it would not intervene to defend the crown... We have our impression of where the crown should be but we won't publicise this," Jusko said.
Jusko added, however, that should the crown go outside this range for short term reasons that did not reflect fundamentals, the bank would be prepared to make occasional interventions.
On the same day, the NBS released an official statement calling the crown's weakening "a short term fluctuation" in a range acceptable to the bank. The statement also predicted that the crown would return to around 43.00 Sk to the euro in the near future.
NBS spokesman Ján Onda told The Slovak Spectator that the bank would never reveal the level at which it would intervene to protect the crown, and said that the bank was also not considering an administrative devaluation of the currency.
"At the moment, the trend is not to discuss the application of administrative steps to adjust the exchange rate," he said.
Cabinet officials have also said they did not feel their goal of currency stability imperilled by recent developments. At a February 15 press conference, Finance Minister Brigita Schmögnerová said that a maximum depreciation of 10% from the current exchange rate in 1999 would still be commensurate with stability.
Curiously, the resolve of the central bank and the ministry not to interfere on the market may have reinforced the currency's downward trend. Rastislav Živor, a dealer with the Dutch investment bank ING Barings, said that "the statements of the NBS and the Finance Minister could have been wrongly interpreted, and the [perceived] limits for currency depreciation may have affected actual developments."
All involved in the currency question agreed, however, that short-term factors rather than longer-term fundamentals were at the heart of the currency developments.
On February 18, Standard & Poor's affirmed its March 1997 rating for Slovakia which had dropped the country into the non-investment, speculative category.
Helen Hessel, an S&P analyst, told the daily newspaper Sme on the same day that "Slovakia's macroeconomic problems require a strong government, which the country doesn't have."
Moody's, another global ratings agency, announced on February 19 that it had dumped its outlook on Slovakia from a stable to a negative level. "The change in outlook to negative from stable reflects the stresses and uncertainties of the next two to three years, when the new Slovak government's austerity program will lead to a sharp slowdown in economic growth and a potential rise in bankruptcies in the corporate sector and bad loans in an already-weak banking system," read the Moody's statement.
Onda confirmed that the fall in the value of the crown had been influenced by the ratings changes, as well as by the delays in the cabinet's approval of the 1999 state budget.
"S&P's and Moody's ratings had some influence on the currency weakening, and another factor was the ongoing discussion about the budget," he said.
The 1999 budget draft was finally approved by cabinet on February 22, and now has to be approved by parliament, where the government has a huge majority. Onda said that parliamentary approval of the budget would have a positive influence on the crown.
Foreign client leaves
According to Dušan Svitek, chief dealer at state-owned Slovenská Sporiteĺňa (SLSP), the country's largest bank, the environment on the money market changed dramatically when a London-based bank closed its crown position, worth 20 million euros, in the second half of February.
"A foreign client left the [Slovak] market and sold its crowns, and the low liquidity in the market led to an even more remarkable [downward] movement of the crown's exchange rate," he told the news agency SITA.
Chodák agreed, calling the crown fall a natural consequence of the gathering clouds over the Slovak money market. "
The market was worried [by the crown sale], and the ratings destabilised it even more," he said.