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Market turnover falls, SAX continues decline on losses to steelmaker VSŽ

The equity market continued in its sluggish trading during the middle two weeks in February. The SAX lost 7.7% and closed at 87.98 on February 22. Slovakofarma gained 3.7% and seems to have stabilized at this level. Slovnaft weakened 0.5% and is trading at 650 Sk. VSŽ stock continues to plummet, falling 20.5% to 155 Sk in the past two weeks and over 120% since elections last September. Average daily turnover on the equity market dropped to 74 million Sk in February, compared with 97 million Sk in the first month of 1999.

The equity market continued in its sluggish trading during the middle two weeks in February. The SAX lost 7.7% and closed at 87.98 on February 22. Slovakofarma gained 3.7% and seems to have stabilized at this level. Slovnaft weakened 0.5% and is trading at 650 Sk. VSŽ stock continues to plummet, falling 20.5% to 155 Sk in the past two weeks and over 120% since elections last September. Average daily turnover on the equity market dropped to 74 million Sk in February, compared with 97 million Sk in the first month of 1999.

Rating agencies S&P and Moody's affirmed ratings

Standard&Poor's affirmed the Slovak Republic's BB+ long-term foreign currency sovereign and senior unsecured ratings and BBB+ long-term local currency sovereign and senior unsecured ratings. The outlook remains negative.

Behind this decision are doubts about the government's ability to reduce the fiscal deficit and restructure the industrial and banking sector. The deteriorating economic situation, after years of economic growth, could seriously undermine the government's power to implement needed austerity and restructuring programmes, especially given the coalition's ideological diversity.

Moody's Investors Services confirmed the country's Ba1 long-term foreign currency ratings, but changed the outlook to negative from stable, due to a weak banking system, reduced corporate competitiveness and payment discipline, ineffective use of the bankruptcy code and fragile external liquidity. If the government effort's falter, the agency said in a public statement, economic growth and the diversification process will slow down and lower ratings will follow.

Tax collection remains a threat

Budget revenues in January 1999 reached 14.577 billion Sk while expenditures came to 10.663 billion Sk, creating a surplus of 3.909 billion Sk. Budget tax revenues, however, reached 12.288 billion Sk, which was only 82% of the January 1998 figure. The state budget counts on tax revenues of 155.7 billion Sk in 1999, meaning that January collection represents 7.9% of the final target.

Collection of VAT fell by 19% year on year, while income tax dropped 2% year on year to Sk3.1bn. The lowest collection rate came in the area of corporate taxes, which represented 789 billion Sk, a 33% decrease compared with January 1998.

Weak tax collection is threatening the feasibility of the proposed 15 billion Sk budget deficit target. To increase tax payment discipline, the Ministry of Finance plans to introduce strict tax control and company inspections, as well as to make tax dodging a criminal offence.

State budget should be approved in March

The government finally approved the 1999 state budget. It includes revenues of 179.9 billion Sk and expenditures of 194.9 billion Sk. The projected budget deficit should reach 15 billion Sk, which represent 2% of GDP.

The Ministry of Finance announced the government had adopted measures to shore up revenues through higher fees on identification cards, drivers' licences and passports. The government will also impose taxes on motor vehicles, fuels and tobacco. Increases in VAT have not yet been introduced.

Parliament is expected to approve the 1999 budget before the end of March. The government is still very reluctant to set hard budgetary constraints, therefore the deficit of 15 billion Sk is seen as too optimistic.

NBS approves new banking law

The NBS board approved a draft of a new banking law proposed by the Ministry of Finance. This law will strengthen the supervisory power of the central bank, which can lower the basic capital of a bank by an amount equal to losses exceeding the total working capital. The new law restricts the powers of shareholders, who gained their stakes by doubtful or illegal transfers, to take steps against the best interests of the bank. The central bank will also change the methodology of calculating the required reserve ratio, by including non-resident banks' deposits into the base for reserves.

Slovenská Poisťovňa suffers from investment misallocation

Slovenská Poisťovňa, the largest insurer in Slovakia, expects a loss of 100 to 500 million Sk in 1998. The main reason for the loss was the need to create provisions against investment activities that were clearly unfavorable to SP, and which had been launched by the previous management. The most obvious loss-making investments concerned bonds of shoe manufacturer JAS Bardejov, a decision to raise the share capital of state bank IRB by 2 billion Sk, or an upgrade of the insurer's IT system, which proved to be overpriced as well as inefficient.

Slovak Post to be transformed

A tender for a stake in the state-owned telecom monopoly Slovak Telecom (ST) will be delayed until April, after the company's transformation into a 100% state-owned joint stock company. Another state owned company with a monopolistic position, Slovak Post (SP), is also a candidate to be turned into a joint stock company.

The state secretary of the Ministry of Transport, Telecom and Post, František Kurej, announced that the SP transformation project should be prepared by the end of May. A minority stake of SP will be offered to foreign investors, who would ideally participate in restructuring and modernisation processes. A majority stake would stay in state hands, while a small stake could be floated on the BSE floor in exchange for FNM bonds.

Tomáš Kmeť is an equity analyst for ING Barings

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