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Low liquidity hurts equity market, while Nafta Gbely repo worries investors

The equity market did not experience any considerable changes over the first two weeks of February. The official SAX stock market index gained 4.2% and closed at 95.37 on February 9. Slovnaft, with 44% of total SAX capitalization, rose by 5.6% and lifted the index. The stocks of VÚB appreciated and after their sharp decline in January closed at 650 Sk.
During the last two weeks, the traded volume reached only 1.2 billion Sk on the BSE and 87 million Sk on the RM-S. Liquidity is the main problem of the equity market.

The equity market did not experience any considerable changes over the first two weeks of February. The official SAX stock market index gained 4.2% and closed at 95.37 on February 9. Slovnaft, with 44% of total SAX capitalization, rose by 5.6% and lifted the index. The stocks of VÚB appreciated and after their sharp decline in January closed at 650 Sk.

During the last two weeks, the traded volume reached only 1.2 billion Sk on the BSE and 87 million Sk on the RM-S. Liquidity is the main problem of the equity market. Even a small transaction can balloon the price of stocks. State papers are the most traded securities on the capital market, contributing over 75% to the total turnover. State bonds and T-bills are safer and bare significantly higher yields, which stocks can not offer. Direct trades with 90% dominate the market.

Liquidity can be boosted by introducing new stocks in interesting companies from the FNM privatization agency portfolio, a plan that has already been announced by FNM president Ľudovít Kanik. However, concrete steps have not been taken yet.

The Slovak government still has not begun its promised capital market reform. Low transparency, insufficient regulation and protection for minority shareholders remain main the barriers to the entry of foreign investors.

SAX base changed

At the beginning of February, the SAX index base was changed. Index administrator Creditanstalt replaced Váhostav, Drôtovňa and Považské Strojárne with Grafobal, Chemolák and Slovenské Lodenice. Liquidity and market capitalization are the main criteria for inclusion in the SAX base, but transparency and information policy are taken into account as well.

The balance of payments deficit dropped to 6.830 billion Sk at the end of October 1998, bringing the total deficit to 17.849 billion Sk. The surplus on the capital and financial account was 48.475 billion Sk, while the current account deficit widened to 63.42 billion Sk.

Industrial output in December fell 1.7% year-on-year (Y-o-Y), the lowest figure posted in 1998. Cumulative industrial production for 1998 grew by 5.2% Y-o-Y. Construction output in December decreased by 19.1% Y-o-Y, bringing the annual decline to 3.7%. This development is due to a sharp decline in state-funded orders, especially in the highway and water-dam program.

Average nominal industrial wages grew by 8.8% in 1998 to 10.186 billion Sk ($291.6) per month, compared with a 12.0% nominal increase in 1997.

The consumer price index in January rose by 3.0% m-o-m and 6.8% Y-o-Y, up from December's figures of 0.2% m-o-m and 5.6% Y-o-Y. This jump can be attributed to the government's increase in regulated prices, especially energy prices, which rose by 11.9% from last month.

The Finance Ministry has prepared the 1999 state budget draft, which should be approved by parliament at the end of February and come into effect in April. The draft includes additional expenditures in the health care and agriculture sectors, and also proposes cuts to the Slovak Intelligence Service budget by 260 million Sk. The projected deficit remains 15 billion Sk.

The IMF views the economic reform package approved by the government last month as very positive, but says that if additional measures are not taken, the fiscal deficit of the public sector will reach 3.5% of GDP, leaving the 1999 budget with a deficit of 20 billion Sk.

Nafta Gbely back to state

The Slovak government has decided to declare the privatisation of the lucrative oil and gas storage company Nafta Gbely invalid, and after court confirmation, a 45.9% stake will return to state hands.

Nafta was privatized in 1996 under the regime of former Prime Minister Vladimír Mečiar by a joint stock company named Druhá Obchodna for a price that was one seventh of the actual market price. Its stocks were traded around 2,000 Sk at that time.

The government decision has raised many questions; on the one hand, the Prime Minister has pledged to review some doubtful privatization decisions which were unfavorable for the state. On the other hand, this move has created uncertainty on the market and has increased tensions.

Slovakia needs an inflow of foreign investment and decisions of this kind are viewed very negatively from the investor perspective. Nafta Gbely, as a strategic gas storage company, is important in the gas supply diversification process. It is an attractive investment opportunity, but it requires restructuring and capital.

Tomáš Kmeť is an equity analyst with ING Barings

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