Slovak equity market undergoes technical correction

The market experienced a technical correction during the last fourteen days as the SAX index fell by 3.2% to 91.53 on January 26. This correction was expected as a group of investors have taken advantage of remaining liquidity problems and the inflated prices of stocks in their portfolios.
The stocks of the VÚB bank are the best example of this trend. A technical transfer of 100 shares on the last trading day of 1998 pulled the price of VÚB to 1,040 Sk, up 15% from the previous day. Since mid-January 1999, VÚB has experienced a sharp fall and has lost almost 50% of its 1998 year-end value. Slovakofarma gained 6% and seems to have stabilised at 2,000 Sk.

The market experienced a technical correction during the last fourteen days as the SAX index fell by 3.2% to 91.53 on January 26. This correction was expected as a group of investors have taken advantage of remaining liquidity problems and the inflated prices of stocks in their portfolios.

The stocks of the VÚB bank are the best example of this trend. A technical transfer of 100 shares on the last trading day of 1998 pulled the price of VÚB to 1,040 Sk, up 15% from the previous day. Since mid-January 1999, VÚB has experienced a sharp fall and has lost almost 50% of its 1998 year-end value. Slovakofarma gained 6% and seems to have stabilised at 2,000 Sk.

Market impervious to Brazilian crises

The most recent developments in Brazil have had negative impacts on other emerging equity markets as investors have been withdrawing their investments and choosing more stable environments in developed markets. But the Slovak equity market, however, failed to react to the Brazilian crises due to the low presence of foreign investors on the market.

FDI is crucial for the restructuring process of the Slovak economy, but political and economical stability and sound business practises must be established first to attract foreign investors, who are very cautious about emerging markets after the Asian, Russian and current Brazilian crises.

Privatisation legislation changed

Deputy Prime Minister for Economy Ivan Mikloš defined the short-term objectives of the cabinet's economic policy. The priority of the government is reducing the public deficit and achieving an efficient start to the restructuring process. This will involve changes to VAT, personal cuts in the state administration, an active social dialogue, introducing new legislation in close co-operation with an international team of experts and public information guarantees.

The fiscal deficit for 1999 should be 15 billion Sk, which is less than 2% of expected GDP. Tax revenues should rise 5.2% year-on-year, which is below the expected nominal increase in GDP, but total revenues will edge up only 1.1%. Budget expenditures are expected to drop 1% year-on-year.

During the first eleven months of 1998, industrial real wages went up 1.9%, which is less than the increase in labour productivity. Wages in the construction sector declined 0.7% in this period. State guarantees for corporate loans worth 122.6 billion Sk ($3.3 billion) have been provided in Slovakia since 1990.

Ministry of Privatisation Vladimír Drožda has prepared the amendment to the Privatisation Act which will create favourable conditions for investigating dubious privatisation contracts.

Biggest banks getting killed by bad loans

The situation in the banking sector continues to deteriorate due to unresolved problems with non-performing loan portfolios in state-controlled banks. Since the beginning of the year, classified claims have increased by 13.6 billion Sk to 133.7 billion, which is 26.5% of total loans.

This growth was accompanied by a much slower creation of provisions and reserves, a disproportion which led to a 4.2% slump in the coverage of classified loans by provisions and reserves to 51.5%. In fact, performing assets are not creating enough profit to cover increasing needs for provisioning of non-performing assets. Thus, the unprovisioned estimated losses of the banking sector ballooned by 5.7 billion to 17.8 billion Sk. Five banks, including the three largest state controlled banks, do not comply with the 8% capital adequacy ratio.

The presidents of the two major Slovak banks, VÚB and SLSP, have agreed not to take any measures which would decrease the possibility of their merging in the future. However, in their current states, both banks need strong foreign investors to start restructuring. Global trends favour the merging of financial institutions; a merger between VÚB and SLSP could significantly cut costs while protecting the banks' dominant position on the market. A privatization project involving a 50.8% stake in VÚB will be prepared before the end of March, and will be followed by the selection and entry of a foreign investor at the beginning of 2000.

Tomáš Kmeť is an equity analyst with ING Barings.

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