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1998 a catastrophic year for lonely Slovak equity market

The Slovak equity market turned in a very unimpressive performance in 1998. The official SAX index lost points consistently during the whole year and closed at 94.0 on 18 December, which represents a 48% decline since the beginning of the year. Turnover on the Bratislava Stock Exchange reached only 43.1 billion Sk, compared to the 84.7 billion Sk in 1997.
The steady decline of Slovak stocks reflected the country's worsening economic situation. Foreign investors were discouraged by political instability and legislative flaws, and there is no reason for optimism in 1999. Liquidity remains very limited and even if the FNM privatisation does decide to float shares of strategic companies, significant changes and radical improvements should not be expected.

The Slovak equity market turned in a very unimpressive performance in 1998. The official SAX index lost points consistently during the whole year and closed at 94.0 on 18 December, which represents a 48% decline since the beginning of the year. Turnover on the Bratislava Stock Exchange reached only 43.1 billion Sk, compared to the 84.7 billion Sk in 1997.

The steady decline of Slovak stocks reflected the country's worsening economic situation. Foreign investors were discouraged by political instability and legislative flaws, and there is no reason for optimism in 1999. Liquidity remains very limited and even if the FNM privatisation does decide to float shares of strategic companies, significant changes and radical improvements should not be expected.

Deficit target met

The government budget deficit reached the planned level of 19.2 billion Sk ($526 million) in 1998, but the Finance Ministry was forced to transfer budget expenditures worth 1.2 billion Sk from last year's to this year's budget. Total budget revenues were 177.8 billion Sk and expenditures 197 billion Sk. This year's budget is likely to expect revenues of 175 billion Sk and expenditures of 190 billion Sk.

The Slovak current account deficit was $1.54 billion at end of 3Q98, mainly as a result of a trade deficit worth $1.55 billion. The capital account experienced a significant outflow of short-term loans during September due to well-known reasons such as the Russian crisis, the rating downgrade by Standard & Poor's, pre-election uncertainty and devaluation expectations. Official foreign currency reserves were $2.92 billion at the end of 1998, $362 million less than in 1997. The reserves now cover 2.8 months of imports.

CPI inflation fell to 5.6% year-on-year in December, which is the lowest figure since December 1996. Monthly inflation was only 0.2% in December, while the average inflation rate in 1998 was 6.7%. The prudent monetary policy of the central bank, the continuing low prices of raw materials and practically stagnant regulated prices are behind these figures.

The favorable figure also shows that the October decision to float the koruna and its subsequent weakening had a limited impact on consumer prices. Inflation should increase in 1999 to approximately 9% year-on-year following increases in regulated prices. Low inflation is the main target of the monetary policy of the central bank for this year.

Unemployment went up to 427,125 in December 1998, 79,372 more than in December 1997. The unemployment rate at the end of last year was 15.6%, and should increase to 17% by the end of 1H99.

Industrial output in November went up just 0.2% year-on-year, the lowest growth posted in 1998. The slackening of the upward trend was mostly caused by a decrease in mining and in manufacturing (down 0.2%) for the first time during the year. Cumulative industrial production for the first eleven months of the year rose 5.2% year-on-year.

Construction output in November fell for the third month in a row, this time by 23.9% year-on-year. This development can be attributed to a sharp decline in state-funded orders, aggravated by rapidly deteriorating payment discipline. Construction output for the first eleven months of 1998 declined 2.3% year-on-year.

Austerity package framework approved

Cabinet finally passed a framework for its austerity package. Actual measures will be discussed by the cabinet on 20 January. The package includes 72 measures, of which the first part consists of measures to restore fiscal discipline, reduce budgetary expenditures and increase revenues. The second group of measures concentrates on launching restructuring processes.

The government also suggests further price increases from 1 April, particularly in transportation, gas for households and electricity for corporations. Housing rents should be deregulated. Later in 1999, electricity rates and heating price for households as well as telecommunication fees should be increased.

The FNM should immediately prepare a list of companies to be privatised, while tax and social fund payments and the list of goods included in VAT brackets should be examined as well. Measures designed to speed up restructuring processes include improving law enforcement and intensifying the FNM's supervision over the fulfillment of privatisation contracts.

The government will also design a program to strengthen FDI inflow, and will prepare a new act on EXIM Bank. Moreover, the package will create conditions for foreign capital entrance into the commercial banks IRB and VÚB. Cabinet plans to extend the powers of the Bank Supervision Office, and provide tax allowances for deposits with a maturity of longer than one year.

Trading of FNM bonds will be permitted, and the duties of securities issuers to provide information will be more strictly outlined. Corporates will be allowed to participate in building savings programmes, and mortgage banking will be supported.

Since this is only a framework package, it is very difficult to assess its impact. Nevertheless, the fact that the scope of measures is quite wide is very positive. It will be very important to introduce further price deregulation as soon as possible.

Tomáš Kmeť is an equity analyst with ING Barings

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