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CAPITAL MARKETS

Equity market will bounce back in mid-January 1999

The beginning of December did not bring any significant changes on the equity market. The official SAX stock market index gained 4% during the last two weeks and closed at 85.20 on December 8. Trading remains very quiet and higher activity is not expected before the end of this year.
According to Ľudovít Kaník, the new president of the national FNM privatisation agency, the FNM plans to swap corporate shares in its portfolio for privatization bonds (held by individuals) starting in mid-January 1999.
The floating of shares in so-called strategic companies, such as power producer Slovenské Elektrárne, power distribution companies and savings bank Slovenská Sporiteľňa, would substantially invigorate the equity market.

The beginning of December did not bring any significant changes on the equity market. The official SAX stock market index gained 4% during the last two weeks and closed at 85.20 on December 8. Trading remains very quiet and higher activity is not expected before the end of this year.

According to Ľudovít Kaník, the new president of the national FNM privatisation agency, the FNM plans to swap corporate shares in its portfolio for privatization bonds (held by individuals) starting in mid-January 1999.

The floating of shares in so-called strategic companies, such as power producer Slovenské Elektrárne, power distribution companies and savings bank Slovenská Sporiteľňa, would substantially invigorate the equity market.

Kaíik estimates that the FNM could trade shares worth 30 billion Sk, including 10-20% stakes of strategic companies, which are attractive investment opportunities.

Cabinet programme passed

Parliament approved the government's programme and gave a vote of confidence to the cabinet of Mikuláš Dzurinda. The government introduced several economic measures to solve the problem of persisting external and internal imbalances in the Slovak economy.

The prices of electricity, gas, heating and housing will be deregulated. Electricity rates will be hiked by 32% as of January 1. There will also be changes in taxation, but details have not been announced thus far.

The government is also contemplating re-imposing an import surcharge, which together with a significant reduction in public investments, is expected to curb the current account deficit to approximately 5% of GDP in 1999.

EC critical of Slovak economy

The EC has not recommended Slovakia for immediate direct negotiations on EU admission. However, according to Hans van den Broek, EC Commissioner for Foreign Affairs, the elections and the appointment of the new cabinet have significantly improved the country's prospects for the beginning of admission talks. The EC will also have to appraise the measures Slovakia has adopted to correct its economic situation.

In its evaluation of Slovakia's progress, the EC criticized mainly excessive state interference in the economy, the lack of transparency in the privatization process, the unstable economy, the bad minorities policy, the weak independence of the courts and slow progress on legislative harmonization.

Economic news

November CPI was up 0.4% month-on-month (m-o-m) and 5.9% year-on-year (Y-o-Y). The inflation rate is lower than expected since the floating koruna exchange regime has thus far failed to influence prices significantly. Forecasts for the year-end inflation rate have thus droppped from 7.5% to 6.5% Y-o-Y.

PPI increased 0.6% m-o-m and only 2.1% Y-o-Y in October. Prices of construction works went up 0.7% m-o-m and 8.9% Y-o-Y in the same time. The low annual PPI figure, despite the koruna's weakening during the past months after its floating, can be attributed to a decline in the prices of raw materials.

The Slovak current account deficit was $1.42 billion at the end of August, mainly the result of a trade deficit of $1.49 billion. The current account deficit was fully offset by a capital account surplus of $1.88 billion. At the end of September, Slovak gross foreign debt reached $11.9 billion, down $326 million from the end of August and 59% of expected 1998 GDP. Per capita debt was $2,201. Short-term debt constituted 40.3% of total debt. Net foreign debt was $2.6 billion in the same time.

SLSP announces new strategy

The NBS is ready to provide 7.6 billion Sk for loan portfolio restructuring at troubled state banks VÚB, SLSP, IRB and Konsolidačná Banka, but is waiting for the necessary legislative steps from the government.

According to NBS Vice-Governor Jozef Mudrík, the funds offered by the NBS represent only part of the money necessary for basic restructuring. The remaining funds should come from the state budget; the old government contemplated allotting 6.6 billion during 1999-2000.

The government has also changed its attitude towards the entry of foreign banking institutions into the banking market. The change in thinking was clear from a statement by the state secretary of the Finance Ministry, Viliam Vaškovič, who said that the new government does not consider the policy of not granting any new bank licenses to be correct. The government will support a license policy that will help improve the competitive environment in the Slovak banking sector.

An EGM at Slovenská Sporiteľňa (SLSP) on November 26 made serious changes to the Supervisory Board of the bank, replacing 6 of its 9 members. Dušan Jurčák was appointed as the new SLSP President. This move was natural, since the FNM, which presently holds a 91% stake in the bank, is represented there by its former employees.

SLSP's new strategy has already been announced. As the country's major savings bank, SLSP will concentrate on investing in safe state securities and on activities on the interbank money market in future, and simultaneously should gradually cease its corporate lending activities.

At the second largest Slovak commercial bank, VÚB, where the FNM now controls a 35% stake, an EGM on November 30 changed VÚB's top management and adjusted the bank's articles in line with the recently-passed amendment to the Act on State Strategic Interests. Ladislav Vaškovič, who has been a member of the Board of Directors until now, was made the new VÚB President. VÚB's restructuring programme should be presented to the Ministry of Finance by the end of this year.


Tomáš Kmeť is an equity analyst with ING Barings

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