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CAPITAL MARKETS

Positive signs accumulating as cabinet tackles banks, economy

Equity market continues to decline
Government presented programme to parliament
Economic indicators worsen
VÚB privatisation shelved
ST going private

Equity market continues to decline

The Slovak equity market continued to deteriorate from November 11 to 25. The official SAX stock market index fell by 7% over two weeks as the main blue chips experienced a steady decline. The entry of foreign investors is crucial to the market's improvement, but this process will not begin until capital market reforms are implemented.

Government presented programme to parliament

The cabinet of Mikuláš Dzurinda presented to parliament its programme for the next four years. The priorities of the programme are the renewal of the rule of law, the removal of cronyism and corruption, modernisation of the Slovak economy, the equality of opportunity, and joining the EU and NATO.

The means for reaching these goals should be the elimination of the fiscal deficit of the public sector by 2002, banking sector restructuring with help from foreign investors, general support and better conditions for foreign investments, support for small and medium sized companies, further liberalisation of foreign trade, capital market reform and transparency of the privatisation process.

The government pledged to reform the tax system gradually. On the macroeconomic side, the government expects economic growth to slow down and both unemployment and inflation to increase in 1999 and 2000. At the end of the cabinet's term, growth should accelerate to 4-5% and unemployment should drop to 10%.

The fact that the programme puts such emphasis on issues like economic transparency, the rule of law, ownership rights and a smaller government role in the economy is a very positive sign.

Economic indicators worsen

According to the Statistical Office, the unemployment rate rose to 13.9% at the end of October, up 14bps on the September figure. The number of unemployed is 53,346 higher than in October last year. An increase in the unemployment rate up to 15% can be expected in the coming months.

The CPI increased 1.1% month-on-month and 6.2% year-on-year in October. The weaker Slovak currency influenced the CPI to a lesser extent than expected. The weaker koruna will, however, push up prices moderately in the following months, and annual inflation at the end of 1998 will reach 7.5%.

Slovak gross foreign debt was $12.2 billion at the end of August 1998, which represent $2,261 per capita and 60% of expected GDP this year. The debt rose by $293 million in August, mostly due to an increase in short-term banking sector debt. Short-term debt thus constituted 42.9% of the total debt. Corporate short-term debt remained flat at $2.1 billion in August.

VÚB privatisation shelved

Parliament passed an amendment to the Act on State Strategic Interests which includes the commercial bank VÚB among the group of companies considered to be of strategic importance to the Slovak economy. VÚB thus cannot be privatized until the end of 1999. Additionally, the amendment strengthens the powers of the privatization agency FNM as a shareholder in strategic companies, since it stipulates that a simple majority is sufficient for changes to management at VÚB and insurer Slovenská Poisťovňa. The managements of these two financial institutions are close to the former ruling party, the HZDS, and have been attempting to entrench themselves in their positions.

The largest Slovak savings bank, Slovenská Sporiteľňa, will likely experience significant changes in its top management, announced Finance Minister Brigita Schmögnerová. At present, the main shareholder is the FNM with its 91% stake.

The commercial bank IRB, which has been under a caretaker administration since December 1997, will have a new investor who will enter the bank soon, stated the Finance Minister. She added that the government would support the NBS's approach and prefer a foreign buyer. The government's co-operation with the central bank in tackling the problems of the banking sector is an enormously positive sign, in particular its open attitude towards the entry of foreign banking institutions into the banking market.

ST going private

According to the Minister of Transportation, Gabriel Palacka, the state-run Slovak Telecom, which holds a monopoly position in the country, will be transformed into a joint-stock company within the next six months. If this lucrative company is traded on the equity markets, it will revive investors' interest in Slovakia. Hence, the best solution for ST would be both entry of a strategic partner and flotation on the market.


Tomáš Kmeť is a stock analyst with ING Barings

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