Spectator on facebook

Spectator on facebook

Crown pushed to limit

Whatever government emerges in Slovakia from negotiations between former opposition parties, one thing is certain: it will receive no breaks from the country's crisis-racked economy. And as recent developments on the domestic currency market have shown, one of the most pressing questions the new administration will have to address is whether or not to devalue the Slovak crown.
The crown (Sk) came under strong downward pressure in the last 10 days of September, leading many analysts and foreign exchange dealers to say that devaluation was inevitable. The new Slovak government, they said, would inherit an economy on the verge of collapse: a growing foreign trade deficit, which is fuelling a current account shortfall of around10% of the gross domestic product, as well as a large fiscal deficit and burgeoning foreign debt.

Whatever government emerges in Slovakia from negotiations between former opposition parties, one thing is certain: it will receive no breaks from the country's crisis-racked economy. And as recent developments on the domestic currency market have shown, one of the most pressing questions the new administration will have to address is whether or not to devalue the Slovak crown.

The crown (Sk) came under strong downward pressure in the last 10 days of September, leading many analysts and foreign exchange dealers to say that devaluation was inevitable. The new Slovak government, they said, would inherit an economy on the verge of collapse: a growing foreign trade deficit, which is fuelling a current account shortfall of around10% of the gross domestic product, as well as a large fiscal deficit and burgeoning foreign debt.

On election day, September 25, the crown hit its all time low of 6.7% on the depreciation side of the plus /minus 7.0% fluctuation band around the mark/dollar basket parity. It has lost more than 4.5% against the basket in the last two months. Since foreign investors are not active on the Slovak market, the pressure comes mainly from domestic corporate clients which have been buying hard currencies in the past few weeks to hedge their foreign exposure. On the other hand, companies who have revenues in hard currencies are not converting them into crowns in expectation of depreciation of the crown.

Outgoing Premier Vladimír Mečiar, whose government is blamed by analysts for creating economic imbalances by loose fiscal policies, has done everything he could to avoid the finger of blame for a potential devaulation.

"We have been keeping the crown stable. It was managed by the central bank together with government economic policies. Now this balance has been damaged....there is no power that could stop it," Mečiar said when asked about the prospects of devaluation of the crown during his last appearance on the state channel STV on September 30. Mečiar blamed oppostion politicians and the opposition media for creating pressure for devaluation of the crown.

Mikuláš Dzurinda, leader of the former opposition Slovak Demo-cratic Coalition (SDK) party, which looks set to form the next government, said on September 27 that the future of the Slovak currency lay in the hands of the National Bank.

"Our priority is to have a strong currency, but the reality is different now. It would not be the responsibility of the government but of the National Bank to decide on the crown," Dzurinda told a press conference on Sunday, one day after his party emerged as the strongest opposition power from the elections.

The National Bank of Slovakia said it would defend the crown and would attempt to keep it within its current fluctuation corridor. The question is how long the central bank can use its hard currency reserves to support the ailing crown when the official reserves have already fallen to a level that could cover three months of imports - the minimum safe level for the economy.

According to the latest published data, the official hard currency reserves held by the central bank stood at $3.39 billion as of September 16. The central bank did not release reserves figures for September 23, but traders said there was strong outflow of hard currencies from the central bank through its daily fixings.

The bank has been supporting the crown by fixing it at minus 5.95% against the basket, even though the crown trades at around minus 6.50% on the market. Market analysts estimated that the central bank had already used more than $500 million in the past three weeks in defending the crown by fixing it above market levels.

"Large companies seem to have already bought enough [hard currency] to safely hedge their foreign loans. The problem now is that smaller clients are continuing to buy. These are small amounts, of half a million dollars or so, but if you add them together, they create strong pressure on the crown," one foreign exchange trader at an international bank said.

The latest foreign trade data, released by the Slovak Statistical Office on September 25, confirmed the deteriorating state of the Slovak economy. The statistical office said the country's foreign trade deficit reached 7.35 billion crowns ($210 million) in August, putting the cumulative foreign trade shortfall for the first eight months at 51.261 billion crowns ($1.46 billion). Imports totalled 37.67 billion crowns ($1.08 billion) in August, compared with 35.76 billion one month ago.

These figures, analysts said, mean that the central bank resources for defending the crown, cannot last for long.

The central bank has warned that the current account deficit of more than 10% of GDP was the main risk for the future development of the Slovak economy. But it also said that a devaluation of the crown would not be a fast and simple solution, arguing that a thorough restructuring of the corporate sector must be carried out to help increase Slovakia's export efficiency.

Top stories

Námestie Slobody gets facelift Photo

The architectural tender will gather ideas for the redesign of the biggest square in Bratislava

Námestie Slobody will be redesigned into a kind of living room in the city.

When the state can’t keep a secret

A selective leak has tarnished President Kiska’s reputation. But he must continue to speak out about corruption.

President Andrej Kiska

Fundamental values explored at Divadelná Nitra 2017

This time round, the Slovak, European and US ensembles at the theatre festival focus on #fundamentals, i.e. basic values and the essence of all things.

Nature Theatre of Oklahoma: Pursuit of Happiness

Foreign rocket engines for North Korea: Why?

For Russia, the path to a weakened China could be through a major nuclear accident in North Korea.