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CAPITAL MARKET

Slovak equity market impervious to Russian crisis

The Slovak equity market did not experience any interesting developments during the last two weeks. A low presence of foreign investors on the Slovak market meant that the market failed to react to the Russian crises, once again giving rise to ironic comments about the Slovak market's safe haven status. On Wednesday 19, the SAX closed at 112.9, down 2% compared to the level of two weeks ago.
According to preliminary data supplied by the NBS, the M2 money supply aggregate went up 9.0% year-on-year in July, up 50bps from June. The NBS's target for this year is to keep M2 annual growth at 9.4%. Koruna-denominated loans to the corporate sector dropped Sk1.5bn in July and grew only 2.4% year-on-year. A continuing liquidity surplus on the money market during the last 3 months has clearly failed to trigger a considerable increase in loans to corporates.

The Slovak equity market did not experience any interesting developments during the last two weeks. A low presence of foreign investors on the Slovak market meant that the market failed to react to the Russian crises, once again giving rise to ironic comments about the Slovak market's safe haven status. On Wednesday 19, the SAX closed at 112.9, down 2% compared to the level of two weeks ago.

Economic News

According to preliminary data supplied by the NBS, the M2 money supply aggregate went up 9.0% year-on-year in July, up 50bps from June. The NBS's target for this year is to keep M2 annual growth at 9.4%. Koruna-denominated loans to the corporate sector dropped Sk1.5bn in July and grew only 2.4% year-on-year. A continuing liquidity surplus on the money market during the last 3 months has clearly failed to trigger a considerable increase in loans to corporates. Small and medium sized companies will thus likely continue to have problems in securing financing. With the NBS unlikely to change its monetary policy before the end of 1998, no significant drop in interest rates on credits to corporates can be expected. The persistently high interest rates will continue to have a negative impact on corporate earnings.

Financial Sector News

After the second round of Slovenská poisťovňa's (SP) share issue, the state privatisation agency FNM likely owns a 40.4% stake in the insurance company, and thus has lost control over SP. VSŽ, Slovakia's largest steel company, now controls 36.2% of SP, and together with a company called Vinlan (controlled by another domestic investment group, but likely to act in concert with the steel company) has more than 47% of SP. However, the share issue has to be approved by a commercial court, and this could be problematic as several laws have reportedly been breached during the share issue. Any exposure to this stock should be discouraged.

The rating agency Thomson BankWatch downgraded its rating of the commercial bank VÚB, citing as reasons the worsening economic climate in Slovakia, the permanent swings in the Slovak inter-bank money market, uncertainty regarding the future of the bankcombined with its weak financial strength. VÚB's general rating was lowered from IC-C to IC-C/D, while the rating of short-term liabilities dropped from LC-1 to LC-2, and the rating of subordinate debt slipped from BB to BB-. The agency also pointed to the fact that the bank can be significantly influenced by political factors until it is fully privatised. VÚB needs serious restructuring, which is unlikely to happen unless it is sold to a strong foreign banking institution. Investing in VÚB shares is inadvisable.

Corporate News

The last two weeks passed without any major events in the corporate sector. The only significant news that might have an impact on listed equities is the problematic development on the pharmaceutical market. The Slovak Chamber of Pharmacies compelled all pharmacies to ask for cash payments for category II pharmaceuticals from all clients of four health insurance companies. Pharmaceuticals in this category are partially reimbursed. This is in reaction to the debt owed by insurers to pharmacies, which has grown to Sk3.8bn so far. If the debts are not settled by 1 September, pharmacies will ask for cash payments for all drugs.

The situation on the Slovak pharmaceutical market has been deteriorating for some time, as insurers have been notoriously late in reimbursing pharmacies, causing a chain of overdue arrears in the sector. Slovakofarma currently derives 35% of its revenues from sales on the domestic market. However, most of Slovakofarma's drugs are fully reimbursed (category I), and hence the company's sales should not be affected by the potential consumption decline due to the cash payments demanded. However, if the situation in the sector is not solved quickly, pharmacies will start requiring cash payments for all drugs in September, and this would have a negative impact on Slovakofarma sales.


Vladimír Zlacký is an analyst with ING Barings

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