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MONEY, FOREX MARKETS

Rates bounce back, crown predicted to remain stable

The end of the first March period of minimum reserve requirement (PMR) was marked by a high liquidity surplus on the interbank market. This surplus pushed the shortest maturities - one-day deposits - to 1.0 percent on March 15.
At the beginning of the current PMR period, the National Bank of Slovakia (NBS) reiterated its intention to achieve the lowering of longer-term interbank interest rates, which continue to trade above 20 percent. The NBS has kept the market in a liquidity surplus by adding crown funds through two-week refinancing repo tenders. But this has so far affected mainly deposits with maturities of up to one month, which have traded between 11 percent (one-day money) and 17 percent (one-month funds).

The end of the first March period of minimum reserve requirement (PMR) was marked by a high liquidity surplus on the interbank market. This surplus pushed the shortest maturities - one-day deposits - to 1.0 percent on March 15.

At the beginning of the current PMR period, the National Bank of Slovakia (NBS) reiterated its intention to achieve the lowering of longer-term interbank interest rates, which continue to trade above 20 percent. The NBS has kept the market in a liquidity surplus by adding crown funds through two-week refinancing repo tenders. But this has so far affected mainly deposits with maturities of up to one month, which have traded between 11 percent (one-day money) and 17 percent (one-month funds).

The current PMR period began with an increase in interbank rates amid expectations that the March 17 Finance Ministry state bond auction and the March 18 auction of 35-day T-bills would drain funds from the market.

The first four auctions of short-term T-bills in 1998 were fruitless as the ministry rejected all bids by banks and investors. The bond auctions are doing better this year. At the March 17 auction, which carried a fixed 18.0 percent annual coupon, the ministry accepted bids totaling 2.23 billion crowns out of the overall demand of 3.68 billion crowns. The average yield was 23.053 percent and maximum yield hit 23.495 percent. This was the fifth successful auction of state bonds this year, bringing the overall volume of state bonds issued in 1998 to just under 7.5 billion crowns.

All deposit rates rose after the auction. Shorter-term rates were quoted at 17-19 percent in the week ending March 20. Three-month deposits were quoted at 20-21 percent and six-month money rose to 22.5-23.5 percent. According to the preliminary schedule, there should be two issues of state bonds before the end of March. The schedule for the second quarter has yet to be announced.

On the foreign exchange market, the crown index over the past two weeks has been moving between 1.0170-1.0250, or between 1.7 and 2.5 percent on the depreciation side of the mark/dollar basket. At the level of 1.0250, the NBS very strongly supported the crown as it was exactly this level that was broken before a radical weakening of the crown last January. In the last few days of the period, the NBS has been fixing the crown at market levels.

In the next few months, the central bank should be able to keep the crown stable even if an attack on the currency occurs, thanks mainly to low market liquidity. In the past few months, foreign banks have shown very limited interest in operating on the Slovak foreign exchange market. Moreover, the foreign currency reserves of the banking sector exceed $7.3 billion, which appears to be a sufficient amount even if domestic demand for hard currencies were to increase.

The most important macroeconomic indicator announced in the past few weeks was the full-year 1997 GDP growth figure, which showed that the economy rose by 6.5 percent in real terms, only a slight slowdown from 1996. The increase in real wages slowed to 6.6 percent from 7.2 percent. Most analysts agreed that these figures were to Slovakia's credit given its difficult macroeconomic enviroment.

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