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MONEY, FOREX MARKETS

NBS allows foreign investors to participate indirectly on Slovak T-Bill market

The main events on Slovak money and foreign exchange market during the past two weeks were another two auctions of state T-bills. It was the third and fourth issue of the seven sales of longer (224-280 days) state papers planned for this period of the year. The National Bank of Slovakia (NBS) said on November 14 it had approved a new T-bill issuing which will allow foreign investors to become indirect participants on the Slovak T-bill market. This is expected to have a big impact on future market developments.
Since November 5, when the period of seven auctions of longer T-bills began, short-term deposit rates on the interbank market dipped slightly. One-week funds hovered at 16-17 percent, 2-week funds at 17-19 percent and overnights fluctuated between 5-15 percent. The NBS apparently didn't want to sterilize the long-term market in an attempt to attract Slovak banks to buy T-bills at following auctions.

The main events on Slovak money and foreign exchange market during the past two weeks were another two auctions of state T-bills. It was the third and fourth issue of the seven sales of longer (224-280 days) state papers planned for this period of the year. The National Bank of Slovakia (NBS) said on November 14 it had approved a new T-bill issuing which will allow foreign investors to become indirect participants on the Slovak T-bill market. This is expected to have a big impact on future market developments.

Since November 5, when the period of seven auctions of longer T-bills began, short-term deposit rates on the interbank market dipped slightly. One-week funds hovered at 16-17 percent, 2-week funds at 17-19 percent and overnights fluctuated between 5-15 percent. The NBS apparently didn't want to sterilize the long-term market in an attempt to attract Slovak banks to buy T-bills at following auctions.

At an American-style auction on November 19, the Finance Ministry sold 5.949 billion Sk worth of issues at an average yield of 25.556 percent. At the next similar auction on November 26, the average yield dropped slightly to 25.035 percent and the ministry accepted bids worth 2.960 billion. These yields kept longer-term deposit rates well above 20 percent. One-month funds were traded at 21-23 percent and 6-month funds at 25-27 percent.

At the latter auction, foreign investors were also allowed to buy T-bills through any registered Slovak entity directly participating in a primary T-bill auction. However, no bids from foreign banks were registered, to little surprise of dealers. The local secondary market with T-bills seriously lacks liquidity, making foreigners hold T-bills until they mature. 35-weeks papers bear too high currency risk for them.

Also the foreign exchange market has been influenced by the central bank's new regime, as it allows foreign investors to buy T-bills. After the announcement, most Slovak banks expected a rising interest in selling foreign currencies, thus making the Slovak crown's currency basket index to decline close to its central parity.

But Slovak T-bills have proved to not attract much foreign interest, as the market is expecting a widened Slovakia trade deficit during the coming weeks and increased clients' interest in buying foreign currencies. The accumulative trade gap for the first 10 months widened to 42.9 billion crowns and analysts said that FY97 deficit should be around 60 billion.

The lower short-term interest rates and falling of the Czech crown have put the Slovak crown under a lot of pressure. The crown fell by nearly 2 percent during the last 10 days of the period, being quoted around -2.0 percent on basket's depreciation side on late Friday, November 28. Traders said the Slovak crown's decline was largely connected to the weakening Czech crown, which has been under downward pressure following a credit rating downgrading and political instability. The Czech and Slovak crowns often move in the same direction as banks in both countries shift around their positions against hard currencies.

Another three auctions of longer T-bills are planned during the following weeks and average yield expectations range between 24-26 percent. Dealers are predicting a further decline of the Slovak crown, but no devaluation is expected. According to NBS officials, the crown's trading range in the near future should be around 1.2-1.8 percent on the basket's depreciation side.

The next year's development will depend on the Finance Ministry's fiscal and central bank's monetary policy. The ministry expects softer monetary policy, maintaining that the NBS will not have to curb money supply as radically as it had to this year. But according to NBS officials, easing monetary policy is conditioned by returning to surplus budget and by rational wage development.


Prepared by Oto Mohňanský from the dealing department at Slovenská Sporitelňa, a.s. Bratislava

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