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DEVALUATION RUMORS WON'T GO AWAY

Defense of the crown

Slovak crown devaluation rumors just won't go away, no matter how much government officials and national bankers wish they would.This time, word of an impending attack on the crown came from ING Barings Securities Bratislava, which issued a statement on November 3 saying "the long-term over-valuation of the Slovak crown handicaps exporters and does not create pressure for import mitigation."
Slovakia's market players, independent analysts, government officials and the National Bank of Slovakia (NBS) are united in their conviction that devaluation of the Slovak currency would not solve any of the country's economic problems. Instead, they insist, devaluation would only worsen the current account balance and make repayment of mounting foreign debt prohibitively expensive.
"People have been talking about devaluation of the Slovak crown for two years now," said Peter Koprna, Chief Dealer at Slovenská Sporiteľňa. "Every week we hear that it's absolutely necessary, that the situation is really awful, but I really don't see a reason for it.

Slovak crown devaluation rumors just won't go away, no matter how much government officials and national bankers wish they would.This time, word of an impending attack on the crown came from ING Barings Securities Bratislava, which issued a statement on November 3 saying "the long-term over-valuation of the Slovak crown handicaps exporters and does not create pressure for import mitigation."

Slovakia's market players, independent analysts, government officials and the National Bank of Slovakia (NBS) are united in their conviction that devaluation of the Slovak currency would not solve any of the country's economic problems. Instead, they insist, devaluation would only worsen the current account balance and make repayment of mounting foreign debt prohibitively expensive.

"People have been talking about devaluation of the Slovak crown for two years now," said Peter Koprna, Chief Dealer at Slovenská Sporiteľňa. "Every week we hear that it's absolutely necessary, that the situation is really awful, but I really don't see a reason for it. If we really needed a weaker crown, we could cancel the [exchange rate fluctuation] band, or widen it, but we don't need administrative devaluation, that's for sure."

Martin Kabát, Director of Market Research at Slávia Capital brokerage company, agreed. "Slovakia's export capacity is running at 95 to 100 percent," he said. "After seven years, we are exporting what we can, and devaluation is really only justified when you have a chance to increase export capacity."

Not only would currency devaluation not assist exports, Kabát said, it would actually hurt them by making imports and technology more expensive.

"Our exports are very import-dependent," Kabát explained. "Slovakia needs raw materials for its manufacturing industry, needs foreign technology for its infrastructure projects like the nuclear plant in Mochovce. All of these things would become more expensive if the crown was devalued, and thus would hurt the ability of our exports to compete on foreign markets."

Downward pressure exists

Market analysts concede, however, that certain devaluation pressures do exist. "People often say the trade balance is creating pressure for devaluation," Kabát said. "But it has already been helped by the [7 percent] import surcharge [imposed in July], which can be applied selectively. In fact, without the surcharge, we would have worse figures than we had last year."

"Really, devaluation pressures are being created by speculators, not by economic processes," seconded Koprna. "Many of [them] have made money in Brazil, in the Czech Republic, in Asia, and are looking for somewhere else to make a killing."

Kabát said that devaluation expectations increase uncertainty in the economy and delay foreign investment. He also offered a different explanation for the newest rumors, saying that it was not so much currency speculators but large institutional foreign investors who, waiting for devaluation, were creating pressure on the Slovak crown. Having taken their money out of plummeting Asian markets, he said, "these big mutual funds, especially from America, are just looking for a place to put their money." Koprna said that currency crashes, such as the one that occurred in Bulgaria in 1997, have made "everybody scared, but I think we still have good economic numbers, good material reserves. We are not Bulgaria."

Why it won't happen

A major brake to devaluation is the fact that neither the government nor the NBS are willing to let it happen. "Devaluation of the crown is not a solution to all of our problems," said Peter Staněk, State Secretary of the Finance Ministry. "We could let the crown fall by 10 percent, but after 5 or 6 months, the same old problems would return, and we would need to take even more extreme measures."

Peter Ševčovič, Director of the NBS Monetary Policy Department, expanded on Stanek's view. "A devaluation of the Slovak crown would first of all lead to an increase in the prices of imports," he said, "and consequently in the prices of domestic goods. This would mean increasing inflation." According to NBS calculations, he added, a 20 percent devaluation would bring about a 16 to 18 percent rise in inflation.

Koprna predicted that since any devaluation would have to be initiated by the government, it was therefore unlikely. "So far we have been very lucky with the tactics of the NBS," he said. "Their intervention has worked very well, to the extent that of all emerging markets in central Europe, only the Slovak crown is stable."

In concrete terms, Koprna said, the NBS has ensured that Slovakia's fixed reserves consist more of long-term money, which represents real investment and protects the Slovak crown against the kind of 'hot money' speculation that led to the Czech crown's fall last May.

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