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NBS RESISTS CALLS FOR CROWN DEVALUATION

Weaker Slovak crown needed to improve current account balance

Slovakia's current account deficit widened to $479 million in the first quarter of 1997 from $420 million in the same period of 1996, and analysts said the situation would not improve without a weaker crown.
"The trade deficit, which is crucial for the current account figures, could certainly improve with a cheaper crown," Vladimír Kukliš of Československá Obchodní Banka (ČSOB) said. "An immediate small drop [in the crown's value] would be definitely better than a possible steep fall later."
But neither the Slovak government nor the National Bank of Slovakia (NBS) is buying the argument. On June 9, Prime Minister Vladimír Mečiar said Slovakia is not considering any administrative devaluation of its currency. "Despite everything we've heard from abroad, we are neither planning nor considering a devaluation of the crown," the economic daily Národná Obroda quoted Mečiar as saying.

Slovakia's current account deficit widened to $479 million in the first quarter of 1997 from $420 million in the same period of 1996, and analysts said the situation would not improve without a weaker crown.

"The trade deficit, which is crucial for the current account figures, could certainly improve with a cheaper crown," Vladimír Kukliš of Československá Obchodní Banka (ČSOB) said. "An immediate small drop [in the crown's value] would be definitely better than a possible steep fall later."

But neither the Slovak government nor the National Bank of Slovakia (NBS) is buying the argument. On June 9, Prime Minister Vladimír Mečiar said Slovakia is not considering any administrative devaluation of its currency. "Despite everything we've heard from abroad, we are neither planning nor considering a devaluation of the crown," the economic daily Národná Obroda quoted Mečiar as saying.

The central bank has been squeezing crown liquidity in order to prevent foreign speculators from borrowing crowns on long positions to sell on spot.

As a result, the interbank market as of June 6 was about 34 percent short of funds needed to meet minimum reserve requirements, and money market rates still remain extremely high. Although the NBS is sporadically adding small amounts of money to the interbank market, it is deliberately keeping it meager to hinder speculators' attempts to drive the crown down.

The NBS's moves have kept the crown steady recently at around 33.5 Sk to the dollar and 19.4 Sk to the mark, implying a deviation from the mid-point of its mark/dollar basket (60:40 ratio) of minus 0.6 percent.

But the central bank's actions are coming at a high price. Between May 26 and June 4, the NBS's hard currency reserves dropped by $300 million to $2.743 billion, while during the same period, commercial banks' hard currency reserves went up by $80 million to $2.109 billion.

Despite the current stability, Kukliš said devaluation expectations, driven by fears of a domino effect from the fall of the Czech crown, could have encouraged some Slovak companies to make foreign payments in advance. Libor Briska of Creditanstalt said Slovakia's current account deficit could worsen by the decline of the Czech crown even if it did not prompt copy-cat speculative selling of the Slovak currency. "The Czech crown is cheaper now, which could open the gate for Czech importers to capture the Slovak market," Briska said.

Slovakia is already running a near two billion crown trade deficit with the Czech Republic, which accounts for around a quarter of its total trade turnover.

The analysts said that even though the visible trade deficit for the first quarter of 1997 fell to $477.2 million from $514.8 million in the same period of 1996, the overall level of the deficit was worryingly high. "These figures indicate that the situation will not change for the better anytime soon," Briska said.

Despite both analysts' call for a depreciation to help the trade deficit, neither one thought the NBS was likely to move in that direction in the near future. "The government and the NBS have several possible measures, including devaluation, to help this to reverse, but so far we don't see any action," Briska said.

Apparently, they are not going to, either. On June 25, NBS Governor Vladimír Masár told the Slovak Parliament that the Slovak crown was the only central European currency that sustained recent speculative attacks and that an imminent attack on the crown was unlikely in the near future.

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