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CAPITAL MARKET REPORT

Investors quiet during interim before Securities Law vote

During the first half of December, investors waited to see how Parliament would vote on an amendment to the Securites Act returned by President Michal Kováč back to the chamber. The BSE floor market experienced a series of quiet sessions with low trading volumes and a marginal increase in blue chip prices. Slovnaft gained Sk83 and is currently trading at Sk783 and VSŽ, after falling below its Sk500 limit, returned back above this mark.
Železiarne Podbrezová was traded in several large block trades in which stakes of 3.3% and 4.2% of the company's equity were exchanged at prices between Sk172 and Sk186. OTC market deals constituted about 90% of total turnover and interesting deals with Plastika, Chemolak, VÚB and IRB were reported at considerably higher prices than those listed.

During the first half of December, investors waited to see how Parliament would vote on an amendment to the Securites Act returned by President Michal Kováč back to the chamber (see story this page).

The BSE floor market experienced a series of quiet sessions with low trading volumes and a marginal increase in blue chip prices. Slovnaft gained Sk83 and is currently trading at Sk783 and VSŽ, after falling below its Sk500 limit, returned back above this mark.

Železiarne Podbrezová was traded in several large block trades in which stakes of 3.3% and 4.2% of the company's equity were exchanged at prices between Sk172 and Sk186. OTC market deals constituted about 90% of total turnover and interesting deals with Plastika, Chemolak, VÚB and IRB were reported at considerably higher prices than those listed. These sales could reflect trading activities characteristic of the end of the year, when investors try to re-price their portfolios.

Slovenské Lodenice's May EGM decided to increase the company's registered capital from Sk626.3m ($20.2m) to Sk800m ($25.8m). Of the proceeds, 70% would go to reduce the company's debt burden, and the remaining 30% would have been invested. This summer, the company's ownership structure changed, after Chirana Prema acquired a controlling stake (it now holds 22.83%). The underwriting of new shares should have happened 6 months after the EGM, (November 30), with a timeframe announced in advance in Slovak newspapers.

But nothing happened, meaning that decisions made at the May EGM can no longer be executed. Negotiations with the EBRD on a DM65m loan have also been interrupted, as the capital increase was one of the loan's preconditions.

Slovenské Lodenice's share price has fallen since the summer from Sk1,800 - 1,900 per share to Sk850. The unsuccessful capital increase might be discussed at an EGM called for December 23, which also should approve a bond issue.

Chirana Prema is expected to tighten management control in Slovenské Lodenice to improve the company's financial results. Harvard Capital & Consulting Slovakia (which controls Chemolak and Plastika) is interested in a strategic investment but has still not decided whether to transform its investment funds into traditional joint stock companies, said the firm's director, Eduard Sebo.

Sebo believes that transforming investment funds into j.s.c in Slovakia is not preventable, although the Ministry of Finance has yet to adopt a clear position, revealed when State Secretary at the Finance Ministry Jozef Magula suggested that two basic types of investment funds should operate in Slovakia - strategic and portfolio.

While the strategic funds will be allowed to control company policy and management, portfolio funds would be excluded from company management. The Ministry is now preparing incentives aimed at reviving the capital market. The prepared Capital Market Concept contemplates tax allowances for portfolio investment funds. Strategic investment funds would be subject to normal corporate taxation.

Nafta's EGM lasted 40 minutes. Participants approved the investment programme for 1997-2004, which turned out to be a fiasco. Nafta's financial director presented the plan, which assumes a total investment of Sk1bn ($33m) spread out over 8 years (Sk125m annually).

The investment targets constructing new underground gas storage tanks, reconstructing old gas storage tanks, establishing natural gas production in Slovakia, and a joint venture with ANACO, a crude oil production company in Kazakhstan.

We believe that Nafta's new owners missed a chance to improve the firm's credibility and dismantle doubts about its future.

The EGM's programme was reduced to the announcement of these points, without any further details, and lasted approximately 2 minutes. The owners most likely do not have a concrete business plan. Our suspicion is that the whole point of the EGM was to approve the investment programme so that the capital expenditures could be used against the total debt owed to the FNM privatization agency.

A representative from Templeton Fund Management, which holds about 10% of Nafta, decided to refrain from voting on the investment programme because his request for further details of the business plan was ignored. According to the NBS Vice Governor Jozef Mudrík, the state should keep its majority stake in the Slovak Savings Bank until its loan portfolio is restructured, which will take at least 3 years. In the case of VÚB, which has been almost half privatised, it would be appropriate to sell a certain stake, although, the state should maintain a significant degree of ownership.

The NBS does not object to the participation of foreign banks in the privatization of Slovak banks. This statement together with a relatively strong criticism of the 1997 budget which was done by the NBS Speaker Ján Onda who called it expansive and said that the budget would be to the detriment of private sector investment, is one of signals of increasing tensions between the Government and the NBS. We believe that the tensions and friction will intensify during the coming year and will negatively influence economical development.

Prepared by ING Bank N.V., Bratislava branch in cooperation with ING Baring Securities (Slovakia), o.c.p.,a.s.

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