Currency drop no prelude to crisis, say dealers

THE VALUE of the Slovak crown has recently retreated to 2001 levels, but despite public fears of a currency crisis, analysts emphasise that the currency remains stable and that the central bank can smooth any unwanted deviations.
Over April and May 2002, the Slovak currency dropped around 2.5 crowns against its euro benchmark, an intense loss in a short period that sparked alarm in the Slovak media of an Argentina-like breakdown, but which analysts have called a 'correction', in line with trade and fiscal deficit warnings.
"The exchange rate went from Sk41.30 to the euro in mid-April to almost Sk44.00 in recent days, but I would not dramatize the temporary weakening; it was just the influence of a certain sentiment. A different sentiment could reversely strengthen the crown any time," said Istrobanka analyst Marek Senkovič.

THE VALUE of the Slovak crown has recently retreated to 2001 levels, but despite public fears of a currency crisis, analysts emphasise that the currency remains stable and that the central bank can smooth any unwanted deviations.

Over April and May 2002, the Slovak currency dropped around 2.5 crowns against its euro benchmark, an intense loss in a short period that sparked alarm in the Slovak media of an Argentina-like breakdown, but which analysts have called a 'correction', in line with trade and fiscal deficit warnings.

"The exchange rate went from Sk41.30 to the euro in mid-April to almost Sk44.00 in recent days, but I would not dramatize the temporary weakening; it was just the influence of a certain sentiment. A different sentiment could reversely strengthen the crown any time," said Istrobanka analyst Marek Senkovič.

"Actual exchange rate levels were quite normal over the past year. The Slovak crown is stable, its exchange rate has not deviated from the range of Sk41.30 to Sk44.00 to the euro since 1999, which is less than 3 crowns. That is a stability that no other currency in the region seen," he added.

The crown's recent drop, said Senkovič, stems both from uncertainty surrounding September's parliamentary elections as well as recent criticism of Slovakia's economic policies by international financial groups.

Both the International Monetary Fund and the Organisation for Economic Cooperation and Development this May have criticised Slovakia's loose fiscal policies and expanding budget deficit, reiterating warnings by the European Union in April.

ING bank forex dealer Miroslav Kuzmiak said that "a bad trade deficit also had a negative impact. Moreover, the Slovak crown is bound to the Czech crown to some extent, and the Czech crown was weakening, too."

"Another problem was that the National Bank of Slovakia (NBS) did not assume any attitude towards the crown's weakening," said Kuzmiak.

The NBS has the greatest power to affect the crown exchange rate through its own currency dealings as well as through the setting of the key interest rate, which it raised by 50 basis points in April in response to government failure to curb spending.

NBS spokesman Ján Onda explained that "the NBS never releases information about the level at which it intervenes," but added that the bank, "does not consider current developments as favourable."

However, Senkovič is confident that the NBS has the resources and the know-how to stave off any crisis.

"Even if unfavourable sentiments on the market prevail, the central bank can easily stop [the crown's decline]. The NBS can do it without any problems; its pre-election foreign currency reserves will be twice as big compared to the last pre-election period [in 1998]," explained Senkovič.

"The Slovak forex market is small, so a relatively small amount can visibly affect the exchange rate. NBS intervention with a few hundred million dollars can smooth the market really well. It all depends on the NBS deciding on an exchange rate intervention level," he continued.

With the current negative sentiment combined with the relative inaction of central bankers, exchange rate development prior to September's parliamentary elections is difficult to estimate.

"If Slovakia becomes a member of Nato and the EU, and the new government introduces an austere economic programme, we can expect a long term strengthening of the crown," said Senkovič.

"The exchange rate is constantly changing. It would make no sense to try to estimate some trend - at least before elections. The crown will react to different factors that appear," he added.

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