A STATEMENT by central bank governor Marián Jusko on June 5 that the institution would not intervene to halt the fall of the Slovak crown helped push the unit down 40 haliers on the day to 44.290/320 SKK/EUR at the close of trading, its weakest level since 1999.
Forex traders said that as dramatic as the fall had been, the local currency could break 45 and even 46 to the euro in the coming days without the assurance of central bank action to defend the crown.
The Reuters news agency had reported Jusko earlier in the day as saying he saw no reason for the central bank to react as the Slovak currency was developing in line with economic fundamentals. The market interpreted the statement as a sign the central bank was happy with a weaker local currency, said forex dealer Miroslav Kuzniak of ING bank.
"June 5 was a big move for this market," he said. "The NBS is clearly trying to solve the country's problems with its high trade deficit by letting the crown go, which is a big signal to the market."
According to preliminary data from the central bank, Slovakia's current account deficit for the first quarter of 2002 was Sk15.1 billion, Sk500 million worse than in the first quarter of 2001. The deficit was mainly the result of a first quarter Sk19.6 billion trade deficit.
After a record trade deficit in 2001 of Sk103 billion, the recent figures added to fears that government spending and investment-related imports could drive this year's deficit near the same heights.
In its revised monetary programme, approved by the bank council on May 31, the National Bank of Slovakia projects the 2002 current account deficit at Sk8.3 per cent of GDP, up from the original estimate of 7.9 percent of GDP, or Sk81.2 billion.
The bank also approved the cabinet's revised fiscal deficit target, which moved from 3.5 per cent of GDP up to 4.5 per cent as some income items were ruled out of the budget on the basis of faulty Finance Ministry methodology.
While Deputy PM Ivan Mikloš said he had recently agreed with representatives of the central bank and the International Monetary Fund (IMF) that a 4.5 per cent deficit would not threaten the nation's currency or inflation rate, Kuzniak said the market would still be watching the government very closely to see what measures it would take to prevent the fiscal deficit from exceeding the mark.
"In the past the NBS has intervened to defend the currency at 44 to the euro," he explained. "Now that this psychological aid is gone, the market will be far more sensitive to macroeconomic signals."
The council of economic ministers, a senior cabinet body, was to meet on June 10 to consider further fiscal adjustments.