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FOREX ANALYSTS SAY INTEGRATION WILL HELP, BUT ECONOMIC POLICY IS KEY

Future bright for crown if next government credible

DESPITE marked volatility in the strength of the Slovak crown this year, analysts say that if pro-Western political forces win September parliamentary elections as expected, the long-term outlook for the currency is decidedly bright.
Political uncertainty and loose fiscal policy have left investors jittery over the past year, sending the crown from a two-year high of 41.5 crowns to the euro in April to a three-year low of 44.9 SKK/EUR in July.
However, entry into the European Union (EU) and Nato, which the country hopes to achieve this year and next - and which presupposes the defeat of the authoritarian former PM Vladimír Mečiar at the polls - should bring long-term stabilisation.

DESPITE marked volatility in the strength of the Slovak crown this year, analysts say that if pro-Western political forces win September parliamentary elections as expected, the long-term outlook for the currency is decidedly bright.

Political uncertainty and loose fiscal policy have left investors jittery over the past year, sending the crown from a two-year high of 41.5 crowns to the euro in April to a three-year low of 44.9 SKK/EUR in July.

However, entry into the European Union (EU) and Nato, which the country hopes to achieve this year and next - and which presupposes the defeat of the authoritarian former PM Vladimír Mečiar at the polls - should bring long-term stabilisation.

"The scenario is simple: If election results are favourable, meaning the election is won by democratic and stable political groups, the crown will strengthen," said Ľudová Banka analyst Mário Blaščák.

In recent polls, Mečiar's HZDS party, which Western diplomats have called a threat to Slovakia's integration aims, has fallen to second place after ruling the political stage for much of its 12-year history.

This November, Nato representatives are set to decide at a Prague expansion summit on Slovakia's bid to join the military alliance, while the country should receive an answer on its EU accession bid at the end of the year.

"The Nato summit is a very important moment. If Slovakia were accepted it would give a feeling of safety and security to industrial investors. A growth in the number of investors and the amount of investments would follow, meaning an inflow of foreign currency and a growth in demand for domestic currency, further strengthening the crown," Blaščák continued.

However, Blaščák also emphasised that the crown would not strengthen automatically following the an entry invitation, and that whatever government eventually took charge after September's poll in Slovakia would still have to ensure economic growth.

"For example, utility prices still haven't been deregulated. Restructuring in the corporate sector will also be needed as new investors start to manage the situation in privatised companies.

"The effort to fulfil the convergence criteria, preparation for monetary union - this should all have a positive impact," he added.

However, Blaščák also cautioned: "In 2003, economic austerity packages will have to be applied again."

Róbert Prega from Tatra banka agreed, saying: "The crown will be affected by the policies of the next government. For example, it will have to improve the state budget; this will be an unavoidable step.

Slovakia's four right-wing parties, while now competing for voters, are expected to unite following elections to form the bedrock of a reformist government.

Others agreed that a new government by itself will not be enough to ensure real improvement.

According to Slovenská sporiteľňa analyst Juraj Kotian, "if there is a credible government, the crown should strengthen slightly, but the growth will not be all that significant.

"Further strengthening [of the crown] will depend on Nato entry and finishing talks with the EU," he added.

EU entry has another implication for currency stability, which is the eventual reintroduction of a currency peg, which the country abandoned in October 1998.

If Slovakia is successful in its EU bid, the country will have to implement the Union's exchange rate mechanism framework, under which a central crown parity against a euro benchmark will be created, with the crown being allowed to fluctuate by 15 per cent from the parity figure.

While future developments remain largely dependent on political factors, Slovakia's improving foreign trade situation has provided a summer boost to the crown.

Data released in August indicated that Slovakia's foreign trade deficit saw a 14 per cent decrease year-on-year for the month of July, while exports for the month reached a 14-month high of Sk59 billion ($1.4 billion).

However, Blaščák warned that the foreign trade figures did not yet represent a long-term trend, and that "a radical and systemic change in the system of Slovak exports will be required."

That change, too, will be hastened by EU admission, as Slovak exporters will be forced to compete on even terms with European producers.

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