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Slovak crown hits historic highs

CONTINUING this year's wild ride, the Slovak crown hit all-time highs in early November and threatened to surpass Sk41 per euro, prompting intervention by the country's central bank.
After falling to three-year lows of nearly Sk45 per euro in July, the Slovak crown has since gained 8.5 per cent on the heels of September election results and the favourable evaluation of the country's process of European Union (EU) integration.
However, the rapid strengthening forced the National Bank of Slovakia (NBS) to intervene in currency markets from November 12 in an effort to hold down the crown exchange rate.

CONTINUING this year's wild ride, the Slovak crown hit all-time highs in early November and threatened to surpass Sk41 per euro, prompting intervention by the country's central bank.

After falling to three-year lows of nearly Sk45 per euro in July, the Slovak crown has since gained 8.5 per cent on the heels of September election results and the favourable evaluation of the country's process of European Union (EU) integration.

However, the rapid strengthening forced the National Bank of Slovakia (NBS) to intervene in currency markets from November 12 in an effort to hold down the crown exchange rate.

By midday November 14, NBS action on exchange markets had pushed the crown down to Sk41.8 to the euro.

The central bank had been threatening intervention for much of the previous week as the currency gained strength against its euro benchmark.

Analysts say they had been looking for currency growth since the July lows.

"The weakening that happened during summer months looked unfounded. We were expecting the development to reverse after elections," said Tatra Banka analyst Robert Prega.

The crown exchange rate has also been boosted by the recent increase of Slovakia's long-term rating by the Fitch rating agency, as well as the governing coalition's presentation of its cabinet manifesto, say analysts.

"A broad picture of the Slovak economy and government policy was the triggering mechanism behind the strengthening," said Prega.

Slovakia's long-term outlook improved greatly after the October enlargement report by the European Commission suggested that Slovakia and nine other states will be invited to join the EU in 2004.

Tied to this, say analysts, is the increased attention on the Slovak crown of speculative investors, who until the elections had been avoiding the country as a more risky investment destination than other Visegrad Four countries.

"Speculative capital takes into account higher earnings in comparison to Western currencies," said Prega, referring to indicators showing GDP growth in Slovakia at significantly higher levels than in surrounding countries.

In the future, these factors could bring more supporting influence on the crown, say analysts.

"The question of further strengthening depends on whether such a positive outlook will remain, whether the government will continue with the policies it has started," said Prega.

However, the NBS became increasingly uneasy about the crown's growing strength in early November, first threatening intervention and then stepping into the currency market on November 12.

"We have reiterated several times that the current exchange rate of the Slovak crown does not reflect current economic fundamentals of the national economy," said František Szulényi, head of the NBS treasury department, shortly before the bank sought corrective measures.

Moreover, an overly strong crown could have a negative impact on Slovakia's foreign trade balance, said NBS officials and analysts.

"The biggest danger, as the NBS said, could be the impact on foreign trade - on the one hand, a stronger crown would support imports, but on the other hand, it would put Slovak exporters at a competitive disadvantage," said Prega.

Analysts say that the strengthening of the crown is inevitable, and the only question to address is the pace and extent of its rise.

"The central bank is only trying to affect the pace of the crown's growth, so that it grows only by a few per cent per year," said Istrobanka analyst Marek Senkovič.

"The crown has grown by hardly 4 per cent since the beginning of this year, and if this trend lasts until the end of the year, it would not be anything tragic," said Senkovič.

In addition, he said, attempts to keep the crown at certain levels would probably not be successful.

"The central bank has the power to weaken the exchange rate, but the question is, whether or not it is reasonable," said Senkovič.

"The NBS has room for it, but it should not try to defend this trend for the long term because it doesn't make sense.

"The Czech Republic is a good example. Its central bank kept intervening for years, but the Czech currency strengthened by 30 per cent over three years. It has stopped only in the last few months, when the central bank significantly lowered interest rates," said Senkovič.

"The Slovak central bank would have to lower its rates by 5 per cent to reach the same level, but such a step is not realistic," he added.

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