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Year of the crown: NBS intervenes to control wayward currency

THIS year was a roller-coaster ride for the Slovak crown, with worrying highs and lows against its reference currency, the euro, prompting intervention from the National Bank of Slovakia (NBS) a number of times throughout the year.
The crown's exchange rate with the euro strengthened over the year from Sk42.40 in January to Sk41.70 at the end of December, while it grew more than 20 percent against the US dollar, from Sk48 in January to Sk40.50 at the end of the year. The currency's exchange rate against its rival, the Czech crown, stayed relatively stable, at around Sk1.34 throughout the year.
In the first four months of 2002, the crown steadily gained strength thanks to the influence of the Czech crown, which at that time stood at the record rate of under 30 per euro.

THIS year was a roller-coaster ride for the Slovak crown, with worrying highs and lows against its reference currency, the euro, prompting intervention from the National Bank of Slovakia (NBS) a number of times throughout the year.

The crown's exchange rate with the euro strengthened over the year from Sk42.40 in January to Sk41.70 at the end of December, while it grew more than 20 percent against the US dollar, from Sk48 in January to Sk40.50 at the end of the year. The currency's exchange rate against its rival, the Czech crown, stayed relatively stable, at around Sk1.34 throughout the year.

In the first four months of 2002, the crown steadily gained strength thanks to the influence of the Czech crown, which at that time stood at the record rate of under 30 per euro.

However, insiders expressed concern that a strong Slovak crown (then around Sk41.60 per euro) did not accurately reflect the state of the Slovak economy, overshadowed by threats of high budget and trade deficits. In mid-April, the NBS considered the exchange rate adequate, but at the end of the month the bank's governor, Marián Jusko, characterized it as "overvalued".

This and later comments from the NBS boss weakened the exchange rate by Sk3.4. It fell to hit the 'psychological barrier' of Sk45 per euro in the second week of June, prompting calls for the NBS to start buying crowns in order to reduce the supply of the currency on the market and thus help it strengthen.

In June, the NBS intervened three times to strengthen the currency, but none of that activity improved the currency's exchange rate against the euro as much as certain political events that happened a little later.

The separation of a small faction from the leading opposition party, the Movement for a Democratic Slovakia (HZDS) led by three-time prime minister Vladimír Mečiar, in July was taken as a signal by forex traders that the HZDS was unlikely to be in a new Slovak government. Fears over Mečiar's possible return to power had caused hesitance in the past among some foreign businesses considering setting up shop in Slovakia.

The news of the formation of the new party powered the exchange rate below Sk44 per euro, and on election day, September 21, the crown stood at Sk43.10 to the euro. The strengthening continued after right-wing parties, favoured in the West, agreed to create the future government coalition.

Immediately after the election results were announced, the crown strengthened further, to Sk42.90 per euro. This trend continued in October, after the credit rating agency Moody's revised its outlook on Slovakia from stable to positive - citing the prospects for improved structural reforms under the new government - and the Irish referendum on the EU enlargement improved Slovakia's chances of joining the Union in 2004.

In mid-October, when the crown reached its record strength of Sk41.10 per euro, the NBS fulfilled the expectations of analysts and forex traders and intervened considerably to weaken the currency. Although the bank bought 500 million euro from the market and replaced that amount with Sk20 billion, the crown weakened by only Sk0.65, from Sk41.15 to Sk41.80 per euro.

Later in November the NBS decreased key two-week interbank interest rates from 8.25 percent to 6.5 percent, which caused the crown to weaken by an additional Sk0.25, to Sk41.55 per euro.

Traders said the latest geopolitical events, including Slovakia's invitations to join Nato and the EU, did not improve the crown's rate against the euro, as they had already been priced in.

At the end of the year, the exchange rate was poised between Sk41.80 and Sk41.70 per euro. However, it is expected to keep strengthening in 2003, and break another 'psychological barrier' of Sk40 per euro in the first half of next year.

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