JOLT COMES FROM CENTRAL BANK VICE-GOVERNOR

Crown hits new heights

FEBRUARY 25 will go down in the history of the Slovak currency as the day the crown broke its historic high set in March last year.

FEBRUARY 25 will go down in the history of the Slovak currency as the day the crown broke its historic high set in March last year.

The crown climbed to Sk32.7 against the euro, showing signs it will remain strong along the home stretch toward euro adoption.

The currency received a jolt from Vice-Governor of the National Bank of Slovakia Martin Barto who told the Reuters newswire on February 22 that the euro conversion rate of the Slovak crown also reflects the future development of the Slovak economy.

"In my view, negotiations on the conversion level reflect a real equilibrium exchange rate, which means a rate based on the fundamentals of the economy," Barto said. "But it would be beneficial for Slovakia if the conversion rate also reflected future developments in economic fundamentals, which we can, to a certain degree, already estimate at present."

The market interpreted his statements as a hint that Slovakia might adopt the euro at a stronger exchange rate than the current central parity of 35.4424 SKK/EUR.

"The very trigger of the recent moves was Barto's declaration that the National Bank of Slovakia (NBS) should also take into account the future development of fundamentals," Viliam Pätoprstý, senior analyst with UniCredit Bank, told The Slovak Spectator. "This was understood as a certain front loading of future appreciation into the conversion rate."

According to Juraj Valachy, an analyst with Tatra Banka, Barto's statement created a larger chance that the conversion rate will be stronger than the current central party.

"This is very encouraging for the Slovak crown," Valachy told The Slovak Spectator.

Pätoprstý agrees that the rate should be stronger.

"It is better for inflation, for real wages and a 3-5 percent stronger conversion rate will not hurt exporters either, as they certainly have large cushions in low labour costs and high productivity," Pätoprstý said. "Fixing the currency will moreover bring them only advantages."

However, Prime Minister Robert Fico told the SITA newswire that the conversion rate will depend on negotiations between European and Slovak institutions rather than the will of the Slovak government, even if the Cabinet would like a stronger rate.

The central bank said on February 26 that it would restrain from comments on the development of the Slovak currency's conversion exchange rate with the euro until it is fixed.

Vice Governor Viliam Ostrožlík told the SITA newswire that remarks by some NBS Bank Board members were only their personal opinions.

Pätoprstý estimates that the conversion rate could be 32.3 SKK/EUR, while Valachy said that Tatra Banka has estimated the rate at 32.50 SKK/EUR.

However, market watchers said that other factors besides Barto's verbal nudge have empowered the Slovak currency.

Among these are the easing of the impact of the US mortgage crisis on Central European currencies, Valachy said.

"Investors are once again interested in pouring investment into emerging markets," Valachy said.

According to Pätoprstý, the strong fundamentals of the Slovak economy, such as stronger than expected GDP growth and labour productivity, has made an impact. The analyst also expects that the crown will continue gaining strnegth and could even touch levels below 32.0 SKK/EUR in the upcoming weeks.

The Czech crown is experiencing similar prosperity, as is the Polish zloty, Pätoprstý said.

"The Hungarian forint is an exception due to the unexpected change the Hungarian central bank delivered on February 25 by moving the country's exchange rate regime from a band to free floating," Pätoprstý said. "Hungary is also experiencing a bad macroeconomic phase compared to its neighbours that is restraining the forint from moving in kind with other currencies."

Marta Ďurianová contributed to the report.

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