Market waits on government

The gradual and painful emergence of a new government in Bratislava has done little to alleviate the countries economic woes, but fortunately the Slovakian Central Bank is holding its nerve and continuing to do a good job despite parliamentary chaos.

Despite spending at almost $1bn, close to a quarter of its official foreign exchange re-serves, shoring up the Crown during August and September, the bank was forced to abandon its fixed exchange rate system at the beginning of last month. The decision to float the currency has been watched with interest by analysts, who detect the steady hand of the bank in the ab-sence of political leadership. The central bank has done a fine job, despite the government, or indeed in the last month or so in the absence of an effective government," says David Calver, Slovakian analyst at Merrill Lynch in London. He notes that the currency has regained some of its losses, and the bank looks set to announce a new parity and then a new trading band.

There remains much to be done, however, even if the worst of the currency crisis is over. A tighter fiscal policy should be at the top of the new government's list to slow import growth, says Calver. "Devaluation may have help-ed exporters, but booming imports are the major problem." Recently the country has been downgraded by all major ratings agencies.

John Lomax on the eastern European desk at HSBC in London believes the new consitution could encourage investment into the market, provided the government can deal with its fiscal problems. He agrees that a tough-er stance needs to be taken to quell imports, but adds that the problems are manageable. "This is not a Russian situation. It is a current ac-count problem, not a debt problem, and these are intrinsically easier to solve. Slovakia has never had a lot of foreign debt, and a great deal is now going to depend on how the the Crown acts over the next month."

The equity market has been fairly flat over the past three months, and has been down just 3% during October. And despite being 23% down over the year, Lomax says that this is not too bad: "It has managed to outperform Hungary, which is often taken as the measure, but one could almost certainly put that down to the fact that there are few foreign investors in Bratislava."

Analyst Thomas Broen of JP Morgan's London office points out that the lack of corporate transparency is also a worry for overseas investors. "We have seen some big transfers of ownership recently, at non-market prices, once a foreign investor has been found for part of the company. This is obviously a major concern. The irony being that certain parts of the mid-tech industries are very competitive, but there is insufficient transpar-ency to allay the fears of outside investors."

Broen adds that the current economic woes can be firmly laid at the door of the outgoing government. "The current account deficit is so wide, 11% of GDP, not because of currency over-valuation, but massive borrowing by the state to support companies and spend on local projects. This will presumably end with the new government." Kevin Hall"

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