For the most part, the Slovak Koruna is a relatively stable currency. Formerly part of communist Czechoslovakia until the country split into 2 republics, Czech Republic and Slovak Republic also known as ‘Slovakia’ in a peaceful separation on January 1, 1993. Slovakia is home to a developing diversified market economy for its 5.4 million citizens.
POLITICS: President Rudolf Schuster and Prime Minister Dzurinda’s represent a four-party centre right coalition (the Slovak Democratic Coalition re-elected in September 2002) which supported Slovakia’s pro-European bid. The people of Slovakia overwhelmingly supported EU membership in a national referendum in May 2003 with over 90 percent support. During year 2002, Slovakia was invited to join NATO and will be formally accepted into the European Union in May 2004. President Schuster supports aggressive free market reforms and integration into the global economy to propel Slovakia to a more prosperous future.
ECONOMY: good economic fundamentals with large levels of foreign direct investment (‘FDI’). Transition from state controlled ecnomy to a market based economy has been successful although a more difficult transition than experienced by the Czech Republic. Currently, Slovakia is forecasted to outpace the Czech Republic in economic growth for year 2003. Domestic agriculture only represents 5 percent of the economy with services and manufacturing accounting for the lion’s share of output. Majority of trade for Slovakia takes place with the EU, mostly with Germany. Slovakia’s stockmarket is small with only a $3.5 billion USD capitalization but it has performed very well in 2003 up 25 percent to July 2003. A major difficulty is the prevailing high unemployment rate although it is making progress falling to 14.6 percent down from 17.7 percent at the start of year 2003 as legislation is overhauling the rigid labor code. The economy is diversified with industrial production accounting for 30 percent of GDP in industries such as steel, engines, machinery equipment, defense, etc.
Economic Statistics
GDP as measured by purchasing power parity is at $66 billion USD (2002) with corresponding GDP/Capita at $12,200 USD (2002). GDP market is at 1,074 billion Korun ‘SKK’. Year 2003 GDP growth estimated 4.1 percent while year 2004 is projected to increase to 4.5 percent, year 2002 at 4.4 percent, year 1999 at 1.3 percent, year 1995-98 averaged 6.5 percent. Inflation is increasing in 2003 to 8 percent due to price deregulation but it is expected to decline again in 2004, inflation 2002 came in at 3.3 percent, 2001 at 6 percent. The trade deficit for year 2001 is at approximately $2.5 billion USD. The current account deficit for 2003 is projected to decline to 6 percent from year 2002 at 8.8 percent, year 2004 is projected to narrow to 4.5 percent, 1999 at 5 percent, 1995-98 at 10 percent. Year 2002 fiscal deficit at 7 percent of GDP, 2001 was a better figure at 4 percent. Public debt to GDP is at 44 percent, external debt to GDP (2002) was valued at $9.6 billion USD. Year 2000 and 2001 FDI into Slovakia totalled $3.5 billion USD.
POSITIVES: strong FDI, large number of privatizations are now completed including industry sectors such as energy to telecommunications, lowering of business taxes, tax & pension reforms, lower trade barriers. CONCERN: potential for higher inflation levels.
BANKING SYSTEM: predominantly foreign controlled. In May 2003, Slovakia’s central bank, National Bank of Slovakia ‘NBS’ intervened in the currency markets by buying euros to keep the Koruna from appreciating too quickly. In February 2002, a financial crisis struck Slovakia whereby a major collapse took place of a large investment company, BMG Invest. Record low interest rates are fueling a deepening of capital markets including the bond market. The nation’s official reserve position stands at a healthy $10.84 billion USD as of July 2003 equivalent to over 9 months import coverage.
REGIONAL ANALYSIS: Czech Republic, European Union, Hungary, Poland
As a leader in Eastern Europe, Slovakia is garnering great investor interest including European multinationals taking advantage of cheaper production. Similar to the Slovak Republic, the Czech Republic also recently voted in favour of EU membership while both Hungary and Poland are also in the first group for European Union enlargement. For further information on the region, please visit the currency review on the CZECH REPUBLIC in this BI.C currency index.
KNOWLEDGE: Slovakia remains vulnerable to inflation threats with August 2003 inflation creeping higher to 8.7 percent as it must lower the persistant fiscal and current account deficits incurred. Industry privatizations in 2001 resulted in increased capital inflows which helped to offset the current account deficit at a very large 8.8 percent of GDP. Year 2002 fiscal deficit was high at 7 percent of GDP, although they say they are on target to meet a goal of 3 percent shortfall in order to meet the Maastricht's’deficit criterion by late 2006. The trade deficit is the problem with energy imports hampering the figure although massive FDI, remittances and energy transit fees have helped to offset this shortfall in the current account. Slovakia only produces 30 percent of its domestic energy requirements, thus required to import the difference. However, Slovakia does benefit tremendously from $500 million USD/year and growing in transit fees received for natural gas pipelines moving energy (Russia is a major supplier) through Slovakia to regional energy markets due to Slovakia’s key strategic centre position in Europe. Under the previous regime of former Prime Minister Meciar’s tenure during the mid to late 1990’s, Slovakia again ran large persistent trade and current account deficits at higher levels than today. Year 1998 current account deficit reached 12 percent of GDP. The government during this time borrowed externally to cover the shortfall.
Ethnic divisions are common in Eastern Europe including Gypsies, ethnic Roma, ethnic Slovaks and Hungarians within the Slovak Republic. Divisive politics with significant opposition forces to the current governments pro-EU stance although widely supported in a recent referendum. Wide regional wealth disparities are prevalent within the Slovak Republic with high poverty areas in the Eastern part of the country when compared to the wealthier Bratislava region. Twelve regional governments now divide along north-south lines. Many in the ethnic Hungarian population represented by Slovakia’s Hungarian Coalition Party (SMK) are against NATO and the EU. Although, the opposition to the EU is minimal and will not be a threat in the future which bodes well for Slovakia. Former autocratic Prime Minister Meciar and his followers are against joining the EU as when they ruled during the mid 1990’s, his government badly tarnished relations with the EU and the United States.
CURRENCY: ISO Symbol ‘SKK’, Slovak Koruna, Slovak crown, Slovenska Koruna. At time of review on September 2, 2003, the Koruna had an exchange value of 38.6 SKK to 1 US-dollar (‘USD’). In relation to the EUR, the SKK has traded in a exceptionally tight trading range of 42.75 SKK to 1 EUR in January 1999 to 41.92 as recently as of August 2003. As measured by the economist magazine’s Big Mac Index based on the concept of purchasing power parity, the SKK is approximately 35 percent undervalued versus the USD as of April 2003. At inception on January 1, 1993, the SKK was pegged to a basket of two currencies including the German Deutschemark ‘DEM’(60 percent) and the USD (40 percent). On October 2, 1998 the currency band and link to DEM and USD was abandoned as the Slovak crown was floated.
CURRENCY HISTORY: historical valuations include year 1995 at 29.7 SKK to 1 USD, November 1996 at 30.9, January 1998 at 35.17, year 1999 at 41.4, January 2000 at 41.7, October 2000 at 51.12, June 2001 at 50.07, July 2002 at 44.83, January 2003 at 39.18, June 2003 at 35.57.
CURRENCY FORECAST: bullish as several analysts view the Slovak Koruna as an EU convergence play supported by $2 billion USD in direct investments. Investors have been betting on convergence trades by buying Slovak government bonds where interest rates are much higher than the eurozone. When rates fall, bonds will rise in price as Slovakia nears EU entry. Strong capital inflows over the last year have not deterred investor interest in the Koruna even with Slovakian interest rates falling 150 basis points during this time. Imminent membership for EU entry and eventual adoption of the Euroland euro as new national currency for Slovakia by 2008. Expected EU membership is targeted for May 2004 then followed by the Koruna entering a 2-year exchange band in ERM-II awaiting for euro currency where the Koruna will fluctuate with a 15 percent band against the euro. The risk for a currency crash is minimal with official reserve to short term debt coverage ratio at 140 percent, the Koruna warrants a higher currency safeness ranking.
UPDATED: September 2, 2003
