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Slovakia: Spring EC's forecasts increase the chances for EMU entry

Mon, Apr 28 2008, 14:37 GMT
by KBC Market Research Desk

KBC Bank

The European Commission released its new spring forecasts for 2008 and 2009. We evaluate them as positive for the Slovak aspiration for EMU entry in 2009.

The EC report expects inflation to go materially higher but not only in the Slovakia but also in the eurozone. The Commission raised the Slovak 12-month average HICP inflation from 2.5% to 3.8% in 2008 and from 3.0% to 3.2% in 2009. It basically changed the inflation forecast in the eurozone by the same margin from 2.0% to 2.2% in 2009. Thus, the difference between the Slovak and EMU inflation remains the same in the autumn and spring forecast. Moreover, based on the forecasts for the rest of the EU-27 countries we expect Slovakia will be able to fulfill also the condition of sustainability. The criterion for Slovakia should be 4.1% in 2008 and 3.4% in 2009 (taking into account 3 best performers plus 1.5ppt). That means the country will stay within the required limits also in the foreseeable future according to the Commission’s view. We expect the EC to give a positive assessment for Slovakia next week on May 7th in the Convergence report. The ECB sounded “less friendly” towards the Slovak aspiration for euro adoption in January 2009. The first draft of the ECB report (according to citied rumors) expressed “serious concern” about the development of the Slovak inflation but this view came under strong criticism of other central banks. So, after this pressure from other central banks the Commission forecast now also questions the “less friendly” ECB attitude. We believe that the report will not be too critical in the final stage. Therefore, Slovakia should get the green light next week and adopt the single European currency as planned in January 2009.

This opens a lot of questions about the next possible revaluation of the central parity and final conversion rate. A second revaluation will be logical given the strong productivity differential vis-à-vis the Eurozone and expect it in May. The new central parity could also be the final conversion rate. This issue is a hot topic these days. PM Fico advocates the strongest possible exchange rate that would be in favor of the Slovak inhabitants. Mr Burian from the ruling Smer party (Head of the Parliament Committee for Finance, budget and the currency) said he would expect the conversion rate close the level of EUR/SKK 32.0. Our long standing forecast is EUR/SKK 32.50, but we would not be surprised by a fixing somewhere in the range +/- 50 hellers around 32.0. This makes a possible range of EUR/SKK 31.50 – 32.50. However, one should taking into account that central bank and ECB officials might like to prevent big swings shortly before the revaluation. According to the rumors, the last possible date for the revaluation could be some Friday in mid–June. The Slovak koruna gained around 0.5 percent on the news. We might see some comments from the NBS after the publication of its new quarterly forecast (tomorrow).

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• Slovakia: Spring EC's forecasts increase the chances for EMU entry
  Published On Mon, Apr 28 2008, 14:37 GMT

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