Over the past months, the Government has engaged a drastic reform within all the sectors of the economy. Can you give us a brief overview of the economic and financial performance of Slovakia?
I would not say that it was so much drastic reform, I would rather say it was a useful reform, which will show results in the future.
Generally speaking I would say that the National Bank is satisfied with the present macroeconomic development. Inflation rate has recorded falling dynamic when CPI reached 6,5% and core inflation 3,3% in November. This development in prices overcome our expectations as the dynamic is for the year-end predicted to be under our interval (6,7-8,2 for CPI and 3,6-5,3 for core inflation). The reasons behind this development are the situation on fuel market and competition on retail trade level, which is, effected the prices of foodstuff. The GDP growth last year reached 2.2%, the first three quarters of this year it was 3,1%. For this year we have expected the growth to be between 2.8 and 3.2%. Due to the situation in the USA and EU countries our expectations moved towards the middle of predicted band, so we consider the growth around 3% to be achievable. It is necessary to realize that there is a slowdown in our main trading partners economies on one hand and revival of our domestic demand on the other hand. This has effected the development of current account, which will reach 9% share on GDP this year. Due to quite substantial share of technologies imported and also due to increased FDI inflows we consider this development as acceptable but we still closely monitor the actual development.
What are the instruments and measures to control inflation?
To ensure the price stability represents the main task of the National Bank of Slovakia. As any other country in transition we have to accept higher rates of inflation mainly due to price deregulation process. When the Government increased the regulated prices approximately two years ago, it was very important for us to prevent the price contagion. That means to be very cautious. I can say that we have been successful in this area and have the inflation under control. Fiscal policy had positive contribution to this process due to the whole package of measures among them the fiscal consolidation in the area of declining the fiscal deficit with effect on domestic demand. This has helped to minimalise demand pull inflation. We believe that the Government is able to maintain this low fiscal deficit and that it also contributes to the monetary stability.
The main monetary policy instruments are interest rates for open market operations. As we start to fully use this instrument just recently there is certain time needed to bring its real meaning and impact to the minds of our public. Thus, especially at this time there is need for favorable policy mix. To ensure better transmission of MP signals to the economy there is necessary the banking system to be sound and properly working. Two years ago some banks faced enormous problems, they did not have enough liquidity, the capital adequacy was approximately zero. It was important to start the process of revitalization of our banking sector together with our Government. Thus the state owned banks restucturalisation and privatization represents important step towards financial system stability.
What are your expectations for 2002?
Due to in fact stopped price deregulations for 2002 we expect inflation rate to reach 3,5-4,9% for CPI and 3,2-4,7 for core inflation. The current account deficit will improve slightly and is expected to reach 7,9% share on GDP. We hope that prices of raw materials will remain stable and will not contribute to a higher deficit because in the first half of the year the contribution of prices was around 9 billion SKK. We expect to continue not only domestic demand revival but also positive contribution of foreign demand. This will effect also the GDP development where we see the potential for 3,5-3,8% growth. We hope that Slovakia will remain an attractive country and a lot of investors will enter this market. New investors need to restructure companies and that means to import new technologies but increase employment and production.
How important is it for you to quickly deregulate prices when considering your chances to join the EMU?
The Government of Slovakia together with the National Bank realizes that we have to liberalize the regulated prices. If I look to the past, the present Government increased some regulated prices substantially but there is still some room for further liberalization in this area. We think that the main steps in this area have been done however we do not consider the decision for year 2002 with regard to regulated prices as a right one. It is necessary to finish this process, to liberalize the rest of the regulated prices. If there is a postponing in this area one year it will mean the jump in prices next year. There is no way how to escape from this process. We expect to continue further liberalisation in 2003 in such a speed to be ready in 2004 to enter EU with deregulated prices.
What level of inflation do you mainly target for 2006?
It will depend on the actual steps and impact of price deregulations, on fiscal consolidation and on EU accession. For us, the best is to improve the situation in this area step by step. I would say that big steps are not good. The strong changes but also the postponing of price deregulation could jeopardize total microeconomic stability. As the government announces year 2004 to plan to access EU from that time price deregulation's will have no impact on inflation, so the desinflation process can start. As we plan to start around year 2006 the examinations to EMU so the inflation of three best countries will matter us, which is around two or three percent. We prefer this development to be stable and to improve the situation step by step.
Among indicator which identifies the monetary policy stance is the movement in interest rates of NBS. The gradual decrease of interest rates on loans and deposits now turns around 8-10 How would you describe the impact of that monetary policy on the inter-banking system and also the impact on the stock market activities?
I would say that the main effect was the stabilization of our money market. In previous years, before the use of these qualitative instruments by the National Bank, there was a big volatility on the money market. That means the money market stabilized got stabilized in one year, in fact in one day ( February 1 2000). Today, the rates on the money market are between 6 and 8%. That means that the situation is stable and there is no doubt that this situation will continue. The NBS´s interest rates have logically extremely strong impact on money market,which is high correlated to primary market interest rates (especially to deposit rates). There is however no impact on stock market which is not very frequently use for allocation of financial resources. Our present real interest rates are very low, negative,which will change in 2002 when inflation is expected to fall down so there might be room for decrease also interest rates. As there might be an impact on exchange rate and domestic demand with effect on current account (which has not been yet quantified) we need to be very cautious in the usage of this instrument.
You mentioned that the deficit of the balance of current account has increased. Do you believe this may prevent further decrease of interest rates?
This currently represents area of our big
interest and is also effecting the Banking
Board of NBS decisions about movements in
interest rates. I have to say that this deficit
is very high compared to our GDP. If we however
as I previously mentioned look at the structure
of this deficit and know that this deficit
was caused by import of technologies, by prices
of raw materials and if we assume that this
development will not continue in the future.
What is for us also important is that the
deficit is financed mainly by the foreign
direct investment. If we face some problems
with financing of this deficit and the flow
of the direct foreign investments will slow
down, in this case the National Bank will
respond to this situation. As we see the main
problem in the production structure of economy
the government should take some steps, mainly
to reduce the fiscal deficit, and continue
to restructure the economy. |
You gave us some indicators of the good health of the economy. But what is the general feeling from the banking sector developments?
It is difficult to compare the situation in the banking sector two or three years ago with the present situation. Two years ago, the banks faced big problems. The Government had to start a revitalization process of the banking sector. Banks that caused problems because of low discipline were sold or closed. Process of revitalization started, first with the privatization of two main Slovak banks. The privatization process is already finished, the new owners replaced the management. As the management is partially created from foreigners who are not fully familiar with our situation there are more cautious at the beginning. So we have to wait some time to start credit activities in privatized banks. If there is a continuity, if somebody could compare the situation three years ago and today, there can be just one answer: the situation has improved. When we look at the official statistics, at the amount of loss making enterprises we can see a substantial improvement. The climate of the banks is better, they fulfill their obligations towards the banking sector. There are also some problematic enterprises, but I can still say without a doubt there is a substantial improvement in this area.
NBS is satisfied with the current level of foreign exchange reserves. Taking into consideration the fact that most of the privatization process is being completed, do you believe that the current inflow of foreign investment will remain steady in the future and will enable a further increase of foreign exchange reserves over the next few years?
The privatization is not yet complete the biggest part of inflow is ahead due to planned SPP privatization. The present level of foreign exchange reserves amounts to 3 monthly imports of goods and services. Last year, the inflow of foreign direct investment into this country amounted for around 2 billion US$. Approximately 50% of this investment was due to the privatization process. The other 50% were decisions from foreign investors, it did not have a connection with the privatization process. If this situation continues, we are satisfied. This country has some competitive advantages, the lowest labor cost in this region, fine location, skilled workers. If Slovakia is a candidate for acceptance into the European Union, I think there is a fair probability of continuous direct investment.
The present level of our foreign exchange reserve is about 4,1 billion US$. Only the privatization of Slovak Gas Company should increase the foreign exchange reserve by some billions. In ordered to protect a fair appreciation of the Slovak currency, we had to intervene and these interventions were caused by the inflow of foreign direct investment. Another type of indirect intervention is the conversion of privatization receipts in the NBS and deposition Slovak currency equivalent with the NBS to prevent huge and artificial appreciation.
The main goal is to remain attractive and the foreign direct investment will continue. We will be able to finance the deficit of current account by this investment.
This will increase our productivity and exports. I do not see any problems in this area.
We do not include our gold reserves evaluated on market prices into this official foreign exchange reserve. But this will change from the beginning of 2002 following recommendations from the International Monetary Fund.
As Slovakia is heading towards EU accession, how important do you consider the Euro to the current development of the foreign exchange market and to the valuation of the Slovak Crown?
As I have mentioned, Slovakia is a very small open economy. It is possible to say that 90% of our foreign trade is associated with EU and associated countries. If Slovakia is close to these economies, I think its monetary situation cannot be different. That means the Slovak currency is very close to the European currency. Euro is a reference currency for our currency and I honestly say that we have to follow the monetary policy of the Central European Bank. I would compare the situation to the one in Germany and Austria in the past. Today, the huge European market steps into our market, that means we have to follow it and the best solution in the future is the replacement of our currency by the Euro.
Do you believe the National Bank will have to intervene again before joining the EMU?
We intervened in the previous year, this year it was a very low amount. That means that we are prepared to intervene at any time. Our foreign exchange market is very limited and small so sometimes interventions are needed to prevent high volatility.. If there is an investor on this market who sells his shares of foreign exchange, there will be a big volatility on the market and we will have to intervene. If the volatility is not connected with the fundamentals of the economy, it is the duty of the Central Bank to intervene on the foreign exchange.
What are the challenges of the Central Bank before the elections next year and before the EU accession?
In the monetary area it is necessary to maintain the present level of the monetary stability. I do not feel any significant problems in this area, the Parliament has approved the State budget for the 2002, the deficit is not very high, could be even lowered. Some deputies think that it is possible to postpone the privatization process. New Government will decide on this. Our goal is to persuade them that it is necessary to continue the privatization process, deregulation and restructuralisation. The National Bank should support and speed up this process. The Parliament passed a new banking law two months ago. This Act will be valid starting from January and it is important to strengthen the supervision of the National Bank in this sector. We want to continue the process of international auditing. I consider this as a big challenge for us. Some adjustments are needed in the area of payment system, there is a new legislation being prepared in this area. This means to fulfill all criteria of EU in the payment system. I hope that the National Bank will submit this new proposal to the Government in the first quarter of 2002.
What would be your final message to our readers?
Slovakia is seen as young country and I would recommend everybody to visit and to talk to the people who have experienced business in Slovakia. There are a lot of foreign investors that are satisfied, conditions are not bad and we will become a part of the European market. I believe this country should expect a great future.
Note: World Investment News Ltd cannot be held responsible for the content of unedited transcriptions. |
V.I.P. INTERVIEWS 
