By Peter Laca
BRATISLAVA, May 19 (Reuters) - Now that Slovakia has landed
a spot in the euro zone, the only question left is how far its
currency will be allowed to climb.
The Slovak crown has gained 1.8 percent against the common
European unit since May 7, when the European Commission gave it
the green light to join the zone in January.
Leftist Prime Minister Robert Fico wants as strong a rate as
possible to boost the salaries of his countrymen in euro terms
and fight inflation, which is expected to hover above that in
richer European Union states for the next decade.
The European Commission has welcomed his aims, and has also
urged his government to tackle price growth, and the European
Central Bank has announced "considerable concern" over
Bratislava's ability to keep inflation in check.
Analysts say that means the crown -- which hit a new all
time high of 31.46 to the euro on Monday -- should be allowed to
appreciate further until the expected July deadline for fixing a
final conversion rate against the euro.
"It is very difficult, if not impossible, to find arguments
why the European Commission might not prefer a strong conversion
rate," said Jan Toth, ING Bank Chief Economist in Bratislava.
He cited as arguments in favour the fact that Slovakia was
the poorest country ever to join the euro zone, with the lowest
prices, that it had super-high growth rates and uncertainty
about overheating, that its exports were booming and that there
were concerns about future inflation.
REVALUATION
Despite its booming economy which has grown more than five
percent a year since EU entry in 2004, Slovakia will be the
poorest euro zone member, with 71 percent of the EU average
gross domestic product per capita in purchasing power parity.
The crown has risen 28.3 percent since EU entry, trailing
the central European leader the Polish zloty and the Czech
crown, which have grown 42.4 percent and 29.5 percent
respectively. Regional laggard Hungary's zloty is up 1.3
percent.
Fixing the crown at a firmer rate to the euro will instantly
boost Slovak salaries in euro terms and give them a leg up in
the convergence process in which the EU's ex-communist newcomers
struggle to close the wealth gap with their Western partners.
The crown is trading 11 percent above its peg to the euro in
the ERM-2 currency grid, which sets a fluctuation band of 15
percent on each side of the central rate. Euro applicants are
obliged to stay in ERM-2 for two years to prove currency
stability.
According to a Reuters poll, the market expects the ERM-2
peg, now at 35.4424 crowns per euro, to be revalued for the
second time after an 8.5 percent hike to the peg last year.
A Reuters poll of analysts conducted between May 15 and May
16 showed the median prediction of the conversion rate at 31.750
per euro, which would be weaker than Monday's all time high.
Market watchers also say that, because Slovakia and the
European Commission must agree on a rate six months ahead of the
switch to euros so shops and consumers can acclimatise, the
upcoming revaluation will likely create the joining rate.
"The conversion rate will be known in July, but if revalued,
the new ERM-2 central parity will almost certainly be the
conversion rate level," Slovenska Sporitelna analysts said.
MARKET LEVEL?
The May prediction is a significant upward move from the
previous forecast of 32.50 in late April, but some analysts said
an even firmer rate is needed to keep inflation down.
JP Morgan economist Miroslav Plojhar said a rate between
31.0 and 31.5 per euro would push Slovak inflation towards the
3.2 percent forecast by the European Commission for next year.
Plojhar said Fico's calls for a strong rate suggest "that
the worry about a sharp spike in inflation once EMU entry occurs
and the intention to please voters with a one-off increase in
wages and savings in euro terms are much stronger arguments than
the threat to competitiveness of the corporate sector".
Fico has said the government has a preferred range for the
final level, and observers expect this undisclosed band to be
the basis for negotiation with EU authorities.
ING's Toth said fixing the rate away from the unit's actual
market levels was not entirely out of the question, but added
investors appeared to be expecting a rate near trading levels.
The united front among the Slovak government, the European
Commission and the European Central Bank for a strong rate may
also encourage investors to bet high on the crown, because now
is the last chance they will have to cash in on its rally.
"If all three key players want a strong conversion rate,
that could lead to an assumption that the (lowest) conversion
rate would be the strongest market level up that given date,"
Toth said.
