(Clarifies analyst's projections in 14th and 15th paragraphs)
By Peter Laca
BRATISLAVA, Feb 22 (Reuters) - Slovakia should seek to
negotiate a switchover rate to the euro that would reflect
expected economic developments and help to reduce inflation
risks after euro zone entry, a central bank vice-governor said.
Speaking to Reuters in a rare interview on Friday,
Vice-Governor Martin Barto declined to comment on what could be
the conversion rate, which is expected to be agreed between the
Slovak government and European Union authorities by end of July.
The crown firmed as much as 0.7 percent per euro near record
highs after Barto's comments as investors said they suggested
the conversion rate could be stronger than recent market levels.
Slovakia plans to become the 16th member of euro zone in
2009, and its adoption process is seen as a test case for the
rest of central Europe as it would be the first ex-communist
country with a floating exchange rate to adopt the euro.
Speculation about the conversion rate has been a key factor
in crown movements and investors look for any signs of
Bratislava's negotiation position.
Barto said Slovakia should advocate a conversion rate
justified by the strength of the economy, but the agreed level
should not reflect only past economic performance.
"In my view, negotiations on the conversion level should
reflect a real equilibrium exchange rate, which means a rate
based on fundamentals of the economy," Barto said.
"But it would be beneficial for Slovakia if the conversion
rate also reflected future developments in economic
fundamentals, which we can, to a certain degree, already
estimate at present."
The crown closed at 32.800 per euro <EURSKK=> on Friday,
which is 7.5 percent stronger than the central parity rate, in
the exchange rate mechanism ERM-2 within which a euro applicant
country must demonstrate currency stability.
The local unit is still weaker than its all-time highs of
32.710 to the euro in March 2007 after Slovakia revalued the
ERM-2 parity rate by 8.5 percent, to 35.4424 per euro, following
strong productivity growth and economic expansion.
The Slovak economy continued to grow rapidly throughout
2007, expanding by a record 10.3 percent for the whole of last
year, as foreign investment fuelled export-oriented industries.
Barto would not comment on where the present or future
equilibrium value could be, while analysts say the growing
economy would justify a conversion rate stronger than current
market levels.
"The recent and current levels were not in line with
fundamentals of the economy," said Jan Toth, chief economist at
ING Bank in Bratislava.
He said a conservative view put the real equilibrium
exchange rate at around 31.50 per euro for the start of 2009 if
the calculation included most recent GDP data and stronger
neighbouring currencies versus the crown.
If future investments and capacity growth in key car and
electronics industries were also added to the calculation, the
equilibrium rate would be even firmer, Toth said.
INFLATION RISKS
Senior NBS officials have said 2007 economic growth was
healthy and did not create additional upward pressure on
inflation.
The bank has held the main two-week interest rate steady at
4.25 percent since April last year, which has preserved a 25
basis points premium over the main euro zone rate. It repeatedly
said the rising crown had tightened monetary conditions.
But Slovakia will have to cut its main rate to unite it with
European Central Bank (ECB) level as part of the euro adoption
process, a move that will loosen local monetary conditions.
Barto said an appropriately set conversion rate should also
help to counter future inflation risks after euro zone entry
takes away the effect of the firming crown on consumer prices.
"The negotiations should take into account more relaxed
monetary conditions (after euro adoption), and future inflation
risks," Barto said.
Keeping inflation under control is Slovakia's key challenge
on its way to euro zone entry. The key price growth yardstick
hit a one-year peak of 2.5 percent in December, on higher cost
of food and petrol fuels, but it still stayed under the euro
adoption threshold for the fifth consecutive month.
