Slovakia’s almost certain euro adoption next year could boost the country’s credit ratings in the near term, despite sharply increased inflation risks, analysts say.
Last week’s recommendation by the European Commission that Slovakia should be allowed to adopt the single currency at the start of next year has still to be formally ratified by EU finance ministers by late June, but the expectation that they will rubberstamp the European Commission’s recommendation has helped to strengthen the Slovak crown.
The currency this week hit an all time high against the euro to trade Sk31.6/E. The final FX entry rate will be confirmed in early July.
Gillian Edgeworth, an economist at Deutsche Bank in London said Slovakia’s final acceptance for monetary union membership could give a boost to its creditworthiness. “Assuming confirmation of Emu entry in early July, it is possible that we will see at least or two of the rating agencies upgrade Slovakia’s rating.”
Moody’s Investors Services commented that eurozone entry would act as a “deterrent to external financial shocks.”
But the agency warned that “demand management and inflation control will become more difficult given the easing of the monetary stance implied by the alignment of the National Bank of Slovakia’s key interest rates with the prevailing ECB policy rate by the end of 2008.”
The appreciation of the Slovak crown against the euro has helped keep inflation in check: since January 2004 the currency has strengthened by 28% against the euro. But analysts cautioned that euro adoption could have a negative impact on Slovakia’s inflation outlook.
“Going forward, the inflation outlook could deteriorate further driven by both demand and supply-side factors,” said Lars Christiansen, chief analyst at Danske Bank in Copenhagen.
Prime minister Robert Fico has stressed that Slovakia has met the inflation criteria for euro adoption with room to spare. “We were 1.0 percentage point lower than the inflation criteria,” he said followed the EC decision, adding that inflation was a worldwide problem but Bratislava would take the necessary steps to curb price rises.
Nevertheless, bond markets will gain from Slovakia’s euro adoption, according to Juraj Kotian, co-head of fixed income research at Erste Bank.
Non-financial corporate issuance will be the prime beneficiary as investors will be more willing to take on Slovakian credit risk once foreign exchange rate risk is eliminated with euro adoption, he said.
Government bonds should attract a wider international audience following entry into monetary union.
Henning Esskuchen, co-head of equity research at Erste in Vienna said that while euro adoption is unlikely to impact local equity markets. “There are so few interesting stocks listed in Bratislava that I doubt it will have much effect on the equity markets.”
This stands in contrast to the experience of Slovenia, where the Ljublana bourse recorded a 90% increase on the back of its eurozone accession.
Robert Prega, chief economist at Tatra Banka said that euro adoption should encourage further strategic investment in Slovakia, on both a greenfield or acqusition basis.