VZCZCXRO0419
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHSL #0165 0791521
ZNR UUUUU ZZH
R 201521Z MAR 07
FM AMEMBASSY BRATISLAVA
TO RUEHC/SECSTATE WASHDC 0783
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS BRATISLAVA 000165 
 
SIPDIS 
 
SIPDIS 
 
TREASURY FOR AALIKONIS 
USDOC FOR MROGERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD LO
 
SUBJECT: Slovak Currency Continues Unprecedented Rise After Rate 
Change 
 
REF: Bratislava 144 
 
¶1. SUMMARY: At the request of the Slovak government the European 
Union lifted the Slovak koruna's central parity rate 8.5 percent to 
35.44 against the Euro from March 19.  The koruna is allowed to 
trade 15 percent above or below the rate under conditions Slovakia 
must meet before it can join the 13-nation euro region.  This change 
was not unexpected given the robust economic growth, rise in 
productivity and more stable inflation.  It does, however, make life 
more expensive for us. END SUMMARY. 
 
¶2. The koruna has strengthened by more than 10 percent against the 
Euro since Slovakia entered the Exchange Rate Mechanism II (ERMII) 
in November 2005, more than any other currency, as companies 
including PSA Peugeot Citroen and Kia Motors Corp. opened factories 
and real economic growth accelerated to a record 8.3 percent in 2006 
(Reftel).  However, the Slovak Central Bank does not have resources 
to continue the interventions against the persistent currency growth 
and therefore requested the revaluation.  The Slovak Republic 
currently holds $14.7 billion in foreign-currency reserves to defend 
its exchange rate, equivalent to the cost of about four months of 
imports. 
 
¶3. The European Central Bank (ECB) decision to adjust the central 
parity was announced following a meeting of the Economic and 
Financial Committee in Brussels last week.  The revaluation is based 
on a firm commitment by the Slovak authorities to pursue appropriate 
supportive policies including tackling wage pressures and credit 
growth.  The panel includes representatives from the national banks 
in the Euro region as well as the other countries in the ERM and 
finance ministries and the European Central Bank.  Greece was the 
last country to revalue within Europe's exchange-rate mechanism in 
¶2000.  The exchange-rate mechanism is one of the five conditions for 
aspiring members of the Euro region and is designed to test the 
stability of their exchange rates for at least a two year period. 
Slovakia remains on target for a January 1, 2009 Euro adoption, 
which would make it the second former-communist country to join the 
13-member Euro-region after Slovenia, which adopted the currency 
this year. 
 
¶4. Slovakia's 12-month inflation rate was 3.9 percent in February 
and to qualify it will need to squeeze the rate further.  The 
estimated ceiling for euro adoption was 2.9 percent in February and 
a country's 12-month inflation rate must be in line in the year it 
files a bid, along with an outlook that inflation is not expected to 
rise.  Annual inflation in Slovakia fell to 2 percent in February 
from 2.2 percent the preceding month as the effect of last year's 
increases in global energy prices waned. The central bank estimates 
the rate will fall to 1.5 percent by December. 
 
¶5. Following the March 16 announcement the Koruna has set new 
records against both the Euro (32.84 SKK/EUR) and the Dollar (24.69 
SKK/USD).  This is a rise of more than three percent over the last 
four days.  Both the Finance Minister and the Central Bank Governor 
released statements on March 19 noting that the growth over the 
weekend was overstated and that they would use "all tools available" 
to keep the development under control.  The Central Bank did not 
intervene in the markets on March 19, but are reportedly taking 
measures beginning March 20.  Slovak exporters, led by Klub 500, 
which represents large employers in Slovakia, stressed that the 
strengthing Koruna is hurting the competitiveness of exports and 
called on the government to take immediate measures to rein in the 
growth. 
 
¶6. Against the dollar, the koruna has strengthened by 25 percent 
since Slovakia entered ERM II in November, 2005.  Slovak government 
bonds have risen 26.8 percent in dollar terms, second only to Thai 
debt, according to indexes of 27 emerging-market debt securities 
compiled by JPMorgan & Co. 
 
¶7. COMMENT:  The revaluation of the central parity was not 
unexpected given the strong GDP and productivity growth and drop in 
inflation.  In fact, many analysts felt at the time that the initial 
parity of 38.455 SKK/EUR in November 2005 was too weak given the 
economy's growth potential.  The change came sooner than most 
analysts had predicted, but the new rate is generally considered 
"well-reasoned" and should support macroeconomic stability, price 
stability and external competitiveness of Slovakia.  The key 
objective remains fulfilling the Euro convergence process and 
maintaining fast and sustainable growth of standard of living in 
Slovakia.  End Comment. 
 
VALLEE