Slovakia’s now near-certain entry into the eurozone in January 2009 should help bolster the country’s credit ratings and improve investor sentiment towards the country, say bankers.
Last weeks 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. But the expectation that they will rubber-stamp the ECs recommendation has helped to strengthen the Slovak koruna, which has been trading at all-time highs against the euro in recent days at Sk31.6 to the euro. The final entry rate will be confirmed in early July. "We expect that the approval process in European institutions will be solely of a formal nature after the unambiguously positive stand of the European Commission. Thus, in our opinion, the probability of refusal of Slovakias accession to the eurozone is almost zero," says Villiam Patoporsky, head of research at UniCredit Bank in Slovakia.
Gillian Edgeworth, an economist at Deutsche Bank in London, says Slovakias 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 one or two of the rating agencies upgrade Slovakias rating," she says.
In the wake of the EUs approval of Slovakias euro adoption goal, Moodys Investors Service, which has an A1 sovereign rating for Slovakia, commented: "Upcoming entry into the eurozone is a deterrent to external financial shocks. At the same time, 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 Slovakias key interest rates with the prevailing ECB policy rate by the end of 2008."
With regard to the outlook for inflation, Lars Christian, chief analyst at Danske Bank in Copenhagen, says the appreciation of the koruna against the euro in recent years since January 2004 it has strengthened by 28% has played a key role in mitigating pressures in the country, something that euro adoption will remove at a stroke. "Going forward, the inflation outlook could deteriorate further, driven by both demand and supply-side factors."
Juraj Kotian, co-head of fixed-income research at Erste Bank in Vienna, says that the adoption of the euro will help to boost the depth and breadth of the bond markets in Slovakia. He says that government bonds should attract a wider international audience following entry into monetary union but that non-financial sector corporate issuance will be the prime beneficiary. Thats because investors will be more willing to take on Slovakian credit risk once foreign exchange rate risk is eliminated.
On the equity markets front, Henning Esskuchen, co-head of equity research at Erste in Vienna, says that while euro adoption had a big impact in Slovenia in 2007 with the Ljubljana bourse recording a 90% increase there is unlikely to be a similar effect in Slovakia. "There are so few interesting stocks listed in Bratislava that I doubt that adopting the euro will have much effect on the equity markets in Slovakia."
Robert Prega, chief economist at Tatra Banka in Bratislava, says that euro adoption should help encourage further foreign direct investment in Slovakia, on both a greenfield and a mergers and acquisition basis.