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Slovak koruna touches record as economic growth beats forecasts

The Slovak koruna surged to a record against the euro after a government report showed the economy expanded faster than expected in the 3Q.

The pace of growth is the fastest reported for the 3Q and almost three times the pace of neighbouring Hungary. The koruna has gained more than 5% in the past year driven by increasing foreign investments from companies such as carmaker PSA Peugeot Citroen, encouraged by the removal of tariff barriers following Slovakia's membership of the European Union in 2004. “The Slovak koruna has had a very good performance recently because growth is good,” said Raphael Marechal, who helps manage €2.49 billion ($3.2 billion) in emerging-market bonds at Fortis Investments in London. “Foreign direct investments in Slovakia is huge with a lot of car makers building factories.” Against the euro, the koruna reached 35.72, and traded at 35.74 by 11:40 a.m. in Bratislava, from 35.79 late yesterday. The koruna has gained the most among 71 currencies tracked by Bloomberg in the past month. The currency may reach 35.5 per euro in coming days, Marechal said. Gross domestic product grew 9.8% in the 3Q as rising wages boosted consumer spending and exports. Growth of 6.5% was forecast, according to the median estimate of 11 economists surveyed by Bloomberg News. The central bank increased the benchmark interest rate by a combined 1.75 percentage point so far this year, to 4.75%. It may boost the borrowing costs by another quarter percentage point, to 5% on the November 28 meeting, said seven out of 10 economists surveyed by Bloomberg. Slovakia's $46 billion economy is booming as newly opened factories owned by foreign companies including PSA Peugeot Citroen and South Korea's Kia Motors Corp. boosted employment and forced wages up 5.8% in the 2Q. The former communist country wants to adopt the euro in 2009, ending its quest to integrate its economy into western Europe. “The economy is doing well, there is nothing preventing the central bank from hiking rates as much as they want,” said Jon Harrison, an emerging-markets strategist at Dresdner Kleinwort in London. “Strong fundamentals support the koruna.”

The Slovak koruna will probably reach 35 per euro by the end of next year driven by an increase in foreign direct investment that will boost Slovakian exports, Morgan Stanley said on November 8. Export growth in Slovakia is accelerating as PSA Peugeot Citroen, Europe's second-largest carmaker which began production at its Slovak factory in May, is boosting output. Shipments of cars by Peugeot and Kia Motors, which will start commercial production later this year, combined with cheaper oil may help cut the trade deficit this year. Slovakia's trade deficit narrowed in August to 4.4 billion koruna ($150 million) as expanding car production helped exports grow at the fastest pace this year. The gap narrowed from a revised July deficit of 6.6 billion koruna, the Bratislava-based Slovak Statistical Office said October 12. In August 2005, the deficit was 396 million koruna. Slovakia aims to switch to the euro before its bigger peers Poland, the Czech Republic and Hungary. The country may qualify for adopting the euro in 2009 and set the conversion rate around 35.5 per euro, Morgan Stanley forecasts. Slovak central bank Governor Ivan Sramko said on October 20 that the bank still needs to “tighten” monetary policy to reduce inflation. The annual inflation rate fell to 4.6% in September, the third-highest in the European Union, from a 20- month high of 5.1% in the previous month. To adopt the euro, Slovakia must among other requirements keep its inflation rate within 1.5 percentage points of the average of the three EU countries with the slowest consumer price growth. The Slovak central bank estimates this ceiling will be 2.8%, Sramko said. (Bloomberg)