Author: František Mašek
Source: HYPERLINK www.finmag.cz , 8th August 2008
Due to next year’s euro-adoption, Slovak investors will gain but also lose money. What will we learn from the events happening to our neighbour?
The D-Day, i.e. 1st January 2009, when Slovakia joins the euro zone, has been steadily approaching. The anticipated change from the local currency will reduce the number of investment opportunities in Europe. The recently fixed exchange rate of 30.126 SKK per EUR has contributed towards removing a series of speculations. Some investors who did business with the Slovak koruna might move towards the Czech one. On small Slovak investors the impact of euro-adoption which, in some opinions, is somewhat early, will be mixed.
“The replacement of the Slovak koruna for Czech investors will not bring about any new interesting opportunities in which they could exploit arbitrations or similar transactions,“ Radko Semancik from the CSOB Investment Company (ČSOB Investičná spoločnosť) stated to Finmag. In a similar fashion to Stepan Pirko from Colosseum or Pavel Makovec from Arca Capital, he warns that, on the contrary, investment opportunities in the Slovak koruna will decline.
For and against investors
The impact of euro-adoption on investments will not be unequivocal. It stands both for and against it. “In countries which are expected to join the European Monetary Union (EMU), this leads to the approximation of their economies to the economies of other EMU members by means of high inflation or thanks to their currency appreciation,“ Makovec resumes. However, the “inflation approach“ runs counter to compliance with the Maastricht criteria which require a country aspiring to entry to the euro zone to hold inflation in check.
The economies of countries aspiring to entry to the European Monetary Union are growing faster than the economies of its older members. According to Makovec, growth in labour productivity is also higher. The Czech koruna (but also the currencies of new EU members) therefore gets strengthened on a long-term basis. The sooner they join the euro area – in the case of the Czech Republic no definite date has been fixed – the more their currencies appreciate. Local investors using funds, shares and other investment instruments denominated in koruna should naturally gain by it thanks to later entry to the euro area and a higher exchange rate towards euro.
At the present time, the euro costs about 24 koruna when, having exceeded the rate of 23 koruna for the common European currency, it started depreciating after the oral intervention of Zdenek Tuma, the Governor of the Czech National Bank (CNB). Many experts presume that this depreciation will continue. However, on a long-term basis, it will continue to strengthen.
About the exchange rate between CZK and EUR at the time when the Czech Republic joins the euro zone, we can now only speculate. Norbert Braems, Economic Director of Oppenheim Research, which belongs to the respected private bank Sal. Oppenheim, has recently calculated that in 2012 a euro might be bought for twenty koruna. Despite the fact that this rate is supported by monitoring a series of important data, it remains only an estimate. Disregarding the fact that the date for the Czech Republic to adopt the euro remains unclear.
The above estimate basically confirms a speculation by which Slovakia has deprived local investors of a part of their profit by its rapid entry to the European Monetary Union. At the same time, we have to realize that a series of other factors pertains, especially the overall contribution of the euro towards the development of the economy as a whole, which, by contrast, have a positive impact on investors.
The Slovak economy, its financial market, is not very big, which conforms to the scope of local investment opportunities. That is why the investments of local people are often directed outwards. When investing, it was necessary to first transfer SKK to EUR or other currency and after the investor concluded the investment, back to SKK.
Currency risk and also the transactional costs, which will be dropped after euro-adoption within the euro zone, play an important role, of course. But more important is the impact of the euro on economic development and the broader range of investment instruments on offer in EUR which will become Slovakia’s home currency. It should, of course, substantially increase competition on the Slovak financial market. How will local property administrators deal with it?
Is it obvious that a positive impact of euro-adoption will prevail over potential losses from its early adoption? We can now only speculate how all this will end up. The Czech Republic’s advantage is that it can, and that for the first time, learn from the development taking place with its nearest neighbour. Can the Slovak experience speed up or slow down the entry of the Czech Republic to the euro zone?
