UPDATE 1-Slovakia well placed to adopt euro in 2009-OECD

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By Martin Dokoupil

BRATISLAVA, April 5 (Reuters) - Slovakia is well placed to adopt the euro in 2009 as planned, the OECD said on Thursday, though it urged the authorities to remain on guard against inflation risks.

The Organisation for Economic Cooperation and Development (OECD) also said in its economic survey of Slovakia that the government's fiscal policy needs to remain prudent after adopting the euro to avoid economic "boom and bust".

Slovakia seeks to become the second post-Communist country in the European Union to adopt the euro after Slovenia, which joined at the start of this year, ahead of the bigger Polish, Hungarian and Czech economies.

"Slovakia is on track to satisfy the criteria for euro adoption in 2009," the OECD report said.

"The authorities will need to remain vigilant to contain domestic inflation pressures given the economy is estimated to be operating above potential in 2007 and that the labour market has tightened rapidly."

The report said the major risk to meeting the EU's inflation criterion for euro adoption would be a renewed large increase in global energy prices, as these influence inflation in Slovakia more than in other EU countries.

Slovakia ranked among the world's fastest growing economies last year with record GDP growth of 8.3 percent.

The OECD sees the economy expanding by 8.0 percent this year, keeping its Nov. 28 forecast unchanged. The Slovak central bank (NBS) predicts GDP growth of 8.6 percent in 2007.

Slovak inflation using the EU measure slowed to a record low of 2.0 percent in February as the impact of last year's rise in energy costs faded away.

"Inflation is likely to fall somewhat through 2007-2008, which would correspond to an average annual inflation rate over April 2007-March 2008 below the (EU's) Maastricht reference rate, which is estimated by the authorities to be 2.9 percent," it said.

The OECD also said authorities may face a temporary economic boom following euro zone entry, but a loss of competitiveness would at some time slow the economy below the trend rate.

"Such an adjustment period could prove painful," the OECD said, adding further tightening in fiscal policy might be needed to prevent economic overheating.

The OECD also said a March revaluation of the crown currency' central parity within the exchange rate mechanism ERM-2 was "well founded and timely" and will help to maintain macroeconomic stability.

It said currency appreciation may have got ahead of fundamentals recently, based on NBS estimates of the crown's equilibrium rate, but added there was much uncertainty about equilibrium values.

The crown jumped to a record high of 32.710 per euro following the March parity shift, triggering heavy NBS intervention .

The bank intervened again on Wednesday after a 25 basis-point cut to its key rate last week and liquidity injections failed to curb the crown.