By Jan Lopatka
PRAGUE, July 11 (Reuters) - More central Europeans than ever
are basking on Mediterranean beaches this year as their surging
currencies pad their wallets, but others are sweating back home
as the rising units strangle the export sector.
With the Czech crown gaining 18 percent against the euro
over the past year to record highs, Prague pet food factory
owner Pavel Bouska has had to scale back expansion and has seen
his export markets shrink.
"I will likely have to cut production next year," said the
businessman who has annual sales of 250 million crowns ($16.63
million), 60 percent of which comes from abroad.
"We have already slashed some expansion projects, such as a
new shop, and we are investing only six million instead of 15."
Cries about the currency radiate from the country's largest
firms like Skoda Auto <VOWG.DE> or oil processor Unipetrol
<> [].
The crown's rise has come hand in hand with other currencies
in the region and reflects the countries' fast catch-up in
productivity and wealth with western Europe, which in turn gives
them the status of safe haven in the turmoil on global markets.
Foreign trade is a key growth driver. In the Czech Republic,
it was equal to 137 percent of gross domestic product last year.
But export growth in local currency terms dropped to zero in
May, and analysts warn the strong crown will take a bigger toll
in the second half as Czech companies get priced out.
Adding to the currency pressure, central banks have been
raising interest rates to fight inflation, further fuelling
interest in the Polish zloty and Hungarian forint.
In Slovakia, glass maker Slovglass, which depended on
exports for 90 percent of revenues, filed for bankruptcy early
in July, mainly due to the foreign exchange rate rise. The
United States was the main export market.
The Slovak crown rose 9.1 percent to the euro over the past
year while the zloty has gained 13 percent.
But exporters are just one sector of the economy. Importers
of goods and services, from electronics and cars to outbound
travel agencies, are thriving.
"A strong zloty means that we can offer prices that are even
20 percent less than a year ago," said Chief Executive Grzegorz
Baszczynski of Poland's Rainbow Tours.
EURO MARCHES IN
Slovak firms can take a breath. Their crown was irrevocably
fixed to the euro this week ahead of the country's euro zone
entry in January.
That means there will be no more currency firming although
economists warn the result will be higher inflation, another
cost factor for business.
Czech exporters have demanded the government speed up
preparations for euro entry. The government says the economy
will not be ready until after 2012, when price levels and output
get closer to euro zone levels, and Poles and Hungarians are
seen joining around the same time.
Those on the losing end of the currency moves have responded
in multiple ways, from investments into higher efficiency to
hedging in financial markets.
Polish candle maker Korona will build a new factory in the
United States, where it exports about a tenth of its production.
"Because of foreign exchange differences we lost about half
a zloty on every dollar. When we open our facility in the United
States, the FX risk will disappear," said Korona Chief Executive
Krzysztof Jablonski.
Euroisation is another way. Firms try to source as much of
their input in euros as possible to match the export sales, an
approach taken among others by the car maker Skoda.
The pet food producer Bouska said he would start buying
grains in Slovakia next year, after the country joins the euro
zone, to unload his euros. "I will bear extra transport costs,
but that is still worth it," he said.
For an ANALYSIS on regional currencies, click []
(Additional reporting by Agnieszka Gebka and Malgorzata Drozd
in Warsaw and Peter Laca in Bratislava; Editing by Malcolm
Whittaker)
