Currency traders are seldom known for their forgiving
natures. But in the case of Hungary they appear to be making an
Hungary was considered something of a market pariah at the
end of last year. A lurch towards authoritarianism under Prime
Minister Viktor Orban alienated investors, who were already
worried by the nations onerous debt burden. Yet the
Hungarian forint has been among the strongest emerging market
currencies so far this year, climbing roughly 10 percent
against both the dollar and euro.
Investors may have been too quick to forget the reasons they
shunned Hungary in 2011.
For a start, the nations finances look as precarious
as ever. Its government debt at about 80 percent of
national income is the highest in Eastern Europe.
Hungarys dependence on foreign creditors makes such high
levels of debt even more of a problem. Foreigners hold about 40
percent of government bonds, leaving Hungary vulnerable to
rapid capital flight.
To make matters still worse, much of Hungarys debts
are denominated in foreign currencies. Many Hungarians took out
mortgages in Swiss francs. Unfortunately, since the start of
2008, the franc has surged about 35 percent against the
forint making it ever harder to repay
Nor can Hungary rely on economic growth to reduce the debt
burden, says Neil Shearing, chief emerging market analyst at
consultancy Capital Economics. This is a small, open
economy, and exports to the euro zone account for about 40
percent of GDP, he says. The euro zones
malaise makes life hard for Hungary too. As a result,
Capital Economics is expecting the economy to shrink by 1
percent this year.
The upshot is that Hungary badly needs outside help.
Optimism that such help is on its way is part of the reason for
the forints recent surge. In January the government
announced that it was willing to restart loan negotiations with
the International Monetary Fund, after they had collapsed the
previous month. A 20 billion euro check was thought to be
within reach. Still, this loan may not be in the bag, says Win
Thin, a currency strategist at Brown Brothers Harriman.
Orban has shown a talent for making enemies, he
The main tension with the IMF has been the governments
attempts to subvert the independence of the central bank
an issue dear to the heart of fund negotiators. By stuffing the
interest-rate-setting committee with more government
appointees, Orban appears to be seeking ever-greater power over
monetary policy. A feud between the central bank and
government is the last thing investors want to see, says
Shearing. The government has also lowered the retirement age
for judges, allowing it to appoint more politically friendly
replacements. Orban and his colleagues have been reluctant to
back away from such policies.
So investors should not expect talks with the IMF to be
smooth. Only a few months ago, Hungarys economy minister
complained that the IMF staff members deeply object to
all Hungarian decisions and boasted that Hungarys
government was forming its economic policy against this
three-letter institution. Nor will an IMF deal, if
one can be agreed on, be a panacea. Years of sluggish growth
Currency traders may end up regretting their decision to
give Hungary the benefit of the doubt.