The actors on the financial markets have accepted that all hope is lost for the forint. When you look at the prognosis prepared by analysts, which is usually for the next three, six and twelve months, you will learn that they used to believe in the past few years that the HUF/EUR exchange rate would return under the threshold of 300. Such a scenario will surely not become reality for the year 2015 that is ahead of us.
A good decade ago, when the forint was not liberated yet, the speculators wanted to make the Hungarian currency stronger than the National Bank would have preferred for a country just about to enter the EU. We have already analysed in depth almost exactly one year ago (“Forint ever weaker as debt mountain barely reduced – Stay home and count your money”, The Budapest Times, February 7, 2014) how the forint declined from a self-confident and potent currency into its present sorry state. The domestic currency is going into historic depths compared to the euro for the third time after 2009 and 2012, although in a heavily changed environment.
IMF wanted “business as usual”
Firstly, the markets were aware that Hungary is one of the countries that were most vulnerable to the financial crisis, which started from the United States but quickly spread to other countries. Therefore, the forint did not benefit from the bailout funds spread throughout Hungary in 2009 by the International Monetary Fund (IMF) and the EU; quite the contrary, this billion-euro package could have been a possible reason why the currency was pushed into a depth never experienced before.
The domestic currency went under 300 HUF/EUR for the first time. During the times of the high-interest policy the investors suddenly got cold feet, since in case of a state bankruptcy the rich returns would have been lost. However, the IMF (and the EU) did not give the EUR 20 billion for free: In order for “business as usual” to continue, then-prime minister Ferenc Gyurcsány, who ruined the Hungarian economy, had to give way to the technocrat Gordon Bajnai.
It happened for the second time in the history of the young Hungarian democracy that a social-liberal MSZP-SZDSZ government let control be taken out of its hands. (The first time was in March 1995, when a minister of finance called Lajos Bokros introduced a brutal savings package, against the will of prime minister Gyula Horn, which is still being cursed and which devalued and inflated the forint in a brutal way and started a privatisation rush giving the energy and banking sector a whole new face, all according to the instruction of the IMF.)
Bajnai manoeuvred the leaking ship of the Hungarian economy through the most difficult economic crisis in decades, for which he was thanked by the voters in their own way. The MSZP was beaten by Fidesz for the second time in 2010 (the first time was in 1998), possibly without a chance to ever return. However, we are not dealing with the political aspect here, rather the aggressively flaunted national way of governing of the second Orbán government and its effect on the HUF prices.
Junk rating should have dug Orbán’s grave
First of all, Orbán played the Greece card and practically compared Hungary with a country of the eurozone, which needed to be “saved” by Brussels. However, Hungary’s possible bankruptcy was already long gone by the summer of 2010 – Orbán certified to Bajnai during the handover of the government office that the state finances had been successfully manoeuvred out of the danger zone.
The IMF control did not fit into the Fidesz concept at all, so Orbán could step up as a freedom fighter chasing away the foreign oligarchs from the country. He simply accepted that the price for this was that the forint devalued again in 2011/12 to the same level as at the time of the global economic crisis. This time the investors did not see that Hungary could recuperate without the help of Washington. The rating agencies did the rest for the ambitious and headstrong Hungarian leadership by giving a junk rating, digging the grave for the foreign debt.
However, Orbán managed to sail clear of these dangers by changing the leadership of the National Bank. With his faithful György Matolcsy in the lead, the MNB was not an “independent” organisation from the government any more, much more a supporter of the economic policy. This new intimacy meant new rules, to which the investors had to get used to first.
The basic interest rate was radically decreased, the National Bank did not focus on the stability target any more and the actors of the financial market were directed towards the bond market. The exchange of the foreign currency debt of the state means that they rely more on the society, whose foreign currency loans were abolished by force.
The MNB keeps the inflation target in mind today but it has no responsibility to handle it. In the middle term the inflation should be kept under 3%, and currently Hungary, similarly to many other European countries, must pay attention not to slide into deflation. The staff of the National Bank keep an eye on the stability of the forint rate of course, but they won’t let us in on their ideas about how far the devaluation potential of the domestic currency will be made use of.
The forint hit the basement again after three years, although Hungary is not really threatened by bankruptcy any more. Political factors were considered as the primary triggers, ranging from the Ukrainian conflict to the “unreliability” of the Hungarians in the eyes of the US government. The fact that the euro is selling low against the USD causes a long-term depression in the HUF/USD parity as well. However, the borrowers who took their credit in Swiss francs may already feel relieved, since they are already saving HUF 10 on every CHF of their debt as compared to the time when the forced switching to HUF (at a fixed exchange rate of 309 HUF/EUR and 256.50 HUF/CHF) was put into force.
Orbán, Matolcsy and their mates now really do not have any influence on the euro crisis, however they want to stay in control of the design of the forint rate. This is the reason why the prime minister repeatedly refused invitations into the eurozone. The weak forint is supposed to make the Hungarian exporters more competitive, not only within the eurozone but also to the same extent within the preferred countries of the eastern opening. Imports will be consequently more and more expensive, which is giving the current studies something to think about.
According to these studies Hungary is showing the weakest export dynamic among the Visegrád states (meaning compared to the Czech Republic, Poland and Slovakia). Maybe this is no wonder, since there were nowhere within the region so many companies giving up due to the crisis as in this country. The commercial banks shut down all the loan opportunities and the government did the rest with the provoked devaluation of the forint. Now Orbán wants to have 12,000 export companies, when there are barely two thousand left after the unprecedented slaughter.
Meanwhile Hungary continues to be an attractive place for investors. In addition to the frequently mentioned factors this can also have something to do with the fact that salaries are a constant in the business plans of multinational companies, and so they have been for a couple of years. The minimum wage fixed in the law is around EUR 330 and the average net wage in the Hungarian economy hardly reaches EUR 500.
It may be hard for Hungarian small companies to raise the salaries and wages of its employees by the 3-4% suggested by the social partner this year; however, for the foreign investors this is only an increase in HUF.