Hungary’s forint posts worst monthly loss versus the euro

Bloomberg

Hungary’s forint dropped to a record low against the euro, posting its biggest monthly loss since the introduction of the common currency, on evidence the economic slowdown that triggered an international bailout is worsening.

The forint weakened as much as 2.8 percent after the nation’s statistics office Friday said unemployment rose to the highest in nine months and producer-price growth slowed more than forecast. The currency dropped 11 percent against the euro last month, the worst performer in eastern Europe, headed toward a key level of 300.

Hungary became the first European Union member to seek international aid to avert a default last year, prompting emergency loans from the EU, International Monetary Fund and the World Bank. The government proposed Jan. 29 a 1 trillion-forint ($4.6 billion) tax overhaul, including cuts, to spur growth as the economy heads toward its worst recession in 15 years.

"There’s every possibility that the forint will break through 300 per euro in the next few days," said Jon Harrison, an emerging-markets currency strategist at Dresdner Kleinwort in London. "Hungary is a small, open economy affected by the slowdown in the euro zone, there is some political risk and concern whether it’s able to maintain the IMF conditionality."

Trying to close the gap

In exchange for the IMF-led loan Hungary agreed to accelerate budget deficit cuts. Finance Minister Janos Veres pledged to meet the government’s target for the budget deficit this year, even at the cost of spending cuts, according to analysts at the nation’s largest lender OTP Bank Nyrt.

The forint’s volatility "hurts more than helps" Hungary’s economy, Veres told reporters Friday.

Official reports show the economy is deteriorating. Industrial production plummeted the most in 16 years in November as a recession in western European markets crimps demand for products assembled in the country such as Audi cars and Nokia phones. The government expects the economy to shrink by as much as 3 percent this year.

Producer-price growth slowed to an annual 5.8 percent in December from 7.1 percent in November, the Budapest-based statistics office said Friday. The unemployment rate rose to 8 percent in the three months through December from 7.7 percent in the same period last year, a separate report showed.

"We may see some recovery in the forint toward 280 per euro at the end of the first quarter," Harrison said. "The recession is deepening but eventually we’ll reach the point at which the negative scenarios are priced in. But it could get worse before it gets better."

The forint, which weakened with the Czech koruna and Polish zloty, was at 297.98 per euro by late Friday in Budapest, after sliding to a record 299.25. It lost 3 percent this past week.

Since the beginning of this year, it lost 11 percent against the Swiss franc, which is popular for foreign-currency mortgage loans in Hungary because of lower borrowing costs. Weakening forint means increasing debt burden for households.

"We have been concerned about foreign-currency loans and the likely downside risk to growth that they now pose," said Roderick Ngotho, an emerging-markets currency strategist in London at UBS. "The question now is whether the central bank will intervene or not if the forint continues down this path."

Hungary’s government and central bank should work together to control the forint, Prime Minister Ferenc Gyurcsany said Jan. 23, adding the country needs to "avoid very quick exchange-rate changes."

The central bank lowered its benchmark lending rate by 2 percentage points to 9.5 percent since November to stimulate growth. That’s lower than Romania’s 10.25 percent rate and Turkey’s 13 percent, and is contributing to the sell off in the currency, according to Commerzbank.

’Much higher’

Policy makers need to "keep their interest rates much higher to protect their currency," said Ulrich Leuchtmann, an emerging-market currency strategist in Frankfurt at Commerzbank. "They’re being much too aggressive" and are "overdoing rate cuts."

Investors should sell the forint against a basket of euros and dollars as the country’s economy worsens amid the global financial crisis, Benoit Anne, an emerging-markets currency strategist in London at Merrill Lynch & Co, said Jan. 28.

"The trade is an expression of our bearishness about central European currencies," Anne said. "Conditions in Europe are going to deteriorate and the euro should weaken further, which in turn will hurt central European currencies."

The Polish zloty depreciated 1.3 percent to 4.4526 against the euro, after falling to 4.4716, the lowest level since August 2004. It has lost 6.8 percent this year.

Slowing growth

The currency was hurt by speculation the slowdown in eastern Europe’s biggest economy may deepen and the central bank will lower interest rates further to cushion the slump.

A rate reduction is "possible" in February and expansion may slow to between 1 and 2 percent this year from 4.8 percent in 2008, central banker Andrzej Slawinski told Polsat News channel Friday.

The Czech koruna weakened 0.9 percent to 27.922 against the euro.