Hungary’s forint, the worst performing emerging-market currency this year to date, will probably rally in 2011 as the government seeks to use private pension fund assets to plug its budget shortfall, according to KBC Groep NV, Barclays Capital and UniCredit SpA.
The currency, which has tumbled 10 percent against the dollar and 2.3 percent versus the euro from a year ago as of Nov. 19, may strengthen as much as 5 percent against the euro in 2011 if the government converts the funds’ foreign holdings into local currency and domestic bonds, said Gyorgy Barcza, an economist at KBC in Budapest.
“They’ve got potentially $3 billion they can convert back,” Koon Chow, a strategist at Barclays in London, said by phone. “It would be a currency-positive effect.”
Hungary, the first European Union nation to receive an international bailout during the global credit crisis in 2008, plans to cut its budget deficit to less than 3 percent of economic output next year to meet EU requirements.
The forint reversed gains today, falling 0.1 percent to 274.47 per euro at 5:06 p.m. in Budapest. The forint has strengthened 4.5 percent against the euro since the government on Sept. 8 committed to the budget target, the best performance among more than 170 currencies tracked by Bloomberg.
Hungary started shifting employee contributions to private pensions into the budget last month to help cover current payments to retirees.
The government is also encouraging private pension fund members to transfer savings to the state system. Private funds are “speculators” that risk invested assets and overcharge clients, Peter Szijjarto, Prime Minister Viktor Orban’s spokesman, said on Nov. 14, according to the MTI news service.
Dismantling the private-pension system may create a bigger budget hole later, said Chow at Barclays Nov. 5.
Hungary is following the example of Argentina, which in 2001 confiscated about $3.2 billion of retirement savings just before it stopped servicing its debt. The government nationalized the $24 billion industry two years ago to compensate for falling tax revenue, reeling from a 2005 debt restructuring.
Bulgaria last month said it will transfer nine private funds with 100 million lev ($70 million) of assets to state control. Poland is “not at the stage of considering the suspension of these payments,” Finance Minister Jacek Rostowski said on Nov. 17.
3 Trillion Forint
Hungarian private-pension fund assets total 3 trillion forint ($14.5 billion), according to Stabilitas Penztarszovetseg, an industry group that represents funds including Munich-based Allianz SE, Europe’s biggest insurer, Vienna-based Erste Group Bank AG, eastern Europe’s second biggest lender, and OTP Bank Nyrt., Hungary’s largest bank.
Foreign assets make up 20 percent of portfolios, according to Barclays’ estimates. Converting the assets in one wave may lift the currency as much as 10 forint against the euro, Gyula Toth, a currency strategist at UniCredit in Vienna, said in a Nov. 9 e-mail.
Toth estimated the pension funds’ foreign assets at about 800 billion forint, which he said the state would probably use to cut its debt by buying back government bonds.
The government drafted the 2011 budget with a plan to draw 530 billion forint worth of assets from the pension funds, which will narrow the budget deficit, Gyorgy Naszvadi, a state secretary in the Economy Ministry, told reporters Nov 9. The government predicts that at least 40 percent of portfolios will return next year, he said.
Converting foreign-equity proceeds on the market may create extra forint demand of about 500 million euros ($682 million), equivalent to Hungary’s monthly foreign-trade surplus, KBC’s Barcza said. Budget holes may force the government to sell the assets “in the next few months,” said Nigel Rendell, senior strategist at RBC Capital in London.
The effect may be delayed by fund members waiting until near the deadline at the end of next year to change to the state system, said David Nemeth, a senior economist at ING Groep NV in Budapest. Once the funds start flowing, the impact on the forint might last as long as a year, he said.
The government may not sell euros from the share proceeds on the market at all, according to Gyorgy Cselenyi, head of interest-rate trading at BNP Paribas SA in Budapest. Hungary will need foreign currency to pay back maturing debt, he said.
Hungary, the EU’s most-indebted eastern member, has 4.3 billion euros of foreign-currency debt with maturities of more than one year due for repayment in 2011, according to data posted on the central bank’s website. The amount due will rise each year through 2014, when it will reach 6.4 billion euros.