The forint, the world’s worst-performing currency in the second half of 2011, is Europe’s best this year as Hungary’s government agrees to conditions for restarting international bailout talks.
The currency of the European Union’s most-indebted eastern member jumped 9.5 percent against the euro and 5.5 percent against the dollar this year through yesterday, the most worldwide after the Colombian peso and paring its 16 percent slide against Europe’s common currency in the previous six months. Government bonds returned 21 percent in euro terms this year, the most after Portuguese debt, data compiled by EFFAS and Bloomberg show.
Prime Minister Viktor Orban’s government last week submitted to parliament amendments to a law which the International Monetary Fund and EU had said threatened central bank independence, potentially ending a seven-month stalemate that blocked talks on a $19 billion credit line. That may help Hungary obtain aid by year-end, extending the forint’s rally, according to Intesa Sanpaolo SpA’s CIB Bank unit, the most-accurate euro-forint forecaster in the six quarters through March, according to data compiled by Bloomberg Rankings.
“It will be a big step forward if the central bank law is approved in the form that is acceptable to the EU, the IMF and the European Central Bank,” Sandor Jobbagy, a Budapest-based analyst at CIB, said by phone on June 19. CIB sees the forint gaining 1.6 percent to 283 by year-end and 2.7 percent to 280 in 12 months.
The forint appreciated 0.5 percent to 286.34 per euro by 4:38 p.m. in Budapest. The government’s benchmark three-year bonds gained, cutting yields eight basis points to 7.762 percent, the lowest since that security was first sold in February.
Hungary became the first EU nation to receive a bailout in 2008 after the collapse of Lehman Brothers Holdings Inc. caused global credit markets to freeze. Orban, 49, shunned fresh aid when he took office in 2010, giving him freedom to orchestrate the takeover of $13 billion in privately managed pension funds to help meet EU budget requirements and cut public debt. Orban said on May 31 he will reject most of the EU’s economic policy recommendations for member states as they would damage Hungary.
Any restart on aid talks may be just as protracted as the process to initiate them, causing the forint to weaken, said Thu Lan Nguyen, a Frankfurt-based currency strategist at Commerzbank AG, which was the second-closest forecaster.
“I am still skeptical that the Hungarian government will be willing to adhere to the conditions that the IMF and EU will like to set,” Nguyen said in e-mailed comments last week.
The international lenders’ demands on taxation and fiscal policy are be “more comprehensive, ambitious, and intrusive than the government expects and is going to be willing and/or able to accept,” Mujtaba Rahman, a New York-based Eurasia Group analyst, wrote in a June 20 report.
Monetary policy must be “extremely cautious” during IMF bailout talks, which will be “bumpy,” central bank vice president Ferenc Karvalits said in e-mailed answers to questions from Bloomberg News last month.
The delay in the IMF deal is “holding up rate cuts,” Daniel Hewitt, a London-based economist at Barclays Plc, the fourth-most accurate forecaster, wrote in a research report yesterday. The central bank left the EU’s highest benchmark rate unchanged at 7 percent for the sixth month today, matching the forecasts of all 27 economists in a Bloomberg survey.
Commerzbank predicts the forint will slump 2.9 percent to 296 per euro in the third quarter and 5.4 percent to 304 by year-end. The forint will depreciate beyond 300 per euro in the third quarter, according to Przemyslaw Kwiecien, Warsaw-based chief economist for X-Trade Brokers Dom Maklerski, the third most-accurate forecaster.
While Hungary can survive without an IMF safety net in the “short term,” it faces a bigger risk from a slowdown in the largest economies in the EU, which buys most of the country’s exports, Kwiecien said in a phone interview on June 20. Hungary sends 77 percent of its exports to the region, compared with an average 30 percent for the 21 countries in the MSCI emerging-market index, data compiled by the World Trade Organization show.
German business confidence fell to the lowest in more than two years in June as the worsening sovereign debt crisis clouded the economic outlook, according to the Munich-based Ifo Institute on June 22. Hungary’s economy contracted for the first time in more than two years in the first quarter. Gross domestic product will decline 0.8 percent this year, the central bank said in its Inflation Report today.
Orban requested international assistance last November after the forint slumped to 317 per euro, then a record low. The three biggest credit-rating companies cut the country to junk status, citing the currency’s drop and concern Hungary’s policies were delaying a bailout and eroding the independence of regulators. The forint weakened to as low as 324.24 against the euro after lawmakers in December approved central bank legislation despite EU and IMF objections.
The Magyar Nemzeti Bank said last week the government has accepted EU and IMF recommendations on changes to the central bank law necessary to start talks. The legislation approved by the IMF, European Commission and the ECB may be passed by lawmakers within two weeks, “after which I can see no substantial obstacle to the start of negotiations,” Mihaly Varga, the government’s chief negotiator, said in an interview on state-run television channel M1 on June 21.
Cost of Risk
“The fact that the government took seven months to make changes to the central bank law does not bode well for a speedy negotiation process,” Barclays’ Hewitt said in a report on June 20. Barclays sees Hungary’s currency 3.2 percent weaker at 297 by year-end.
The cost of insuring Hungarian bonds for five years using credit-default swaps has tumbled 98 basis points from a five-month high of 630 reached on June 5, data compiled by Bloomberg show. The swaps fell three basis points to 528 basis points today.
The extra yield investors demand to hold Hungary’s dollar bonds rather than U.S. Treasuries has retreated 134 basis points from a five-month high of 6.79 percentage points on June 1, according to JPMorgan Chase & Co. indexes. The spread was little changed at 556 basis points today.
The forint may appreciate to 285 by the end of the year and 265 year-end 2013, Gaelle Blanchard, a London-based emerging-market currency strategist at Societe Generale SA, wrote in an e-mail on June 21. Two months ago, Societe Generale had forecast the forint weakening to as low as 315 due to bailout talk delays.
“The country’s medium-term outlook has improved considerably under the premise that an IMF program will ultimately be put in place,” Blanchard said.