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Why has the Forint lost value?

December 29th, 2012

Commentators across the political spectrum wonder why the exchange rate of the Forint declined in December. Pro-government analysts suggest purely external factors are responsible, while left-wing columnists blame the fall primarily on the government.

On 26 December, the Forint weakened to a six-month low of 295.65 to the Euro on international markets, while traders in Budapest were on their Christmas holiday. The Hungarian currency exchange rate stabilized at 290.4 to the Euro on Friday, 28 December. At the beginning of the year, the Forint traded for 320 to the Euro, and for 280 earlier in December.

Miklós Bonta in Népszava maintains that the decline of the Forint is only partly the result of the fiscal cliff uncertainties. More importantly, the Forint’s depreciation reflects the fears of international investors about the succession process at the top of the National Bank. If current rumours prove well-founded and György Matolcsy, the current Minister of National Economy were to replace András Simon in March, the Forint could well lose steam and be traded even lower than 300 to the Euro, the left-wing columnist speculates.

The government likes to blame the decline of the Forint on external actors, and congratulate itself for its rise, Bence Kriván notes in Népszabadság. The left-wing analyst believes that the Forint has again come under pressure primarily because of the recurrence of fears about the government’s plans. The government seemed willing to negotiate with the IMF only when the Forint was about to collapse, he suggests, but once the exchange rate temporarily stabilized, it became apparent that there was no real intention to reach an agreement. In addition to international developments, the recent decline of the Forint is the result of PM Orbán’s late December hints that Hungary does not need money from the IMF after all and that the government in 2013 will offer further help to Hungarian families indebted in foreign currencies. As for the future, Kriván also suggests that Matolcsy’s possible nomination as the Central Bank chief could alarm international investors and weaken the Forint.

The Forint has declined mainly due to external factors, Zsuzsa Nagy Vajda writes in Magyar Nemzet. According to the pro-government commentator, the loss in the value of the Forint is partly the result of foreign investors’ profit realization and partly due to the growing US fiscal cliff worries. Vajda Nagy notes that the Hungarian currency is still 8 per cent stronger than it was at the beginning of the year, which she believes is a clear indication that international markets trust the Hungarian economy, despite the lack of an IMF deal. The Forint was helped when the FED and the ECB spectacularly increased the money supply, but the main reason for its stabilization in 2012 is that the deficit was kept under 3 per cent and that the government considers both debt reduction and job creation as its priorities, Nagy Vajda contends. She adds that the government is walking a tight rope, since it needs to stimulate growth while re-balancing the budget, which, according to mainstream economic theory, can hardly be done simultaneously. The road ahead is bumpy, but Nagy Vajda believes that the government’s efforts could be furthered by a more cooperative National Bank, once András Simor, the current “neoliberal” Governor of Hungary’s central bank ends his mandate in March 2013.

It is not surpising that the Forint declines when international markets become volatile, Csaba Szajlai comments in Magyar Hírlap. He points out that Hungary is an export oriented country with close ties to Western economies, and thus the worries about the US reaching the fiscal cliff has an obvious effect on Hungary’ economic prospects. He remarks, however, that it would not be catastrophic even if the Forint temporarily weakened below 300 to the Euro. But in the long-term, the exchange rate of the Forint can only be stabilized by fully regaining the trust of international investors, which could be done by reaching an agreement with the IMF, rather than curbing the independence of the National Bank, the conservative columnist concludes.

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