Hungary jump exposure to global crisis

October 22, 2008
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, BUDAPEST, October 22 – Hungary is under strain as an emerging economy exposed to global financial and recession pressures, with the central bank suddenly raising its key rate by three points to 11.5 percent in an attempt to shore up the forint on Wednesday.

The economy has lurched from one development to another in the last nine days.

The International Monetary Fund announced on Monday it would provide help if needed, a 5.0-billion-euro credit from the European Central Bank was offered last Thursday and an extraordinary summit meeting of state decision makers was held Saturday.

Also Monday the country\’s central bank decided to leave its key 8.5 percent interest rate on hold, only to raise it by three points on Wednesday against a long running plunge of the currency.

Immediately after Wednesday\’s move, the forint-euro rate firmed to 272 forint to the euro before it dropped back to around 276 forint.

"The rate hike could slow forint depreciation if other emerging currencies continue falling. And in case of a stabilisation on global markets, the forint could recover markedly," analyst Gergely Suppan of Takarekbank told the online economist site Portfolio.hu.

Politicians and analysts here insist that the country is nowhere near bankruptcy, such as threatened Iceland in the last month, and has stressed that the banking sector is stable in Hungary, where 90 percent of the banks are subsidiaries of foreign institutions.

"Developments on Hungarian markets are likely to continue to depend on global sentiment," Suppan added.

Although the firming of the forint after the rate announcement was only temporary, the hike in the interest rate to 11.5 percent can nevertheless breathe life into the frozen government bonds market, according to Miklos Hegedus, head of economic think tank GKI.

The sudden rate rise sent a message that the government was committed to keeping state debt under control "even if it needs extra burden on households and the local business sphere," Hegedus told AFP.

Referred to as a "second Iceland," a label vehemently rejected by both the governor of the central bank (MNB) and the finance minister, Hungary has just emerged from two years of severe austerity measures that left it particularly exposed to the financial turmoil.

Undertaken as a reaction to a skyrocketing public deficit of 9.2 percent of the gross domestic product (GDP) in 2006, the policies tamed the shortfall to an estimated 3.4 percent of GDP for 2008.

Inflation, estimated to come to 6.5 percent this year, is projected to fall next year to 3.9 percent.

But at the same time, Hungary has a sizable external debt, accounting for 65 percent of GDP.

The debt, along with a tendency of Hungarians to take out domestic loans in currencies other than the forint, boosts the country\’s need for external financing at a time when markets struggle with a lack of liquidity.

"During the budget austerity, the government managed to hold back household consumption in forints but with a high key interest rate on forint, it could not stop the population taking loans in mainly Swiss franks or euros," Hegedus said.

Currently some 60 percent of domestic loans by Hungarian banks are mostly in Swiss franks and euros, the interest rates for which are significantly lower than that which affects the forint.

To ease Hungary\’s thirst for foreign exchange, the European Central Bank provided a 5-billion euro credit last week.

An offer of help from the International Monetary Fund was also meant to calm anxiety on Hungarian markets after foreign investors pulled back, perceiving the country risky.

While the austerity measures managed to curb public deficit, they also slowed economic growth.

Last week, Hungary cut its economic growth forecast for 2009 to 1.2 percent from an earlier 3.0 percent, against a background of tightening credit at home.

The growth slowdown coupled with a decline in Hungary\’s main export markets in the euro area could further worsen Hungary\’s balance of payments.

But the outlook is not so grim, said Hegedus. With a political consensus forming behind the new budget for 2009 by the minority socialist government, further austerity is in sight, "which has a message of improving the balance," he said.

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