The deadline for submitting the 2012 budget is approaching and there is still the greatest uncertainty about the basic figures. One prediction after the other about the value of the Hungarian forint as well as the country’s economic growth turns out to be faulty. Here is a telling graph of the situation:
In less than a year the following prognoses surfaced. At the beginning of the year the government predicted a 3% growth but by April the optimism of György Matolcsy, minister of economics in charge of the so-called Convergence Program, had grown. He predicted an economic growth of 3.6%. Since the announcement of this ridiculously high figure optimism has been shrinking. Right now the Hungarian government is talking about a GDP of 1%, but according to foreign and domestic analysts even that figure is too optimistic a prediction. Neal Shearing, chief emerging-market economist at Capital Economics, projects that Hungary’s economy will contract 0.5% next year. András Vértes of GKI (Gazdaságkutató Intézet) is even more pessimistic. The last time I heard an interview with him his prognosis was an economic contraction of perhaps 1.5%.
Meanwhile Hungary’s currency, the forint, is down 12% against the euro since September which is keeping foreign investors away and creating a dilemma for policy makers. If the Hungarian National Bank were to lower interest rates that would help sagging economic growth but then the forint would fall even more. And if that happened, the millions of people who took out loans in foreign currencies would be in even greater trouble than they are now. Meanwhile, as it is, Hungary’s sovereign debt load is growing because of the weak national currency. According to Shearing “you can’t really grow your way of the problem.”
According to other analysts even if calm returns to the world markets “Hungary will still be viewed as a riskier market.” What are the risks that put Hungary in such a bad position? First and foremost, the unusually high exposure to foreign-currency mortgages. Second, and lately this is becoming an increasingly important problem, the government’s policies that are perceived as antagonistic to banks. Third, the ever-looming threat of a sovereign credit rating downgrade.
It seems that this third risk, at least for the time being, has been averted. S&P didn’t downgrade Hungary’s sovereign debt to junk status. But there are still the other credit rating agencies that may, and who knows what the future holds, especially in light of the Orbán government’s latest “unorthodox” answers to the country’s economic woes.
The Hungarian government tried to lessen the foreign-currency indebtedness of the population by setting up a mortgage repayment program, but the plan appears to have backfired. The program puts the burden of the lump-sum repayment option at a fixed rate on the banks, and both Fitch and Moody’s warned that a sovereign credit rating downgrade might follow. Moreover, on November 4 the European Central Bank in a “strongly worded legal opinion” warned that the law passed by the Hungarian parliament allowing mortgages to be repaid at below market rates created “a situation that can substantially weaken the banking system’s stability and it likely to also have adverse spill-over effects on the economy.” Moreover, the European Central Bank’s opinion also contained a warning that the measure could hit the Hungarian economy by putting upward pressure on domestic interest rates. Moreover, weaker bank lending could add to the already very slow economic growth. The opinion concludes that “while at this stage it is difficult to quantify the overall macroeconomic impacts, the net short term effect for growth is likely to be negative for Hungary.”
Well, this opinion, which appeared on the website of the European Central Bank, certainly doesn’t help Hungary’s already dire economic and financial situation. Stefan Wagstyl of the Financial Times called the legal opinion “a withering response” to Hungary’s passage of the law on September 19. Moreover, the ECB was supposed to be consulted on the question because, after all, the Hungarian government’s move also affects the whole European banking system. But the government submitted the draft law to the ECB on the same day the Hungarian parliament voted the bill into law.
Today the news spread on the Internet that tomorrow’s Figyelő, a weekly dealing with economics and finance, will carry an interview with Maria Fekter, the finance minister of Austria. In this interview Fekter told the Hungarian reporter that Austria is asking the European Union to review the Hungarian mortgage law’s legality from the point of view of the European Union. The reporter suspects that Maria Fekter was aware of the opinion of the European Central Bank when she agreed to his requested interview. One must keep in mind that the hardest hit banks are Austrian owned.
But it seems that not only foreign banks are fed up with the Hungarian government. Sándor Csányi of the Hungarian OTP, the country’s largest bank, apparently had a “secret meeting” with the prime minister during which he acted as the messenger of the Bankszövetség (Association of Banks). A few weeks ago Csányi made a speech before the students and faculty of Corvinus University in which he expressed serious misgivings over the government’s handling of the forex loans. Surely, Csányi is the only one who dares raise his voice or to whom Viktor Orbán listens. After all, everybody suspects that Csányi is one of the largest financial backers of Fidesz.
If I were Csányi I would definitely say something because OTP has suffered serious losses on the Budapest Stock Exchange of late. Just today OTP was down 7.65%. Today an OTP share is worth 2,299 ft, about $10.00. Last May it was worth more than 6,000 ft a share.
And here is what has happened to the Hungarian forint in the last two years:
Just today, admittedly a major “risk off” day, the forint started out at 306.9 to the euro and by the end of the day it stood at 311.18, a change of over 1.5%. (By contrast, the Polish and Czech currencies moved about 1%.) One simply doesn’t see how the country will get out of this mess.