During most of the 1990's, the national currency, the Hungarian 'forint' was hungover from decades of being a blocked currency after following the communist command economy model. As communism collapsed in 1989, Hungary transformed the economy to Western market principles. During the early 1990's, the forint was a soft currency that could have collapsed at anytime as significant depreciations took place in the forint's value as Hungary had few quality products to sell to the world community as the nation was technically in a depression. However, by year 1994, Hungary's embracement of open markets while welcoming massive foreign investment monies reflected with positive economic growth that remained for the rest of the decade. During 1998, the Hungarian economy was vulnerable to external economic shocks and was negatively impacted by the Russian economic crisis. However, over the last few years, positive developments have taken place within Hungary including robust real GDP growth, buoyant exports and a strengthening banking system that have evolved Hungary to one of the world's most stable emerging countries with political stability.
POLITICS: Prime Minister Dr. Peter Medgyessy is in power since May 27, 2002 representing the left liberal coalition Socialist Party of which they came to office with a top priority of joining the EU. In March 1998, Hungary was invited to join EU membership talks of which the country is making steady economic progress towards attaining entrance guidelines. Hungary became a member of NATO in 1999.
ECONOMY: at present, Hungary enjoys one of the most stable economies in central and eastern Europe with improving financial conditions. They have successfully transformed and modernized the economy. Foreign investment and foreign ownership is a large component of Hungary's economic successes as over the last 15 years, the equivalent of $24 billion USD was invested into Hungary. As a net direct result, inflation and unemployment have been steadily declining whereby 85 percent of Hungary's economy is now privatized. Year 2000, Hungary's sovereign debt was upgraded representing the advancement and modernization of the domestic economy where services now account for 60 percent of GDP. Recent concerns reflect Hungary's twin deficits, the fiscal and current account deficit with the new government's ambitions for increased spending. The Socialist Party must adhere to these deficiencies in order to stay on target for ERM2 and euro accession in the next couple of years. Both tourism and remittances from Hungarians living abroad along with other private capital inflows have helped to mitigate the current account deficit and add to reserves. Major industries for Hungary include pharmaceuticals, textiles, metals, processed foods and auto assembly. Overall, Hungary's products have greatly improved and in demand by many in the West today. This bodes well for currency stability for the Hungarian forint as exports have led Hungary's economic miracle. From year 1995-2000, GDP growth averaged 4.5 percent as tourism and industrial production are industries of particularly strong growth.
Economic Statistics
GDP is at $135 billion USD (2002) as measured by purchasing power parity with GDP/Capita at $13,000 USD. GDP growth is forecasted at 3.6 percent of GDP in 2003, 2002 at 3 percent, 2001 at 3.8 percent. Inflation has fallen to 5.3 percent for 2002 from 2001 at 9 percent, 1997-2000 inflation averaged 10 percent with 1997 recording 18 percent compared to 1991 at 35 percent. Great strides have been made on inflation which is projected at year-end 2003 between 2.5 to 4.5 percent. Current account deficit in 1993 at 12 percent of GDP, and is projected at 5.4 percent for 2003. Unfortunately, year 2002 current account deficit was off the map at 9.4 percent. The government aims to cut its budget deficit from a high 6 percent of GDP in 2002 to 4.5 percent in 2003 and 3 percent for 2004 while maintaining the goal of raising living standards (double the minimum wage) to help close the gap between Hungary and the EU. Unemployment in year 2002 at 6 percent which is below the EU average. External debt is at $31 billion USD (2002).
POSITIVES: vast structural reforms implemented over the last 10 years, low net external debt to GDP, upgraded and advanced telecommunications, high levels of FDI, low taxes and flexible labour market. CONCERN: regional wealth inequalities, ageing population, wage and pension increases.
BANKING SYSTEM: much improved banking environment with modernization of banking laws & financial services. Hungary's banking system is widely viewed as one of the strongest and healthiest in the region with well capitalized banks along with several foreign banks maintaining branch offices within Hungary. The Russian financial crash in August 1998 resulted in the failure of some Hungarian banks and brokerage houses, most notably, the failure of Hungary's second largest retail bank although it was recapitalized by the Hungarian authorities. National Bank of Hungary 'NBH' is holding interest rates steady at 6.5 percent. In mid 2001, NBH implemented new inflation targetting and forint exchange iniatives thus resulting in the appreciation of the forint in relation to both the US-dollar and the euro which itself was disinflationary. As of February 2003, official reserve assets for Hungary are at a healthy level of $14 billion USD.
REGIONAL: European Union, Russia, Balkans
Both Germany and Austria are major trade partners although EU and German economic output is slowing which will impact Hungarian exports negatively. Austria, Slovenia, Slovakia and Romania are Hungary's most immediate neighbours with a favorable economic and political climate. Hungary over the last 10 years has dramatically improved and developed close ties to Western Europe. Improved regional Balkan economies particularly a strengthening Serbia will help Hungary's GDP growth to increase by at least a further 1.5 percent. Russian economic risk is prevalent although now minimized with the much stronger Russian economy when compared to 1998 with the crash of the Russian ruble which ultimately helped to collapse of a few of Hungary's financial institutions. Ukraine may play an important role for redistributing oil to Hungary from routes in Central Asia. Russia is currently a major supplier of oil and natural gas.
KNOWLEDGE: inflation risk as Hungary has in the past battled relatively high inflation in addition to difficulties in the current account, why? Energy related as Hungary is a net energy importer and relies heavily on imported oil. Electrical energy demand is also projected to increase in the years ahead. In order to contain this inflation risk and manage the trade imbalance, Hungary should seek to expand nuclear energy. Hungarian nuclear energy accounts for approximately 35 percent of domestic energy capacity with the goal of obtaining 50 percent level. Coal/fossil fuels would be expected to decline in use for electrical energy purposes.
CURRENCY: ISO symbol 'HUF', Hungarian forint. At time of review on March 31, 2003, the forint was valued at 227.15 HUF to the US-dollar ('USD'). The forint was devalued every day at a 0.4 percent monthly rate up until April 1, 2000 at which time the devaluation rate was cut to 0.3 percent. The managed devaluation of the forint allowed for an export led growth for the economy and a reduction in net external debt levels. By mid 2001, all exchange controls were removed as the forint is now fully convertible and follows that of a floating exchange rate regime within a plus/minus 15 percent band tied to the euro. The forint has since regularly trades in the upper part of the band. More recently, the forint came under a speculative currency attack in January 2003 but was successfully thwarted by the government and NBH working together. When looking at purchasing power parity, the forint is approximately 10 percent undervalued in relation to the USD.
CURRENCY HISTORY: a historical comparison for the forint's value is only
relative since the collapse of communism took place 13 years ago. Historical valuations include year 1993 average at 91.93 HUF to the USD, November 1995 at 133, December 1996 at 160, August 1997 at 198, January 1998 at 206, August 1998 at 221, January 1999 at 216, July 1999 at 241, January 2000 at 251, November 2000 at 309, November 2001 at 283, December 2002 at 232. The forint was in a period of a prolonged depreciation versus the USD up until November 2000 at which time it has reversed course by steadily appreciating. During year 2002, the forint appreciated by 17 percent versus the USD mirroring the movement in the euro 'EUR'.
CURRENCY FORECAST: the potential for capital flight is minimized as this currency risk is managed effectively from the Central Bank and governemnt authorities to thwart any unexpected speculator attack or external shock. Eventual EU membership as early as May 1, 2004 is very positive and admittance to ERM2 for 2 years likely followed by formal replacement of the forint with Euroland euro in 2006 as new national currency. Hungary appears to be on path to achieve its inflation targets although government must keep its resolve to bring the fiscal and current account deficit position into euro entrance guidelines. The short term outlook is challenging as major trading partners Germany and Austria are experiencing an economic slowdown although this may be offset by lower oil prices ahead if the Iraq crisis is completed successfully. Sovereign risk ratings by several analysts are favorable for Hungary with recent upgrades. In fact, Hungary's transition from command economy to free market resulted by 1996 Hungary to achieve an investment grade rating for foreign currency debt. Overall, Hungary enjoys high country ratings and low risk rankings which reflects in an increasing sound currency. UPDATED: March 31, 2003
