The Republic of Hungary during most of the 1990's, the national currency, the Hungarian 'forint' was hung over 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 any time 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 decade, positive developments have taken place within Hungary including real GDP growth but the economy remains hostage to debt & deficit difficulties. Below are BankINTRO.com’s summary notes for landlocked Hungary, a country of 10 million people.
POLITICS: parliamentary democracy. Member of NATO in 1999, European Union in 2004, OECD in 1996, WTO member. Please contact BankINTRO.com for further details.
ECONOMY: at present, Hungary is climbing back from a very challenging credit crisis and global recession that greatly impacted its economy in 2008-09. Hungary found itself in the midst of short term debt servicing difficulties at the height of the October 2008 credit crisis and was ultimately rescued with an International Monetary Fund 25 billion rescue package. 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. 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. Overall, Hungary's products have greatly improved and in demand by many in the West today (i.e. machinery, medical equipment, buses, pharmaceuticals, engines, electronics). Hungary has room to boost public sector service employment participation in the economy, higher employment figures will help to boost and close the income gas when compared to the EU – 25 averages.
Economic Statistics
Total GDP as measured by purchasing power parity stands at 186 billion USD (2009) with corresponding GDP per capita at 18,600 USD. Market GDP stands at 130 billion USD (2009). GDP growth is forecasted at 2 percent for 2011, year 2010 at 0.6 percent, year 2009 fell by 6.7 percent. Inflation figures include year 2011 projected at 3.3 percent, October 2010 at 4.1 percent, year 2010 at 4.7 percent, 2009 at 4.2 percent, 2008 at 6 percent, year 2001 at 9 percent, 1997-2000 inflation averaged 10 percent with 1997 recording 18 percent compared to 1991 at 35 percent. The current account has corrected to near balanced conditions from earlier years malinvestments where it reached a shortfall of in 1993 at 12 percent of GDP; year 2002 current account deficit was off the map at 9.4 percent. The trade position is in surplus at 5.68 billion USD (2009). Fiscal deficit outlook has a target of 2.9 percent for 2011, 3.8 percent for 2010. Fiscal deficits in previous years were a challenge such as a 6 percent figure of GDP in 2002 and 9.2 percent shortfall in 2006. Public debt at 78 percent of GDP (2009), external debt at 147 billion USD (December 2009). Unemployment in 2009 came in at 9 percent, 12 percent live below poverty line. Major trade partner: Germany. Modest net oil & natural gas importer, electricity basically balanced between consumption and production.
POSITIVES: vast structural reforms, high levels of FDI, low corporate taxes, low corruption, good legal system for protection of property rights, flexible labor market, private sector at 80 percent of the economy. CONCERN: regional wealth inequalities, ageing population, low employment rate as it impacts the overall standard of living for Hungarians, high external & public debt – default risk is elevated, relies too heavily on foreign money to finance its economy, unorthodox decisions by authorities.
BANKING SYSTEM: much improved banking environment with modernization of banking laws & financial services. Hungary’s central bank has an inflation target of 3 percent. October 2010 interest rates jumped from 3 to 11.5 percent, high rates have the ability to attract hot foreign speculative monies. Non-performing loans to hit 12 percent in 2011 as a major concern for the Hungarian household is the high level of personal debt (ie. Mortgages). It is suggested that upwards of 60 percent of residential mortgages in Hungary and 30 percent of all bank loans are issued in Swiss franc (CHF) currency as there is significant foreign bank branch presence within Hungary. As of December 2009, official reserve assets for Hungary are at a healthy level of 44.2 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 neighbors 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. 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 November 15, 2010, the forint was valued at 202.72 HUF to the US-dollar ('USD') and/or 276.37 HUF to the EUR. During the 1990’s, the managed devaluation of the forint allowed for an export led growth for the economy and a reduction in net external debt levels. mid-2001, all exchange controls were removed as the forint is now fully convertible. From 2001 – February 2008, the forint followed that of a floating exchange rate regime within a plus/minus 15 percent band tied to the euro. The forint now freely floats. When looking at purchasing power parity, the forint is upwards of 30 percent undervalued to the USD.
CURRENCY HISTORY: a historical comparison for the forint's value is only relative since the collapse of communism and transition to free market economy during year 1990 for Hungary. 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. quotes for the forint include 2003 at 226.53, May 2004 at 210.65, March 2005 at 185.67, September 2006 at 215.71, October 2007 at 176.27, July 2008 at 147.07, October 2009 at 181.24, June 2010 at 230.31, October 2010 at 197.21. In October 2008, the forint dropped 10 percent reflecting the global credit crisis. During September 2010, the forint hit a record low to the Swiss franc.
CURRENCY FORECAST: Hungary appears to be on path to achieve its inflation targets although government must keep its resolve to bring the fiscal deficit position into euro entrance guidelines. Sovereign risk ratings are fair to good sitting around BBB+ although economic concern remains as Hungary rebelled against IMF support in July 2010 and against austerity plans. Heightened short-term currency risk is prevalent, Hungary currently remains vulnerable to high debt levels particularly the external account.
Hungary for years has been publicly committed to ERM2 theoretically leading to euro membership in the 2014 to 2015 time frame at which time the forint will cease to exist when it joins the common currency zone of Europe. However, history suggests euro entrance for Hungary may face further delays & economic disappointments and political instability.
Some analysts have suggested that euro adoption will further increase foreign investment into Hungary by upwards of 30 percent. Other important currency indicators to watch for Hungary are Swiss franc (CHF) and Euro (EUR) currency valuations; the CHF is tremendously overvalued when assessed by purchasing power parity. A currency correction for the CHF will help to boost Hungary’s household income as much debt issued in Hungary was realized in CHF currency.
