Hungarian Forint devalue chances and effect on property

[geordie]

There has been a lot of talk about the effects of the Budget deficit in Hungary and the need for the Hungarian government to devalue the Forint in order to achieve membership of the euro. Obviously this is going to affect property values, at least in the short-term, although there is every liklihood that they will recover, but does anyone think a devaluing is likely?

 

[budapest]

Hi geordie,

The forint is quite a nervous currency and has had its fair share of ups and downs, particularly over the last year, when it reached a low of 283HUF=1Euro. Over the last five years though, it has more or less bounced back close to the rate of 250HUF=1Euro. It closed today at 253HUF=1Euro.

There has been some talk about devaluation, mostly from overseas, but in my opinion, it is not likely in the near future. Huge measures have already been taken to ensure that the budget deficit is reduced as quickly as possible and so far, expectations are being met and even beaten, so things look good for the future. Still a long way to go, of course, but devaluation makes little sense right now.

When Ireland devalued, our government debt had reached 120% of GDP. There was mass emigration, low employment and low FDI. Hungary's budget deficit last year was 9.6%, which is huge when compared to other European countries at the minute, but in overall terms, it is not impossible to rectify.

Hungary has the highest interest rates in Europe, which attracts investment from various quarters. It also continues to attract huge foreign investment, so future potential is good for the economy.

Another consideration is that in many cases, property values in the central districts and in most new builds are actually in Euro, so changes in HUF values should not have a primary impact on these prices.

Currency fluctuation is a significant consideration when investing in a non-Euro country in Europe, but not as important as it once was. In many ways, the Euro is effectively a second currency already.

 

[tyoung]

When Ireland devalued, our budget deficit had reached 120% of GDP.??? When was this?
Govt debt as % of GDP got to be quite high but the budget deficit never reached 120% of GDP . I don't think it got over 10% ever.

 

[Hungary]

Hey Guys,

There is a misunderstanding in connection to Hungarian monetary policy. All information is available at [broken link removed]

"Exchange rate regime

According to the Act LVIII of 2001 on the Magyar Nemzeti Bank, the government and the MNB mutually decides on the parameters of the exchange rate regime. Currently Hungary adopts an exchange rate band. The central parity, which is pegged to the euro, is 282.36 forint/euro. The market exchange rate may deviate from the parity within the +/-15 percent fluctuation band. The edges of the band are defined by the 324.71 forint/euro and 240.01 forint/euro exchange rate levels. The central parity was 276.1 forint/euro between 4th May 2001, the widening of the band, and 4th June 2003.
Market forces determine the exchange rate movements in the fluctuation band. The MNB is entitled to intervene within the band. The official daily exchange rate, quoted by the MNB, reflects the market rate. If the exchange rate reaches the edges of the band, the central bank, according to its obligation, will keep the exchange rate within the band with the help of foreign exchange market intervention. That is, at the edges of the band the MNB buys or sells foreign exchange to prevent the further appreciation or depreciation of the forint. The minimum amount of intervention is 4 millions euro.
The current Hungarian exchange rate regime, considering its main characteristics, is compatible with the ERM II. regime, in which every country striving to join the EMU has to participate for at least two years before introducing the euro.
"

It does not make sense to talk about develuation! Forget it please...

 

[Persius]

Surely this is just the Hungarian National Bank's (MNB) view of how things should work. They state that the market sets the rate, and if the rate moves to the edge of the desired bands, then the MNB will intervene. It doesn't mean that an intervention is guaranteed to be sucessful and prevent the HUF's value against the Euro leaving the band - most likely as devaluation.

AFAIK, the Bank of England were doing the same thing in ERM I back in the early 90s, but speculation from George Soros forced sterling to devalue outside of the accepted bands and ultimatly forced the UK to withdraw from ERM.

I believe many economists say that central bank intervention is ultimatly doomed to failure, and exchange rates are set by "the market" or currency traders/speculators

 

[Hungary]

Hungary is a small country with a small economy. It would be very very dangerous to let the market set exchange rate. Freely floating exchange rate regime would be a weapon against Hungary through money makers and speculators. Hungary is not UK or US and Forint is not Sterling or Dollar please. Macroeconomic environment and market mechanism needs to be under control, otherwise Hungary would be South America...

I agree with the National Bank's objective:

"The primary objective of the MNB shall be to achieve and maintain price stability. Without prejudice to its primary objective, the MNB shall support the economic policy of the Government using the monetary policy instruments at its disposal."

Dirty floating has much more positve impact than free floating system to Hungary until introducing Euro.

 

[Persius]

Hungary is a small country with a small economy. It would be very very dangerous to let the market set exchange rate. Freely floating exchange rate regime would be a weapon against Hungary through money makers and speculators.

Are you saying that there are currency controls in place in Hungary and/or that the HUF is not a freely tradable currency?
I didn't think this was allowed in EU/ERM

Freely floating exchange rate regime would be a weapon against Hungary through money makers and speculators. Hungary is not UK or US and Forint is not Sterling or Dollar please. Macroeconomic environment and market mechanism needs to be under control, otherwise Hungary would be South America...

Sounds a lot like Ireland and the Irish Pound (IEP) back in the early 90s and ERM 1. That didn't stop speculators or the devaluation of the Irish Pound at the time.
In the long run, this devaluation was probably a good thing for the Irish economy.

I agree with the National Bank's objective:
"The primary objective of the MNB shall be to achieve and maintain price stability. Without prejudice to its primary objective, the MNB shall support the economic policy of the Government using the monetary policy instruments at its disposal."

Nothing wrong with the objective. However my point is that the National Bank can not guarantee that the HUF/EUR exchange rate will remain within a certain band. Central banks frequently do intervene in the money markets to try to influence/protect exchange rates. However the fact is that they frequently fail in their attemps.

 

[tyoung]

According to the Economist mag. Hungary's current account deficit is projected to be 5.9% of GDP and it's inflation rate 5.9% for 07. The inflation rate in the Euro area is projected to be 2.1%. With those no. a devaluation is likely at some point before entry to the Euro.

 

[budapest]

I'm no expert when it comes to the complicated Hungarian economy, but I believe that there are very specific reasons and explanations for these figures.

5.9% inflation seems high, but less than a year ago, this was under 3%. By far the main reason for this increase is the austerity measures introduced by Gyurcsány's government to deal with the huge budget deficit. These are temporary crisis measures and will be removed in due course.

Leading on from this, a projection for 2007 for a 5.9% budget deficit is not bad (I had heard 6.8%), considering that it was almost 10% last year. Gyurcsány's economic plan to reduce this further to 3.2% by 2009 has been approved by the European Commission. Hopefully it will materialise.

In my opinion, there is no specific reason for the devaluation of the forint to occur. I've never seen it mentioned as even a likelihood in Hungarian newspapers. A more significant economic issue in my mind is the underpayment and non-declaration of tax, which occurs and is accepted in every corner of society (some say a casualty of the high tax regime).

 

[Hungary]

Dirty floating (economics term) does not mean that forint is not freely tradeable but exchange rate is under control by central bank. And if necessary it takes steps (buying or selling currency, increase or decrease interest) to maintain extreme fluctuations. Since band is wide (from 240 and 324) Hungarian National Bank is in a good situation to keep exchange rate in the band. According to experences, forint was not stronger than 240 and weaker than 284.

I still do not understand why you are talking about develuation because tools of current monetary policy does not contain develuation and appreciation. Dirty foating is used from 2001 and HUF has been in band so far. It is expected not to be out: extremly strong or weak currency would have very serious impact on Hungarian economy:

- housholds use Euro or Swiss frank based loans (not weak currency is preferable)
- exporters prefer not strong currency

This is the reason why the middle golden way is the best solution for Hungary. As a result band sets the way of introducing Euro.

High crediblity in fiscal and monetary policy provide normal exchange rate while high level of uncertainty in government and political stablity leads to weak exchange rate. Macroeconomic environment and its factors are not the mean reasons of fluctuation in exchange rate. I mean players' attitude and predictions are more important.

If you are not an economist it also does not make sense to go into details. I suggest you read a book about fiscal and monetary policy and their intercorrelations with macroeconomic environment.

Inflation, budget deficit, etc. are the consequences of bad fiscal and monetary policy and not reasons for fluctuation in exchange rate.

 

[ringledman]

Either way I think it is clear that there are better places to invest in Eastern Europe than Hungary at the moment.

You don't have to be an economist to realise that there is a big hole to be filled by the government and this will have an impact on the economy and subsequently the housing market will suffer.

There are far better economies such as Poland & the Checz Republic to be investing in.

No doubt Hungary will turn the corner, but not yet.

 

[Hungary]

Either way I think it is clear that there are better places to invest in Eastern Europe than Hungary at the moment.

You don't have to be an economist to realise that there is a big hole to be filled by the government and this will have an impact on the economy and subsequently the housing market will suffer.

There are far better economies such as Poland & the Checz Republic to be investing in.

No doubt Hungary will turn the corner, but not yet.

I do not think good economy is the most important requirement to invest in whether we talk about Eastern Europe or other area in the world. Business potentials should be examined instead.

To be honest, investing in an unfavourable economic environment probably provide you higher return in long term. I am not the first one who say good time to buy and bad time to sell in Budapest at the minute. It is not a concidence but it is a simple expectation. Good time needs to come after bad time is gone. The highest capital appreciation and return and yield were available between 1995-2000 in Budapest. Nobody could say this was the best period of Hungarian economy. And foreign investors came to invest from 2000. They missed the potentials.

The market is now overpriced and stable. Next boom is expected because there are still good potentials in CEE countries such as Slovakia, Romania, Croatia and Hungary.

 

[geordie]

Thanks everyone, there is a lot of food for thought here. Whether devaluation happens or not I think we can all appreciate there are major fundamental problems with the Hungarian economy and the radical measures that have been introduced by the government to fill the budget deficit are a drastic but necessary measure. They are bound to have an effect on the economy and the currency is very vulnerable because the Hungarian government do not enought reserves to support a crisis and we saw what happened in the UK a few years ago.

I think a lot of developers realise that these fiscal measures are going to hurt and I see that a number are now offering property at euro prices so that they are taking more of more of risk from potential purchasers.

People totally underestimate the risks of investing in these emerging markets and in Hungary does devalue prior then it will pull down the currencies of the other CEE countries. I suppose the key for investors is to get rental contracts written so that they are paid in euros so as to reduce currency risk even further, how likely this is I don't know, so if anyone has any feedback on this it would be very welcome.

 

[auto320]

When the row flared up over austerity measures in September last, fuelled by the opposition's hope that if they made enough trouble they they could force the government to stand down, a lot of amateur investors ran from the market; this was actually a good thing for serious players as it brought stability and got rid of the people who distorted the market by buying with no knowledge of actual prices and values. The world did not fall apart in Hungary, despite the doom-mongers pronouncements at the time.

Nobody can really say if speculators will force devaluation at some time in the future, but it seems unlikely if you look at the confidence in the local market. I was given a prospectus for a newly-built shopping centre a couple of weeks ago, and along with some friends I am considering buying it. The interesting thing about it is that the tenants have all signed leases that are linked to euro values, so they don't see a huge risk, and indeed one of the tenants is a major bank.

I spoke to an agent last week who knows this market well and who is still working steadily there; he made the point that you almost never get served your latte here by a Hungarian -- most of them are happy enough to work at home in Hungary. I still put Hungary ahead of the other CE states in terms of potential, and at the end of the day potential is what we back in the property business.

 

[Hungary]

I was given a prospectus for a newly-built shopping centre a couple of weeks ago, and along with some friends I am considering buying it. The interesting thing about it is that the tenants have all signed leases that are linked to euro values, so they don't see a huge risk, and indeed one of the tenants is a major bank.

In Hungary, rent of commercial properties such as office and retail is fixed in Euro only. There is no option, therefore, euro based rents does not mean that tenants are not concerned with high currency risk. However, they have to take risk if they want to rent office/retail. All of us knows financial solutions how to mitigate currency risk such as futures/options/swaps. You mentioned a bank as a tenant, so banks are the biggest players in future market.

The companies, which have revenue in Euro, can also manage this kind of financial risk.

Currency risk management is now a good business here in Budapest.

Rent or Buy in Euro have a significant risk in Budapest. High fluctuation in short term could cause financial loss to whom may concern. And Euro based purchasing price has a high chance to be a paddy price.

Finally, residential properties are usually rented in HUF becaus tenants want to eliminate currency risk. Fluctuation in rent is not welcome honestly. What is more, international companies and foreign expats also prefer renting apartments in HUF because currency risk cannot be an issue.

Introducing Euro is not expected to be taken place sooner than 2013. It does not make sense to calculate in Euro but it is common here.

 

[geordie]

Thanks everyone, that's given me lots of food for thought.

 

[budapest]

Incidentally, the forint closed today at 249.89HUF=1Euro, its strongest rate since January last year.

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