Azernews.Az

By Bloomberg

Hungary's position on the forint for most of this year was best summed up by the economy minister's call in March for the country to take advantage of its declines to boost exports.

That changed this month.

On Oct. 1, the European Union warned that Hungary risks falling back into the excessive-deficit procedure, which can lead to the blocking of aid money, if the country fails to cut debt. Two days later, Economy Minister Mihaly Varga told reporters the government wanted a "favorable" exchange rate to help reduce debt by year-end.

Traders got Varga's message, buying up the forint after he spoke and fueling a 1.6 percent rally against the euro, the second-biggest gain among 31 major currencies. The rally is a boon for Hungary's fiscal accounts, cutting the size of the foreign debt when measured in forint and helping the country maintain access to much-needed EU financing. The stronger the forint is, the smaller the government's international debt looks on its books.

Hungary wants a "cosmetic change in the exchange rate for year-end and verbal intervention is one way to achieve that," Viktor Szabo, who helps oversee $13 billion in emerging-market debt at Aberdeen Asset Management Plc, said by e-mail Oct. 10. "The big question is how long the rally can last."

Orban's Debt

The rally marks a reversal of the first nine months of the year, when the forint's 4.6 percent slump made it the third- worst performer among major currencies. It gained less than 0.1 percent to 305.88 per euro by 8:13 a.m. in Budapest.

At stake for Prime Minister Viktor Orban is 22 billion euros ($28 billion) in development funds from Brussels through 2020, which his cabinet is counting on to invest in an economy that has fallen into recession twice in the past five years. To help maintain access to that financing, Orban's administration is looking to cut debt to the equivalent of 76.9 percent of the country's economic output from 77.3 percent last year.

Hungary doesn't have an exchange-rate target and relies on "disciplined" policies and economic growth to reduce debt, the Economy Ministry said in an e-mailed reply to questions yesterday. The central bank didn't respond to e-mailed requests for comment sent last week. Adam Balog, the bank's vice president, was quoted yesterday by state news service MTI as saying that policy makers don't have a forint target and don't seek to influence the market.

Tatha Ghose, an analyst at Commerzbank AG, said he doubts that Varga's Oct. 3 comments are sparking the forint rally. He instead points to EU money coming into the economy as the source of the gains.

'Extra-Large'

"I don't see that any verbal or other intervention by policy makers can make much difference," Ghose, who is based in London, said by e-mail yesterday. While "extra-large" EU fund inflows are supporting the forint for now, it may slide toward a record low of 325 per euro by 2016, he said.

Prior to this month, Hungary had shown little interest in reversing the forint's slide. The government needs to build its export industry to make better use of the weak forint, Varga told Gazdasagi Radio on March 18.

That position put them in line with many countries across the globe that have been supportive of weaker currencies to help stoke exports and growth.

'Outlier' Status

Bank of Japan Governor Haruhiko Kuroda last week reiterated his commitment to pumping trillions of yen into the economy, a policy that helped push the currency to a six-year low. New Zealand announced Sept. 29 its biggest currency intervention in seven years while the Czech Republic's central bank said on Sept. 25 it would maintain its weak koruna policy until at least 2016, a year longer than policy makers had envisaged when they set a cap on the currency a year ago.

U.S. Treasury Secretary Jacob J. Lew warned delegates at the International Monetary Fund meeting last week to avoid targeting exchange rates "for competitive purposes," while European Central Bank President Mario Draghi used the gathering to deny that he has "actually undertaken policies directly targeted to the exchange rate."

The 18-nation euro has weakened against 15 of its 16 most- traded peers in 2014 as the ECB expands its balance sheet. The IMF cut its global growth forecast for 2015 to 3.8 percent last week from 4 percent in July.

For Hungary, though, the focus is now on reducing debt. Foreign debt accounted for 41 percent of the government's liabilities at the start of the year, meaning gains in the forint can go a long way toward improving its fiscal accounts.

"Hungary is an outlier at this moment," Ilan Solot, a foreign-currency strategist at Brown Brothers Harriman in London, said by phone yesterday. "While most countries are just letting their currencies go, we're getting some signals that further depreciation of the forint wouldn't be useful."