GKI: Forint likely to continue weakening against the euro

January 11, 2015


Independent economic research institute GKI predicts the forint will gradually weaken against the euro in 2015. The government does not seek to strengthen the forint but rather believes a weaker forint will benefit the Hungarian economy, according to András Vértes, chairman, who does not agree with the government’s assessment.

Vértes told ATV that the recent strengthening of the dollar against the euro and the forint reflects a flow of capital from Hungary and Europe to the United States, prompted by the surprisingly strong 4th-quarter performance of the US economy which significantly exceeded expectations.  Furthermore, new Fed chairman Janet Yallen has said she anticipates the Fed will start raising interest rates from the second quarter which, according to Vértes, serves as a major inducement for companies and governments to buy dollars.

Vértes did not think that the prospect of Greece exiting the eurozone was a major factor.  He said the government deliberately strengthened the forint at the end of December in the interest of massaging year-end debt figures (45 percent of Hungary’s national debt is denominated in foreign currency), but that it was now content to allow the forint to weaken against the euro in the belief that it will strengthen the national economy.

Vértes points out, however,  that 70-80 percent of Hungarian exports are generated by multinational companies whose operations are already based in euros or forints, many of the components being imported for assembly and re-export.  He says small- and medium-size enterprises are mostly oriented on the domestic market, and for this reason do not stand to profit from a weaker currency.

GKI forecast at the beginning of 2014 an average euro-forint exchange rate of HUF 320 for 2015.  This estimate was revised to HUF 330  after parliament adopted a law in summer obliging banks to convert FX loans into forint-based ones. Vértes says that depending on the Ukrainian crisis and other factors the forint could reach an even lower point against the euro.

He points out that this has an odd effect on the budget.  On the one hand, it increases the forint value of EU development funds coming from Brussels.  On the other hand, it increases the operating costs of companies that rely on imports, and puts companies with large amounts of FX debt in a difficult position.