“You can understand why people in this country speak about Hungary being a mafia state, because the state behaves pretty much like an organized crime racket.” – Lajos Bokros, Movement for a Modern Hungary (MOMA) chairman, former Minister of Finance
There’s a lot happening in foreign exchange markets. The Swiss National Bank recently ended its policy of capping the Swiss franc against the euro, the forint has weakened against the euro, and the US dollar has strengthened considerably against both the euro and the forint. What’s happening?
I think we have to separate several factors, that is, the international factors, European factors and the domestic factors. In the global arena, the most important factor is the appreciation of the US dollar against almost all other currencies.
Why is that happening?
Because the United States has a much higher level of economic growth than any other comparable large economy, except for China, of course. But we all know that the Chinese currency, the Renminbi Yuan, is under very strict government control, so it’s not right to draw a full comparison between the Renminbi Yuan because, unlike the Yuan, the US dollar is not.
As a consequence of this, the US dollar is again playing the role of a safe-haven for capital which is flowing into the United States and into the banking system of the whole world. I think we can expect a further appreciation of the US dollar, at least in this year.
The second important factor is that the eurozone will start quantitative easing, something they resisted for a long time. Earlier, the US and also the UK had employed quantitative easing for quite some time but have now finished.
The eurozone will start its quantitative easing program in the foreseeable future and there is an expectation in the market that it might be successful. If you try to flood the market with cheap euro, so to speak, the consequence is the depreciation of the European common currency at least vis-a-vis the US dollar, which is appreciating anyway against many other currencies not just the euro.
The Swiss National Bank wanted to fix the exchange rate of the Swiss franc against the euro in order to maintain the international competitiveness of the Swiss economy. Now they realized that there’s no need to maintain that peg any more because the euro is depreciating toward the US dollar and there’s no need for the Swiss franc to be depreciated against the US dollar. They also probably think that the Swiss economy is competitive enough and the productivity level is good enough to withstand this one-time negative shock which this one-time big appreciation created. As you know, the Swiss franc appreciated more than 20 percent within one day. Since then it has come down, of course, but we can see now that the euro and the Swiss franc have almost reached a level of par and are fluctuating in a relatively narrow band.
Of course, many people say that this was a big mistake on behalf of the Swiss National Bank to allow the Swiss franc to appreciate, but I have a different view because it was only a question of time regarding when they would make this move. Had the Swiss National Bank postponed this liberalization of the exchange even further, they could have had an even bigger appreciation and I think that that is what they wanted to avoid. It is better to bite the bullet right now. It may cause some harm, but postponing it further and having a fixed exchange rate for an even longer period of time would make it even more difficult to get out of this arrangement at a later stage, and it would have caused even more harm.
In public policy you always make a comparison of what you can achieve right now as compared to the future.
What’s the situation with the Hungarian forint?
The Hungarian forint has been depreciating against the both the US dollar and the euro for a long time, which is very strange because I can understand the depreciation of the Hungarian currency against the US dollar because that reflects nothing else but the strength of the US dollar, but to be depreciated against the euro, which is in itself depreciating against the US dollar, is a consequence of a deliberate government policy in Hungary to depreciate the Hungarian currency in order to maintain the relative strength of the export competitiveness of Hungary.
I don’t think this is a good policy because that means a constant loss of value for Hungarian labor, Hungarian consumers, Hungarian savers and Hungarian investors. But when you have a government which tries to drive a wedge between those entrepreneurs it likes and those it feels are harming the country, then this is the only tool for the government to maintain a relatively high level of confidence.
Good for exporters, though
Yes, it is good for them. But most Hungarian exporters are also large importers. Of course, they have costs that arise in Hungarian currency so they gain and the profitability goes up, but at the same time it makes a mockery of the otherwise general wish of the whole society that they should converge with Western Europe. With a constantly depreciating currency depreciating the whole GDP and the whole income productive capacity of the country, you will never converge with the Western European level of economic well-being and welfare.
What does the Hungarian forint’s fluctuating exchange rate mean for Hungary’s ability to service its national debt?
Hopefully the government made some steps in order to reduce that part of the forint debt of the nation which is in Swiss franc. I don’t know exactly what has happened because unfortunately it is very difficult to analyze the balance sheet of the Hungarian National Bank. I don’t see that they have changed too much of the existing reserves into Swiss franc beforehand in order to withstand this high appreciation. Maybe they did. If they did, then it was a good step. But when you depreciate the Hungarian currency against all major Western currencies then, of course, the foreign debt denominated in Hungarian forint will go up. If, at the same time, you depreciate the Hungarian GDP then the ratio between foreign debt and GDP will go up too – and that is not a good policy because what matters is not only the public debt, or the fiscal debt, but also the whole national debt, which has been reduced to a certain extent by the fact that the non-fiscal players, i.e. the households and the enterprises, deliberately prepaid a good amount of their debt in the last five years or so. As a consequence, there’s more and more concentration of foreign debt in the public debt because the other sectors have restored their balance sheets, as we used to say, they have less and less leverage.
Does this mean we’ll start seeing inflation?
It depends on how the exchange will perform in the foreseeable future. If you have an up-shoot of the exchange rate of the Swiss franc or other major Western currencies which we use in foreign trade, if that lasts only for a couple of months, then inflation will not need to go up. If it is a permanent feature of the new economic arrangement, and if the Hungarian forint, as a consequence of deliberate government policy, keeps deteriorating further, then it is absolutely unavoidable that inflation will occur sooner rather than later.
How will that affect the average household in Hungary?
Negatively, obviously. But, again, the big question is how the government will react. Will wages go up? Will pensions go up? Will social transfers go up? So, you can have a higher inflation environment where nominal wages grow but real wages stagnate.
Let’s transition to the issue of corruption. Have you heard any feedback regarding the ongoing scandals of corruption happening in Hungary that have resulted in the US issuing visa bans for several Hungarians?
It’s very difficult to make any specific comment because one of the most important characteristic features of the Hungarian government policy is that it is very secretive. Through many of their deliberate decisions, you cannot get reliable information; in many cases government is the last one to provide reliable information. So, it’s difficult to say, but the very fact that there is a kind of a tension between the government of the United States and Hungary which originates in this allegedly negative behavior of some high-level Hungarian officials, that tells you a lot about the underlying problems.
If the government is the first one to be corrupt–if instead of fighting corruption the government is the one that is involved in corrupt activities–and has allegedly committed crimes which are not being investigated because it would probably be connected to high-level government officials, then you can understand why people in this country speak about Hungary being a mafia state, because the state behaves pretty much like an organized crime racket. And obviously they are the last ones to be interested in providing reliable information to the general public.