Hungary’s Forint has hit record lows in the past few months, and there are various reasons behind it. It has been inching towards a downward spiral, increasingly setting a newer threshold against the euro every day. Experts suggest that a number of international and domestic factors are responsible for this. Some of these include high inflation rates, a strengthening dollar, and investors becoming increasingly risk-averse. On this note, if you are interested in such foreign currencies and plan to invest in them, you must definitely do some research into foreign exchange trading.
According to most global analysts, the Forint downfall is primarily because of the risk-averse nature of the investors in this emerging market. This has also been fueled by how the Orban government is being lenient with the increase in the coronavirus cases in the country and also the consequences that the EU rule of law proceedings brought to the area from a financial point of view. Economists have also spoken about how the pre-election spending spree coupled with the expansionary nature of the fiscal policy has been an upside risk to the increasing inflation.
All of the factors together had a role in the downfall of the Forint, and there’s definitely no doubt about that.
Currency fluctuations have been common throughout history, and they affect the economy in many ways. But the factor that has played the biggest role in this case, is probably the sharp change in the country’s exchange rate policy throughout the course of the last few years.
If you look back, you will notice that Hungary’s exchange rate policy has undergone a 180-degree change. In fact, analysts had even warned the country that their currency hitting an all-time low was not a question of ‘if’ but rather a ‘when’ especially owing to a faltering exchange rate policy.
Let’s take you back to the time when the first Orbán government came into existence which spanned 1998 to 2002.
At that time, the policymakers were very much convinced that if they worked on making the Forint stronger, that would be the best approach for them. They thought that the effect would be felt by all Hungarians, too, as the value of their income would increase, and so would their savings. At that time, the inflation rate was only at about 10%. Policymakers thought that appreciation of the currency would be a way to keep the inflation rate stable.
However, later on, when the socialist governments came into existence, they were not inclined to follow this philosophy.
However, the National Bank of Hungary (MNB) continued to follow the previous plan and took the necessary steps so that Forint did not fall. At that time, retail FX loans were quite popular in Hungary, and the MNB continued to make repayments.
This approach was then changed in 2015 when the third Orban administration came in and saw the need to take measures to survive in a low inflationary environment. The policymakers thought that now that the global arena did not have inflation, maybe this weakening currency was not a bad thing after all. They thought that if it did depreciate a little, that would mean a little income for Hungary. Also, since the household FX loans were sorted out, the policymakers presumed that if it did weaken, it wouldn’t be a threat to them.
The policymakers also felt that if they had a high Forint interest rate, then the companies in Hungary would have a competitive advantage over those companies who were borrowing at lower interest rates from the neighboring countries. Thus, the MNB started working towards creating an environment of low-interest rates so that corporate investment growth could be stimulated.
The flaw with this policy was that when something was to happen in the global market, this policy would not protect the currency from depreciation. Thus, depreciation in the months to be followed was inevitable.
It is unlikely that the Forint is going to make a comeback in the short term. If the dollar loses its strength in the coming few months, then that might be a ray of light at the end of the tunnel as it will help slightly to boost its value, but that alone will not be enough.