In the last few months, there was a period when the Forint strengthened, and it was hoped that it would return to its valuation prior to last summer’s collapse. There are too many variables at play preventing the Hungarian currency strengthening; however, according to privatbankar.hu, further devaluation cannot occur either.
Despite it being a floating currency, the Forint’s value does not change much. The dollar’s value often rises and falls 10% compared to the Euro or Yen within a year or a few months, while the Hungarian currency does not usually move beyond its narrow range of 5%. However, last year’s collapse saw the Forint outside of this bracket.
Due to the Forint’s low value, Hungarian household incomes are still lagging behind Western European ones, despite a 10% rise in wages. Hungary’s net-average salary is under €800, which is a 1/3 of wages in Germany, Austria, France and the UK. All the while, Hungarian purchasing power parity (PPP) is above the countries mentioned.
There is a big difference between PPP and nominal value, meaning that the Hungarian currency is both weak and undervalued. In addition, Hungary has a balance of payments surplus, which would enable Hungary’s rise in wages if measured in Euros. Economists were hopeful that this process would start; however, it seems very unlikely at the moment.
Till 2013, 1€ could be purchased for under 300 FT. In subsequent years, the Euro’s value crept up to between 305 and 315 FT. This devaluation could be linked to the exchanging of foreign debts in the last few years.
This process has been going on since foreign national debt has fallen from 50% to 20%, while securities in Swiss Francs had to be exchanged to other foreign currencies. After overcoming all these foreign exchange pressures and having a balance of payments surplus, it was predicted the Forint would strengthen and thus reduce prices.
However, based on the most recent communications, the Hungarian government wants to exchange the remaining 20% of foreign debt into the Hungarian currency. In this programme, the government hopes to sell more bonds, which would lead to a rise in their interest rates. Loose financial regulation will help to facilitate this. These events will make it impossible for the Forint to increase in value.
In addition to all this, inflation has been on the rise. Increasing wages have led to increased consumption of both foreign and domestic products, despite a proportion of the latter being destined for export. A rise in domestic trade will not support the Hungarian currency strengthening in relation to the Dollar and the Euro.
The Forint’s undervaluation will decrease if the inflation rate becomes greater in Hungary than in the Eurozone. This could lead to further devaluation of the Hungarian currency; however, it is not in the government’s interest as they wish to trade public funds on the securities market. This means that a situation where trust in the Forint decreases and public saving is exchanged into Euros will not arise.
It appears that the Forint will stabilise at 320 FT and deviate around that value. The strengthening at the beginning of the year could be linked to monetary speculation related to the government’s monetary policy. The subsequent rise in interest rates has led to the currency’s devaluation to its current level.
Last week, we reported that Socialists Párbeszéd want to introduce the Euro to Hungary in order to make the country less vulnerable to economic shocks. A government official has also called the Hungarian economy a ‘success story’.