Saturday July 5, 03:35 AM
Hungary struggles to offset forint rise [at Financial Times]
By Thomas Escritt in Budapest
Hungary's undercapitalised domestic companies are struggling to achieve the productivity needed to offset rises in its currency, which hit a record high against the euro this week. The forint, which reached 234.50 against the euro this week,
from 260 in April, has been rallying since the central bank's surprise decision in late February to abandon a policy of maintaining a fixed trading range against the euro. The currency hit a five-year high in June before this week's record. Eszter Gargyan, chief economist for Citibank in Hungary, said the rally was partly supported by the continuing strength of borrowing in foreign currencies, primarily the euro. Together, retail consumers and non-financial corporations have borrowed some €18bn ($28bn, £14bn) over the past four quarters. Consumer borrowing amounted to €6bn of this - 5.9 per cent of gross domestic product. Much of this has been converted into forints, lending further support to the currency. "Unless the European banking sector faces a major capital squeeze, we do not expect these flows to stop. The abrupt reversal of these funds is also likely to be limited by the long tenor of mortgage-backed loans," Ms Gargyan said. The forint is likely to be further supported by a continued tight monetary policy stance in the face of rising inflation, which accelerated to 7 per cent in May, well above expectations, partly because of high global energy prices. For domestic companies, the combination of high energy prices, high labour costs and a strong forint is a deadly combination. Years of high costs and limited access to credit - local companies have historically not been as well capitalised as their peers in neighbouring countries - have prevented them from investing in the kind of productivity improvements needed to counterbalance an appreciating currency. Zoltan Bakonyi, head of Magyar Aluminium, which exports to western Europe, said: "Firms like ours, that pay taxes honestly and which don't have an international parent [to finance investment], are already under such a cost burden that they haven't been able to make the kind of investments which would increase productivity to the extent needed to offset the strengthening forint. The Hungarian economy cannot keep pace with a forint appreciating at this speed."
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