Currency woes

As a "poor college student" I've been thrilled at how far my US dollars are stretching since the fall of the forint.  I'm saving $50 a month on my rent alone, which is a huge relief (I don't have a job, and my parents aren't paying - it's just me and my savings until they run out in a year or two!)  I feel sorry for my friends here, especially those with Euro or Swiss franc loans, but... what can I do?  I'm just going to allow myself to spend a little extra money on the local vendors to "stimulate the economy", and hope for the best!

angol wrote:

This doesn't affect us immediately using forint within Hungary. If needed, transferring foreign exchange into forints now offers a much better deal than previously. But government measures to cover the increasing costs of servicing its borrowings could create some impact.

It does affect us because we need more Forints to pay for imports and a huge amount of things are imported here. The only thing which would help would be if Hungary was sitting on some readily saleable natural resource like gas, diamonds or oil. However, there's really not much here like that except perhaps a natural resource of knowledge and people - manufacturing with lower labour costs. However, all that also requires imports which must be bought with foreign exchange. Government could print more Forints but that's inflationary.

angol wrote:

In January, indirect taxes will go up on VAT and excise duties (booze and fags). Bank rate is also likely to be raised soon, which will give better returns on forint savings accounts. Other measures will be needed, and the unorthodox approach of the present government to financial management doesn't give many clues.

The returns on Forint accounts will show the risk in the currency. There should be a net inflow of some cash depending on the predictions for the economy. On the other hand, the government really does not want a very strong currency because this will limit growth by exports and therefore jobs. What the government definitely does not want is high unemployment caused by low exports and low internal demand. Busy people are not likely to be engaged in social unrest.

angol wrote:

But one has to consider the possibility of exchange controls being imposed if the situation gets really dire. This would limit the export of forints, and probably restrict instant access to largish amounts of foreign currency held in foreign currency accounts in Hungarian banks.

This is a possibility but in the longer term, the reduction in the value of Forints is a draw for investing for all the previous obvious reasons - cheap exports, high employment etc. The long term outlook (years) will be positive. Worst case would be a raid on foreign exchange with the government issuing IOUs with a conversion to bonds later on. That would be probably illegal and a PR disaster. People would steer well clear, The best thing is generally always property although the illiquid nature of those things means it's not for the faint hearted. Government bonds are always the most secure form of investment in case of uncertain times. Anyone with spare cash could buy up some cheap property here for sure. I am sure prices are already dropping. I expect the real estate market is dead at the moment.

angol wrote:

None of this should be of instant concern to anyone. But those with long term plans involving investment of any kind would certainly be wise to think through possible scenarios and consider plans to mitigate or even take advantage of what could lie ahead.

You can guarantee all the economists have already raked over this one in great detail. The one that really concerns me are the neighbours like Austria and Slovakia, both in the Eurozone and likely to be on the receiving end of cheap exports from Hungary and elsewhere EU but not in the Eurozone. The non-Eurozone countries can devalue, something the Greeks, Italians and so on cannot do. In the worst case, this will probably end up with something like "Hungarians are stealing our jobs by undercutting the market". This could increase ethnic tensions in the region.

angol wrote:

(N.B. No, I'm not a financial adviser just an interested observer.)

Me too.

Fluffy,
Thanks for correcting any errors.

The only thing which would help would be if Hungary was sitting on some readily saleable natural resource like gas, diamonds or oil. However, there's really not much here like that

This morning I read this:
Europe's energy challenges from Money Morning. There are several references to Hungary's shale gas deposits, which are under (long-term) development.

Also, this Soaring to new heights gives a pretty full description of Hungary's Mako Trough Basin - from about halfway down the article. It's a slow process of development, though.

Nice analysis!

With the high tax rates low (net) wages do not transform into low manufacturing costs.
The uncertainty and the "Robin Hood" attitude of the government towards capital tends to shy away long term investment, the kind required to increase manufacturing capacity and make use of the cheaper labor.

Real estate prices are still inflated: without foreclosures and with precedents like banks having to pay the exchange rate difference on loans taken out in foreign currency, mortgages are still regarded as "free money" by enough people to keep the prices high. (While for those who do pay off their loans, interest rates are rather high, covering the losses from those who don't.) Now with lending slowing down the money supply is diminishing, but now most owners are locked in.
What I'm beginning to see is dirt cheap long term rentals: just enough to cover the loan payments. Lock in a good price in Forints and it's going to keep going down and down in euros or dollars...

szocske wrote:

....
What I'm beginning to see is dirt cheap long term rentals: just enough to cover the loan payments. Lock in a good price in Forints and it's going to keep going down and down in euros or dollars...

The government in Hungary is always in trouble. Doesn't matter what flavour of political party is running the show. The IMF mission in town and despite denials, probably will give Hungary a facility to borrow. There's no harm in being cautious (by having a loan facility) but it seems like the country is being typically unpredictable.

The long term rentals are OK if there is sufficient demand but the question is if there will be demand? The price of real estate is totally linked to the economy so we're talking about guessing the value of property in 20 years. The return on investment in a rental property should be over say, 7% p.a. to be competitive with a EUR mortgage rate. What I mean is that in HU, the rate on EUR was until recently about 7%. So to break even, you need to make in rent more than 7% and rely on capital increase in rising property to make more. What the capital increase would be is anyone's guess in 20+ years. I think 7% is quite ambitious as a return given the economics of Hungary and the volume of property available in the market.

What I hear is that many people want to leave the Hungary to do better elsewhere. It's easy to see Hungarians, Poles and other nationalities in other countries and nearly all of them complain it's because of lack of opportunity back home, not travel for adventure. Without some great change in Hungary, the population will probably reduce over the next 20 years. The same problem exists all over the region. For example, Serbia's population will drop from about 7 million to 6 million in the next 20 years unless there are big changes in the economy. There's no real estate market at all there.

If anyone has steady income, then for sure, at the moment renting is better than buying. Renting needs no maintenance, no investment and if it all goes wrong, no capital to release and instant mobility.

What I see on the real estate web sites are many 1000s of apartments to rent in Budapest. Renters should have a fantastic choice and a fair price if well informed and good at haggling. Investors will however be suffering as they are effectively subsidising the renters.

From The Economist....

Planet Orban

A reality check for a government that trumpets its independence

FOR those wanting to find evidence of the headstrong and self-defeating approach of Hungary’s government and especially its prime minister, Viktor Orban, the decision to storm out of talks with the IMF in July 2010 was a prime example. So now is this month’s U-turn: the reopening of talks with the Washington-based institution on securing a precautionary credit line (a kind of overdraft for solvent but cash-strapped countries).

The move came after the Hungarian forint fell to a record low, successive bond auctions failed, and Standard & Poor’s, a ratings agency, said it was considering downgrading the country’s debt to junk status. The decision to go back to the IMF calmed the markets a little. But the effect was muffled by the clumsy way in which it was announced (neither the central bank nor even the IMF was consulted first).

The government vigorously defends its record of the past 18 months. It decries the previous deal with the IMF (done in the depths of the 2008 crisis) as an example of “old-type forms of co-operation which were obstacles to our economic independence”. It blames its latest switch chiefly on turmoil in the euro zone.
Fidesz, Mr Orban’s party, can justly claim to have inherited a mess from its Socialist predecessor. It has cut the deficit, not least by sequestering €10 billion ($13.5 billion) that Hungarians held in the private pillar of the state pension fund. It has imposed windfall taxes on the mainly foreign-owned banks and forced them to renegotiate the Swiss franc loans that many Hungarians unwisely took out over the past decade. That has brought a sharp rebuke from the European Central Bank.

At best this record counts as stabilisation. But growth is measly, below even the 1.5% the government forecast. Poland is faring far better (see article). Business spirits are low and the black economy untamed (a decision this week to raise value-added tax to a stonking 27% will not help).

Yet on a recent visit to London Mr Orban was in robust mood. He blames many of the country’s economic woes on the mistrust created by past misgovernment. He wants a radical break with the cartels, sleaze and weak institutions of the post-communist era. A flat tax that started last January underlined the change, he says. He has high hopes for the economic benefits of a calmer relationship with Russia, and of investment from China. “The wind blows from the east,” he says.

At least in the short term, time and events are not on Mr Orban’s side. When Hungary hit the rocks in 2008, the outside world was quick to help with a $20 billion package, fearing contagion to other wobbly ex-communist countries. Now the picture is different. With most ex-communist members of the European Union in better shape than old members in the south, the east European label is looking meaningless. Two of Hungary’s neighbours—Slovenia and Slovakia—are in the euro. Poland is the unquestioned diplomatic and economic heavyweight. Mr Orban looks like an oddball, and his country is now a lower priority, at a time when lenders have more urgent calls on their time and money.

Perhaps his biggest problem is on the domestic front. After arriving in office with a thumping mandate, Mr Orban has frittered away time and energy on peripheral issues, such as a new media law detested by believers in free speech. His government’s bunker-like mentality has damaged communication with voters. Having loudly proclaimed independence from the outside world, concessions to pressure now look like failure. His opponents are gloating, his supporters seething.