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Hungarian report Hungarian report
by Euro Reporter
2011-07-26 10:09:25
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Rate unchanged as debt turmoil roils currency

Hungarian policy makers will probably leave the benchmark interest rate unchanged for a sixth month as the sovereign debt crisis weakens the forint and increases the country's credit risk. The Magyar Nemzeti Bank will keep the two-week deposit rate at 6 percent today, according to all 21 economists surveyed by Bloomberg. The decision will be announced at 2 p.m. in Budapest, with central bank President Andras Simor commenting at 3 p.m.

The forint fell to a record low against the Swiss franc, in which most Hungarian mortgages are denominated, last week as the U.S. and Europe struggled to resolve to their debt crises. Policy makers are likely to forego a rate cut to avoid fuelling the currency's decline and increasing costs for local borrowers, even though economic growth and inflation are slowing. "The growth outlook could warrant a rate cut but the central bank is very sensitive to credit risk," BNP Paribas SA economists led by Bartosz Pawlowski in London wrote in a report yesterday. "The recent spike in credit-default swaps" and the "franc-forint spikes essentially rule out such a possibility."

The forint weakened 7 percent against the Swiss franc in July, dropping as low as 238.5 per franc on July 18. It traded at 233.6 at 3:37 p.m. yesterday. OTP Bank Nyrt., Hungary's largest lender, fell 7.5 percent this month. Five-year credit- default swaps, used to protect against non-payment or speculate on a borrowers' creditworthiness, traded at 293 basis points yesterday, and compared with a 2011 low of 239 on May 4. Investors have scaled back bets on a Hungarian rate increase over the past two months. The three-month forward rate agreement traded 0.08 basis points higher than the benchmark rate yesterday, compared with 0.195 on May 26. A basis point is 0.01 percentage point.

Gloomy outlooks

In its latest survey on financial markets in the Central and Eastern European region, Erste Group and ZEW reveal that financial experts still worry about Hungary’s economic outlook. Outlook of the Hungarian economy was not perceived better in July than a month ago by financial experts, the latest Financial Market Report CEE jointly conducted by Germany’s Centre for European Economic Research (ZEW) and Erste Group shows. Only 5.5% of the questioned financial market experts said the current state of the Hungarian economy was good, and 38.9% thought it bad. Such results put Hungary to the top of the list of the worst economies in the region, the study claims.

Investors’ sentiment about the outlook on performance of the Hungarian Stock Exchange deteriorated again in July. While more than 61% of financial market experts queried in the survey said in June that they expected an increase in the index of the Budapest Stock Exchange in six month time, only 46.9% of them said the same in July. In the meantime, the proportion of those expecting lower BUX index went up to 25.6% in July, from 19.4% in June. Thus the bull/bear quotient – which shows how the number of those think the BUX will go up relates to the group believes it will decrease – fell to 1.8 from its earlier 3.15 rate.

According to daily Napi Gazdaság, which reports on the survey, the quotient has not been this low since January. Back then, anticipation preceding the announcement of the Széll Kálmán Plan and the renationalization of private pension funds worried investors, the daily wrote. An increasing number of surveyed financial experts think that the Hungarian currency will gain momentum versus the euro during the course of the next six months. More than 36% of respondents anticipate a stronger forint – representing an 8.1% increase from last month. Meanwhile, the percentage of those awaiting a weaker forint course also grew on a monthly basis, to 25% from 19.4%. Only 38.9% of financial experts - down from 52.8% in June – think that there will be no change in the exchange rate of the forint.


Bonds gain on W Europe debt crises

In addition to funds transferred from private pension funds to the state pension system, strict fiscal policy is expected to help reduce Hungary's government debt by a further 1 to 1.5 percentage points in 2011, László András Borbély said in public radio station Kossuth this morning. Commenting on the success of the latest debt auctions, Borbély, a Deputy CEO at Hungary's State Debt Management Agency (ÁKK), noted that bond purchases by foreign investors played a major role in the good results, with the total value of foreign-held bonds up HUF 66 billion within the same day. According to Borbély, investment in Hungarian securities is motivated by concern over government debt in Portugal and Spain which has prompted investors to consider Hungarian bonds instead.

Borbély attributed the enduring confidence of foreign investors to the government's Kálmán Széll Programme and the Convergence Programme, which in his opinion have helped maintain faith in Hungary's economic outlook and dent financing ability. However a "major breakthrough" may not ensue until the 2012 Budget Act is submitted to Parliament which will clearly demonstrate the government's serious commitment to a tight fiscal policy, Borbély said.

Each of the private pension funds active in Hungary has met the 20th July deadline; payment of yields to members who have opted out of private funds is underway according to plan. The first such payments were made on 12th July and the process is expected to be complete by 18th August.  A nationwide civil initiative to reduce Hungary's government debt has received about HUF 60 million so far, of which HUF 10 million was donated over the past 4 weeks, according to Borbély. The ÁKK Deputy CEO is expecting a surge in pledges in the coming months as the organizers will be soon launching a road show to promote contributions.

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