Because they devalued the forint this summer, so everything is now about 7% cheaper.
Well, they didn’t actually devalue it. No. I mean, that would imply there had been a… devaluation. Ha ha, how silly. No, what happened was that the Bank of Hungary moved the band in which the forint was allowed to float freely. Whereupon the forint freely floated down from around 250/euro to more like 275/euro. So, it was a sudden fast downward change in the value of the currency caused by central bank action. Which is not a “devaluation” at all.
(The forint lost about 10% of its value in a month; you can see the graphic here. It has since clawed back about a third of that loss. Still, a Euro will go about 7% further than it would in May, and about 10% further than in March.)
Nobody seems to have paid much attention, but I think there are some points of interest here.
Hungary has some underlying macroeconomic problems. It ran up big deficits and big debts under the previous Socialist government. The current government, though nominally center-right, seems unable to deal with the problem; Hungary is still running big budget deficits, and the national debt is still growing. Meanwhile, like most transition countries, Hungary imports more than it exports. Both these things combine to put downward pressure on the forint.
(For those who like details, here’s the IMF’s last report on Hungary, done just before the devaluation, in June. It’s the IMF, so bring a grain of salt, but I think it covers the high points.)
So a devaluation may not have been a bad thing. Arguably it was (1) recognizing reality, and (2) helping to inoculate the forint against a speculative attack.
Devaluations are good for exporters, since they make their goods cheaper on international markets. They’re bad for importers, for industries that depend on imports, and for consumers who buy a lot of imported stuff. Which, in a small open economy like Hungary’s, is almost everybody. Because stores are full of imported goods, the devaluation will raise prices and tend to increase inflation. Fortunately, inflation in Hungary has been very low recently, so the economy can probably take the hit. Still, people will notice a rise in prices. Devaluations make people feel poorer, which is why governments tend not to like them.
Another problem is that a lot of debt in Hungary is denominated in euros. Imagine a company that borrowed a million euros to buy equipment. It may now have to pay back 475 million forints instead of 450 million. (On a much smaller scale, the same thing may apply to individuals who’ve taken euro-denominated personal loans.) This makes devaluations potentially dangerous; if they go too far, then loans don’t get repaid, because the debtors simply can’t generate enough forints. Then banks start collapsing. Whoops, you just lost a decade of growth.
As with inflation, though, it looks like Hungary’s economy can take it. The banking system is very sound and has plenty of liquidity.
I Am Not An Economist, but it seems to me that this was probably the right move anyway. The forint was going to fall anyway; better to let it fall under controlled circumstances. And the partial rebound after the initial crash suggests that investors are not yet running away from it. And a boost to exports is always welcome; exporting industries should increase production and start picking up employees. (There are some interesting questions about when and how the export boost should communicate itself to the general economy, but let that bide.)
The “macroeconomic maneuver as medicine” metaphor is a hoary cliche. Still, it may be helpful to think of a devaluation as a prescription-only drug that comes with big yellow warning labels: “May cause inflation. Do not take if you have a weak banking system. To be administered under the care of an independent central bank only.”
Anyway. Hungary was planning to peg the forint in 2009 and join the euro in 2011. That’s still possible, but it’s looking less likely. (To oversimplify, a key question will be whether the devaluation is a supplement to fiscal restraint, or a replacement for it.) The volatility of the forint will make it harder to hit the necessary targets, and so less likely that Hungary will join at the scheduled date.
If I were a policy maker in Hungary — or, indeed, in any transition economy — I’d be asking myself if this was really a bad thing. If the devaluation has the desired effect (still an open question, to be sure), then Hungary will have successfully used a medicine that’s just not available to countries in the Eurozone. The obvious example is Italy. Italy has a public debt that’s 50% bigger in proportion to GDP than Hungary’s, and its exports are suffering from competition with China. If they weren’t on the euro, a devaluation would be an obvious way out. But they are on the euro.
This connects to P. O’Neil’s recent post about a possible economic crisis in the Balkans. I think the devaluation makes this less likely, at least in the short term. But when these countries go on the Euro, they’ll have a lot less room to maneuver.
Meanwhile, it’s a great time to visit Hungary.