“I am sarcastically bullish on Hungary”

Benoit AnneOne of the most recognized financial observers of Hungary suggests a more market-friendly and bank-friendly policy framework after the elections.
Benoit Anne, the leading strategist of the large French bank Société Générale, says in his interview to alapblog.hu that the forint will depreciate against the euro (reaching Ft/€ 320) until the elections and will stabilize around 310 later. This level would suit both the government and the foreign investors.

Nevertheless, the interviewee expresses concern about the lack of domestic or foreign investments in the country that would stimulate economic growth. Even a deteriorating balance of payments would not matter if this contributed to growth. In support of this argument, he relies on the example of the large current account deficit of Poland. Although Hungary has a current account surplus, the credibility in the Polish government bonds is much higher than that for the Hungarian ones. The interview was carried out at the Portfolio.hu Conference in Budapest.

Zentai Péter: Do you agree with the foreign analysts who claim that Hungary has been a “safe haven” of the financial markets in the last twelve months; however, this is coming to an end?

Benoit Anne: What happened in the last year in Hungary was just a matter of luck. The crisis in the monetary market, the currency market turbulence was triggered by the tapering policy of the United States. Its primary indirect victims were the countries outside Europe and their currencies. The European Central Bank, however, did not copy the American changes in the monetary policy. As Hungary and Poland are part of the EU block, they are correlated to what the ECB signals, which was working as a shield for them. Compared to the previous, sovereign debt crisis, Hungary did not really get into trouble this time. That is why the impression is created that Hungary is a safe haven. The fact of the matter is that Hungary had luck.

Then not just Hungary but Poland and all of the Member States in Central and Eastern Europe had luck…

If you look at the economic and financial fundamentals, I would favor Poland over Hungary. Romania is also improving dramatically. However, there are a lot of question marks about Hungary. The current situation is less important than what is being expected in the financial sector and the economy.  In Hungary, we should study the post-election situation: whether the credibility of the policy framework will change or will remain as unpredictable as it is now, letting the world view of Hungary worsen.

What steps should be taken?

The investment climate should be improved. Unless this happens, it will just further deteriorate. The signals towards the investment climate remain fairly poor here.

But this is not only true for Hungary. Even in Germany, few investments are made.

The investment performance is low both in Germany and elsewhere but the climate is good. Elsewhere, local and foreign investors are not worried about the political environment.

Is it not the case that the current government wants the local investors – who were put to disadvantage to historical reasons – to benefit, which obviously, can only be realized at the expense of the foreign investors?

I can understand that. But it should not start with the local investor base. Due to the distortions of market mechanisms in the financial sector and the fear around loans, the banking system is weak and there are no domestic investments. The economic players – whether Hungarian or foreign ones – are not able to establish a predictable, non-political relationship with the financial institutions in the long term.

So, in contrast to the neighboring countries, Hungary’s local investment climate does not facilitate the revival of the economy.

Why do you not appreciate the fact that after a long time Hungary has achieved a quite stable, positive balance of payments?

Today, the most important thing is to stimulate economic growth which might involve large input of capital goods. A negative balance of payment does not matter if there is strong growth. Why are we ignoring then the fact that Poland has a large current account deficit? And yet, the yield on Polish government bonds is much lower than that of Hungarian ones. If the actual balance of payment was the crucial factor, this would be the other way around.

What are the prospects of the Hungarian forint? What are your expectations about the post-election era – in economic, financial terms?

Taking into account the recent uncertainties, I have to say that I am sarcastically bullish about Hungary.  After the elections, I am good to anticipate a more market-friendly behavior of the new government, which will make foreign investors more optimistic about the country.

I predict that the forint will weaken first (the euro will go up to 320 forint), strengthen after and stabilize around 310.