Bloomberg News

Forint Drops to two-Week Low as Premier Orban Cuts GDP Estimate

December 12, 2011

Dec. 12 (Bloomberg) -- The forint fell to a two-week low and Hungarian bonds weakened after Prime Minister Viktor Orban said the 2012 budget needed adjusting based on a slower economic growth forecast and a weaker currency than previously estimated.

The forint fell 1.6 percent to 306.9 per euro, the weakest on a closing basis since Nov. 29. The country’s benchmark 10- year bonds retreated, lifting the yield 20 basis points to 8.93 percent. The benchmark BUX index of shares rose 0.5 percent to 17,121.96 by the close in Budapest.

The Cabinet, which earlier based the draft budget on the expectation that gross domestic product would expand 1.5 percent next year, now forecasts “at most” growth of 0.5 percent because of lower export demand from the euro area, Orban said in an interview with state-run television channel M1, broadcast yesterday.

“The forint started the day by another substantial weakening,” Gergely Tardos, head of research at OTP Bank Nyrt., Hungary’s biggest lender, and colleagues, wrote in a research report today. “A probable reason for the depreciation is that Prime Minister Viktor Orban acknowledged at the weekend that the growth and foreign exchange forecasts used in the budget planning seem outdated.”

The original budget draft, targeting a deficit of 2.5 percent of GDP, was based on an average forint exchange rate of 268 per euro next year, with alternative scenarios based on rates of 280 and 300. The new draft must assume a “significantly” weaker forint rate, Orban said.

Safety Net

Hungary last month lost its investment-grade credit rating at Moody’s Investors Service after it sought assistance from the International Monetary Fund and European Union. Orban reversed his policy of shunning foreign aid after the forint fell to its weakest against the euro on Nov. 14 and the government struggled to raise planned amounts at debt auctions.

The government, which will start negotiations with the IMF and the EU this week, may be targeting a safety net of as much as 15 billion euros ($20 billion), Citigroup Inc. said in a research note dated Dec. 9, citing unidentified government officials.

“If there is fast cooperation between the two sides in the negotiations, and that is coupled with a relatively positive sentiment globally, then the forint may stay below 300 per euro for longer,” Peter Karsai, a Budapest-based trader at Commerzbank AG, and colleagues wrote in an e-mail to clients today.

The cost of insuring Hungary’s debt with credit-default swaps rose to 588 basis points from 575 basis points on Dec. 9, according to data-provider CMA.

European stocks retreated as Moody’s said it will review the credit ratings of all countries in the region following last week’s summit in Brussels.

Hungary won’t rush to sign the fiscal accord agreed to by euro-area leaders, and it will be guided by national interest as it deliberates on the matter, Orban said.

--With assistance from Zoltan Simon in Budapest. Editors: Ash Kumar, Peter Branton

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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