January BOP fundamentals do not support the forint's existing strength

HUNGARY - In Brief 19 Mar 2019 by Istvan Racz

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The forint has continued to strengthen against the euro recently, up by 2.5% between end-2018 and today's MNB fixing. Obviously, this started with the MNB's verbal intervention on January 16, and has been maintained since then by the expectation of an eventual policy tightening by the central bank.Given this strength of the currency, it is important for investors to know and keep in mind that the forint's appreciation is not at all supported by BOP fundamentals. On the contrary, it is taking place in the face of deteriorating BOP balances. Or at least this is what the January figures suggest.According to the latter, in January 2019 Hungary had a net financing deficit of 8.4% of GDP (EUR 931m), marking a sharp turnaround from a surplus of 5.1% of GDP (EUR 528m) in the same month of 2018. On the details: the services surplus and the income deficit (the latter excluding net EU transfers) both remained stable, roughly compensating each other in both Januaries (in 2018 and this year as well). However, merchandise trade swung into a deficit of 1.5% of GDP from a surplus of 2.2%. Hungary's surplus on net EU transfers fell to just 2% of GDP this January, from no less than 9.6% in January 2018. The former was due to domestic demand running faster than supply (a phenomenon well known from 2017-2018), whereas the the latter was in part due to the fact that this January, the government had to account for various penalties, as the cost of the large cash payments by the EU in late 2018.The result of all this was a current account deficit of 1.4% of GDP in January this year, against a surplus of 5.5% one year ago. Adding in net capital transfers, mainly from the EU, the external inco...