Hungarian forint declines; S&P forecasts Euro adoption in 2014

Ratings

The Hungarian forint fell as Standard & Poor's said the European Union nation will probably only adopt the euro after aspiring members Romania and Bulgaria, because of its widening budget deficit. The “desolate state of public finances” in Hungary means it probably won't adopt the euro before 2014, Kai Stukenbrock, associate director at Standard & Poor's, said yesterday. The government said June 28 the deficit may exceed its revised target in 2006 and 2007 even after measures to reduce it. “You can't blame the rating agencies as Hungary has persistently missed its targets,” said Lucy Bethell, an emerging-markets strategist at Royal Bank of Scotland Group Plc in London. “People have lost confidence in the government and the central bank, which makes Hungary a pretty risky bet.” Against the euro, the forint traded at 280.45 at 11 a.m. in Budapest from 279.35 late yesterday. The currency is unlikely to strengthen to more than 275 per euro this month, said Bethell. Prime Minister Ferenc Gyurcsány's government is struggling to reduce a budget deficit that's the largest in the European Union, and is set to overshoot its target for a fifth year in a row. By S&P forecasts deficit may reach 11% of GDP this year which is almost four times the level needed to meet euro adoption rules. The ratings company cut Hungary's credit rating to BBB+ in June, the third-lowest investment grade, from A-. S&P's rating is the lowest among the EU's 10 most recent entrants, while Slovakia, at A, has the highest grade. Gyurcsány yesterday lowered his economic growth forecast for the next two years, saying the pace will be the slowest in more than a decade because of measures to cut the budget deficit. The $104 billion economy will expand about 2% next year and 3% in 2008, compared with 4.1% in 2005 and a forecast 4.3% this year, Gyurcsány said at a meeting yesterday. Next year's growth will be the slowest since 1996. The central bank raised its benchmark rate a quarter point to 6.25% in June, the first increase in 2 1/2 years, to stem a slide in the forint. Policy makers then considered raising the rate to 6.5% or leaving it unchanged, central bank President Zsigmond Járai said after the June 19 meeting. Policy makers said on July 3 they will raise the country's benchmark interest rate gradually to help the central bank reach its mid-term target for inflation in 2008 of 3 %. (Bloomberg)

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