Hungary's forint posted the biggest decline in two weeks against the euro amid concern the country's budget deficit will widen as the government increases spending.
Prime Minister Ferenc Gyurcsány raised taxes and utility bills in August and September to trim the biggest budget deficit in the European Union, driving up consumer prices. The currency reached an eight month-high yesterday as the central bank kept its benchmark interest rate unchanged at 8%, the highest in the European Union. „Hungary has fundamental economic problems, such as an excessive current account deficit,” said Lars Christensen, an emerging market strategist at Danske Bank S/A in Copenhagen. „The forint has been doing tremendously well recently and I think these gains are hard to justify.”
Against the euro, the forint fell to 257.94 at 5 p.m. in Budapest, from 257.04 on Tuesday. It may decline to 270 by year-end, Christensen said. Hungary's government has missed its deficit targets every year since 2001, partly because of overspending. The Finance Ministry said November 16 it expects its budget deficit to reach Ft 230.4 billion (€854.7 million) in November. The ministry forecasts a deficit of Ft 2.06 trillion for the full year. It maintained its deficit goal of 10.1% GDP for 2006.
Hungary's plan for adopting the euro, submitted to the European Commission September 1, forecasts the deficit by EU standards to drop to 3.2% of GDP by 2009. Hungary's central bank said earlier this week that it expects the current account gap, the broadest measure of money flowing in and out of a country, to decline to 5.5% of GDP in 2007, from an estimated 7.9% this year. Hungary's inflation rate, the highest in the European Union, rose to a two-year high of 6.3% in October because of increases in energy prices, clothing costs and a higher value-added tax rate.
Inflation in Hungary has almost tripled in the past six months, exerting further pressure on the central bank to raise rates for a sixth time since June. The main task is to prevent an economic slowdown coinciding with accelerating inflation, said central bank president Zsigmond Járai in Budapest yesterday. The bank maintains its target for annual inflation at between 2% and 4%, he said. (Bloomberg)