Hungary Developments Are Worrisome

by Win Thin

Hungary is perhaps taking a more obvious approach to influencing monetary policy than Brazil, as ruling Fidesz party has reportedly submitted an amendment to the Central Bank Act that would give the cabinet sole control of appointments to the central bank Monetary Policy Council.  Currently, the central bank president and the government split the appointments evenly.  This would help prevent the government from stacking the 7-member MPC with friendly members, but that is exactly what Fidesz wants to do.  The terms of 4 MPC expire on March 1, and under the current law, replacements would be split between central bank chief Simor and the government.  Proposal would allow the government to appoint all 4 and would simply complete the process started back in 2005, when then-Prime Minister Gyurcsany first wrested control of some of the MPC appointments from the central bank.  

Fidesz is also making some questionable moves on the fiscal side, as it is seeking deep cuts in the funding of the independent Fiscal Council.  The budget watchdog has criticized the government’s budget plans and has noted that fiscal transparency has deteriorated under Fidesz.  We remain skeptical of the government’s budget plans, especially after it allowed the IMF program to expire without a replacement.  We think markets have gotten too sanguine about policy risks in Hungary and believe that the forint will be amongst the hardest hit if the deeper EM correction continues to unfold.  The 270 area is likely to provide a strong floor for EUR/HUF for now, and we favor a move higher near-term to 279 and then 282 (retracement levels from the September-October drop).  In regional plays, we would go long TRY or PLN vs. HUF as well.