By Sandor Peto
BUDAPEST, Jan 19 (Reuters) - Faced with a sharp slowdown in
exports and entry to the euro sooner or later, the European
Union's eastern bloc look unlikely to be worried by a steady
slide for their currencies this year.
Indeed, all signs are that the free-floating regimes
governing the forint, zloty and Czech crown may be the best
defence their respective governments have against a deepening
recession in the euro zone, mobilising cheaper exports and
import substitution to keep their economies working.
There are big risks to such a strategy, including stoking
inflation, letting depreciation run out of control and making it
harder for companies and households to manage foreign currency
loans.
However, weaker currencies could be a boon if the
authorities can avoid such pitfalls while ensuring competitive
levels for eventual entry to the EU's Exchange Rate Mechanism,
the test bed for readiness to adopt the euro <EUR=>.
Poland's zloty <EURPLN=> shed 29 percent to the euro in the
last five months of 2008, while Romania's leu <EURRON=>
Hungary's forint <EURHUF=> and the Czech crown <EURCZK=> lost
12-14 percent. The losses have deepened already this year.
A year ago, when prices were soaring, currency falls of this
size would have scared policymakers and increased the risk that
these economies would fail the inflation test for euro entry.
But falling global food and energy prices have defused that
threat and central banks have switched to cutting interest rates
to prop up growth.
"Weaker currencies cannot help the economy in the short
term. But in about six months, if the weaker levels remain, they
can," said Zsolt Kondrat, analyst at MKB in Budapest.
"If these weaker levels prevail, that will be a palpable
help to exports," he added.
HIGHER REVENUES, CHEAPER CREDIT
Even in Hungary, where forint levels around 280 to the euro
were regarded as a sign of trouble in the past, central bank
Governor Andras Simor said a weaker forint would not threaten
the inflation target, though he said the bank did not want to
see excessive volatility and rapid currency falls.
"I think the inflation target could even be achieved with a
forint at 286 (versus the euro) which was the weakest the forint
got to during the last three months," Simor told Reuters earlier
this month.
The region's currencies are expected to weaken and remain
volatile in a fragile global investment climate.
"To some extent this will be a part of monetary policy as
central banks try to get the currencies to weaken," said Nora
Szentivanyi, analyst at JPMorgan.
"Economic growth will become the top priority, especially in
countries where fiscal policy is determined by IMF programmes
and economic stimulus can come from monetary policy (rather than
from fiscal measures)," she said.
Peter Reichert, production and development manager of the
Hungarian unit of German automotive supplier Knorr-Bremse, says
the weaker forint helps his company weather the storm.
"The weaker forint is indirectly good for us as we generate
all our revenues in euro while we pay our staff in the local
currency," Reichert told Reuters.
Recent industrial output figures showed deep falls that give
central banks another reason to tolerate weaker currencies.
"The Czech crown can weaken further, trade deficits are
coming back again after a long time," said Zsolt Papp at KBC.
The Czech and Polish central bank are also expected to cut
rates further to foster growth as inflation slows.
Official rate cuts should make local credit cheaper and this
could also prop up consumer demand, said Gyula Dora, CEO of
Hungarian biscuit producer and retailer Salgo Coop Zrt, which
plans to lay off 10 percent of its 300 workers to cut costs.
"A decline in interest rates would help, because deposit
rates will not be as high as now and if credit rates go lower,
too, people will buy more," Dora said.
FX BORROWERS AT RISK
Analysts said currency weakness would make central bankers'
hands tremble only at levels beyond which households could
default on foreign currency loans, which have been popular in
Hungary, Poland and Romania in recent years.
"I don't see a problem with a forint exchange rate at 290,
it may even weaken slightly further... that will not threaten
meeting the inflation target," JPMorgan's Szentivanyi said.
Last year central bank stress tests showed the forint would
have to weaken substantially, beyond 300, before existing
foreign currency loans become a problem.
"The risk is that given the current volatility, nobody can
promise that it will stop at 290 when it falls," Kondrat said.
Several banks in Hungary have reduced or stopped lending
altogether in foreign currencies since October but there is a
large stock of outstanding euro and Swiss franc loans <EURCHF=>
<CHF=>.
"A durably weaker forint (than 285-290) could still cause
unease for central bankers, due to financial stability reasons,
as the proportion of FX-based loans in the portfolio of the
domestic banking system is high," said Orsolya Nyeste at Erste
Bank in Budapest.
(Reporting by Sandor Peto; Editing by Ruth Pitchford)
