Month: May 2012

Hungary’s Stimulus Crashing Corners Orban Before Bailout Talks

May 30, 2012


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Hungarian Premier Viktor Orban’s
negotiating hand going into bailout talks with the International
Monetary Fund has been weakened after the economy slumped the
most in three years, said economists from London to Budapest.

Hungary is headed toward joining the Czech Republic and
Romania among eastern European countries in recession as the
euro region’s debt crisis saps demand for their exports. That
adds to pressure on Orban to obtain aid from the IMF and limits
his ability to protect the flat personal income tax, a
cornerstone of his economic policy, said Neil Shearing, chief
emerging markets economist at Capital Economics in London.

“As long as the economy isn’t growing, the government’s
room to maneuver in IMF negotiations is limited,” Shearing said
by phone yesterday. “One of the red lines the government has
drawn is that it’s not willing to debate the flat income tax,
while the IMF has been fairly critical. Keeping the tax risks
becoming self-defeating, creating a vicious cycle that’s
difficult to break out of.”

The country, seeking a date to start aid negotiations six
months after requesting financial assistance, is on the brink of
its second recession in three years even after the government
touted a “hidden” $5.3 billion stimulus package, according to
data released yesterday.

Forint, Bonds, CDS

The forint fell 0.5 percent to 295.07 per euro at 10:22
am in Budapest, its weakest in in three weeks, as Greek
political parties failed to form a government and will hold new
elections that may decide whether the country will be the first
euro-area member to drop the common currency.

Hungary’s benchmark 10-year bonds dropped, raising yields
to 8.49 percent, the highest since April 24, from 8.36 percent
yesterday. Credit-default swaps, measuring the cost to insure
government debt against default, rose to 566.024 basis points
from 559.167 yesterday, according to data compiled by Bloomberg.

Gross domestic product plunged 1.3 percent in the three
months to March from the fourth quarter, the most among the 19
European Union members that reported output data through
yesterday. That followed economic stagnation in the October-
December period.

The flat personal income tax cut budget revenue and drove
Orban to squeeze companies for cash to close budget holes. The
government approved taxes on banking, energy, telecommunications
and insurance companies last week to allay EU concern that its
budget was unsustainable and to unfreeze grants from the bloc.

Bailout Talks

The European Commission last month authorized the start of
bailout talks after Orban pledged to change a central bank
regulation to ensure monetary-policy independence. With
parliament still debating the changes, the IMF hasn’t given a
date for talks, which the government requested in November as
the country’s credit grade was cut to junk, the forint fell to a
record low against the euro and debt auctions failed.

Prospects of a bailout boosted the forint 6 percent against
the euro this year, the sixth-biggest increase in the world,
after a 16 percent drop in the second half of 2011.

In a country report published in January, the IMF said it
was “concerned about the underlying composition of fiscal
policy,” citing a “highly regressive mix” of tax and spending
policies. It recommended Hungary “revisit” the levy on
personal incomes.

Minimum Wage

The Cabinet raised the minimum wage by 18 percent this year
and urged private companies to compensate lower-income earners
who saw their pay cut by the flat tax, hurting competitiveness
at a time when the jobless rate is at a two-year high.

Mihaly Varga, a former finance minister who is currently
Orban’s chief of staff, will replace Tamas Fellegi as the
minister in charge of IMF negotiations. The change shows the
government’s focus on obtaining the bailout, said Luis Costa, a
London-based strategist at Citigroup Inc. (C)

“Varga is probably one of the last credible men in the
government and so should give some impetus to the
negotiations,” Costa said in an e-mail. “We also think that he
has a mandate from Orban to move on some aspects of the talks,
whereas his predecessor Fellegi did not.”

The 16 percent personal income tax introduced in 2011
failed to raise household spending last year after cutting the
burden for higher earners. To bolster state coffers, the
government nationalized private-pension fund savings and levied
special taxes on financial, energy, telecommunication and retail

Budget Deficit

The measures masked the deterioration of the budget, with
the shortfall reaching 5.25 percent of GDP last year without
one-time revenue, the European Commission said in a May 11
report. It prompted the EU executive to partially suspend
development grants to Hungary from 2013 to enforce fiscal
discipline as Greece teetering on the edge of default triggered
investor concern about contagion to the rest of the euro area.

“While others gave in to temptation, we resisted and
rejected austerity, which led the European Commission to charge
that we ruined our structural balance by carrying out a 1.2
trillion-forint hidden economic stimulus last year,” Matolcsy
said on May 9. “That led to a 6 percent increase in real wages,
maintaining growth and boosting the employment rate in a very
tough external environment. We are expecting the same for 2012
and 2013.”

The economy shrank in the third quarter of 2011 from the
previous three months and stagnated in October-December,
according to revised data published by the statistics office
yesterday. The unemployment rate was 11.7 percent in the January
to March period, the highest in two years.

‘International Trends’

The euro region’s crisis is hurting economies across
eastern Europe, even as Germany, Europe’s largest economy,
expanded 0.5 percent in the first quarter. Czech GDP dropped 1
percent that period, the third consecutive decline. Romania
slipped into its second recession in four years after its
economy declined 0.1 percent.

Hungary’s slump was “led by international trends” that
“clearly show that Europe is still facing serious growth
challenges,” the prime minister’s office said yesterday in a

A dearth of lending is exacerbating Hungary’s woes, with
the central bank warning last month of a “severe” credit
crunch as commercial banks curb lending after paying special
taxes and being forced to take losses on foreign-currency
mortgages last year.

‘Negative Turning Point’

OTP Bank Nyrt. (OTP), Hungary’s largest lender, yesterday
reported that first-quarter net income plunged 66 percent to
12.8 billion forint because of a bank tax and losses on a
foreign-currency loan repayment plan.

“We are witnessing a negative turning point,” the GKI
research institute in Budapest wrote in a report yesterday.
“The data suggest that the contraction can’t be explained by
the external environment alone and that domestic demand and the
economic policy behind that had a key role.”

Hungary’s economy will contract 0.3 percent this year,
according to the European Commission, while Nomura International
Plc forecast yesterday that GDP will decline 1.3 percent in 2012
and grow 0.3 percent in 2013.

A shrinking economy will make it more challenging for
Hungary to meet its budget-deficit targets of 2.5 percent of GDP
this year and 2.2 percent in 2013. The tax changes announced
last week will probably hurt the economy, Ferenc Karvalits, a
central bank vice president, said in e-mailed answers to
questions from Bloomberg News.

“The impact of this sharply lower growth view is
particularly pronounced on the fiscal outlook,” Peter Attard Montalto, an economist with Nomura in London, said in e-mailed
comments. “In Hungary it erases many of the gains made by the
convergence report and means a deficit of around 4 percent of
GDP for this year is most likely.”

To contact the reporter on this story:
Zoltan Simon in Budapest at

To contact the editor responsible for this story:
Balazs Penz at

GBPUSD: Trading The Bank Of England Inflation Report

May 20, 2012


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Trading the
News: Bank of England


Time of release:
0 GMT,
0 E

Primary Pair Impact:



DailyFX Forecast:

Why Is This Event

There’s speculation that the Bank of
England will curb its growth forecast as the UK faces a
double-dip recession, but the central bank may sound more hawkish
this time around as the stickiness in price growth raises the
risk for inflation. As BoE officials see the economy getting on a
more sustainable path in the second-half of the year, we should
see the group move away from its easing cycle, and the Monetary
Policy Committee may start to lay out a tentative exit strategy
as the board no longer sees a risk of undershooting the 2% target
for inflation. In turn, we will stick with our bullish outlook
for the GBPUSD, and the upward trending channel in the
pound-dollar should continue to take shape as gets ready to shift

Recent Economic


RIM to offer free device, monetary incentive to developers

May 20, 2012


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Canadians need to stop being willfully deaf about Research in Motions successes and rally behind the homegrown technology, a RIM executive told a group of Ottawas mobile developers on Monday.

Topics :
BlackBerry 10 Dev Alpha , Nortel , Canada , Toronto , Ottawa

The Global Monetary Policy of “Three Sheets to the Wind”

May 18, 2012


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Sell first and ask questions later. That was the global investment strategy overnight. Whether it was JP Morgans $2 billion loss, Greeces possible exit from the euro, or Greece of America Californias $16 billion budget deficit, investors found plenty of reasons to sell everything. US dollar cash and US Treasuries rallied.

How soon could Greece exit the euro? Well, it may not be that easy. Remember, back in February we made the argument that Europes powers that be had to prevent a Greek bond default. They couldnt allow a precedent to be set.

If it was okay for Greece to default, then why not Spain? Why not Italy? Confidence in Europes entire government bond market would be blown to smithereens, taking the banking system (capitalised by government debt) with it. The European Central Bank (ECB) would be collateral damage.

Mind you, no one in Europes establishment likes to mention Iceland. Theres probably a reason for that. It might give the Greeks ideas. In 2008, Icelands three largest banks owed foreign creditors more money combined than the size of Icelands economy. The government couldnt guarantee the banks debts. So it didnt.

The government DID assume the banks domestic obligations. But it told the foreign creditors to get lost. It defaulted. The currency fell by about 80% against the euro. The default and devaluation put Iceland back in a trade surplus a few years later and earlier this year ratings agency Fitch upgraded the credit rating on Icelandic government debt.

Now, you may be thinking that stiffing your creditor is a less-than-honourable decision. But it was done democratically. Iceland put the question of default to its people and 90% of the people chose default. They put the credit risk right back on the lender, which seems appropriate considering the borrowers were not the people but the banks. The people refused to accept the debt burden taken on by the banks. And the creditors? Too bad for them.

Greece has taken the other path. The politicians thus far have rejected what the people want. Greek politicians are taking their marching orders from Brussels, Berlin, and Paris. The debts of the private sector are now the debts of the people. Maybe this explains why the Greeks are currently unable to form a government. According to some sources, that government may have less than EUR2 billion cash.

Of course the main difference between Iceland and Greece is that Iceland had its own currency. The default was coupled by the devaluation. Thats what made the debt go away. It caused a short, sharp, painful recession. And in GDP terms, the economy is much smaller today than it was in 2008. But the debt was liquidated. Thats the important part. It hasnt been preserved as a perpetual burden on taxpayers in order to satisfy creditors (the private banks).

The Greeks cant devalue until they exit the euro, and the Europeans dont want the Greeks to exit just yet. If the Greeks repudiate their foreign creditors, it means they repudiate the debts they owe to French, German, and other European banks. Theres no telling what would happen then.

Some people are already speculating that a massive ECB money-printing binge – on the order of hundreds of billions of Euros – would ensue. The intent would be to insulate the rest of Europe from a Greek euro exit. But an unintended consequence would be a devaluation of the euro…back to parity with the US dollar!

Now that would be a shocker. But then, we are in a kind of race to the bottom when it comes to currency values. Every country wants a cheap currency to boost exports. Exports lead to growth. Growth is better than austerity. But obviously, not everyone can have the cheapest currency. If Europe devalues…you can expect QE3 from the Fed soon. Heck, maybe even the Chinese will devalue as well. And the RBA may cut rates again sooner than anyone expected.

You can see the absurdity of the current monetary system in this series of tit-for-tat monetary expansions. The race to the bottom in the competitive currency devaluation has lowered global interest rates. In the early stages, lower rates led to more borrowing – the credit boom. The biggest beneficiaries have probably been countries like Australia and Brazil. You got combined commodity inflation and demand for risk assets like commodity currencies and resource stocks.

Around the middle of the race, you saw the expansion of government deficits. You can thank the Federal Reserve for this. The best example of this is the decline in 10-year US Treasury yields since 2007. You can see below the 10-year yield is once again near all-time lows. This has been a boon for US mortgage rates and, of course, for the US government, whose borrowing costs have gone down as its deficits have blown out.

Inflation Anxiety Persists

May 16, 2012


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As rising food and oil prices drive inflation up, BOU expert cries for oil

Bank of Uganda expects no good inflation news anytime soon. Its experts are worried that in the months ahead food prices will continue to go up and global oil prices will remain unstable, forcing up all other costs in the economy, and forcing inflation to rise.

This is the reason why BOU has chosen to maintain a tight monetary policy, holding the Central Bank Rate (CBR) at 21 percent for the third consecutive month, despite public clamours for a reduction.

Bank of Uganda expects to reduce the central bank rate later in 2012, once the risks to the inflation outlook have receded, BOU Governor Emmanuel Tumusiime Mutebile said on May 2, while announcing the monetary policy statement for April.

Concerns of supply shocks which could cause oil prices to surge higher remain elevated, Mutebile said. Therefore developments in oil prices remain a big factor in BOUs efforts to curb further inflation pressures.

Oil has a pervasive influence on Ugandas inflation because it imports the effects of international shocks, distributing them through the economy via transport and energy costs.

Ugandas oil import bill has more than doubled over the past few months to US$ 90 million, from about US$ 40 million.

Desperate for a reprieve, Central Bank officials are impatient that the delay in exploiting Ugandas own oil had undermined a golden opportunity to use locally produced product to reduce the import bill, stabilise inflation and stimulate economic growth which is currently below its potential of 8%, at a mere 4%.

Every journalist is writing about inflation and pointing at food prices, exchange rate and oil prices, BOUs executive director Research Adam Mugume said at a monthly press briefing at Bank of Ugandas head office on May 2. But no one is writing that Uganda now needs its oil from Bunyoro so that it can reduce its high expenditure on imported oil.

It is unfortunate that we cannot do much about it, Mugume said of Ugandas oil exploitation programme, only expected to reach full scale production in 2016.

BOU is equally helpless in tackling the other major driver of inflation – food prices – whose volatility the governor said was threatening monetary policy.

Food prices could rise further between May, June and July 2012 and that means we have to tighten [monetary policy] further, Mutebile said.

Food crop inflation averaged 7.2% in the last three months compared to a minus 2.9% fall in the three months up to January 2012. In January, food inflation stood at 13.5%, jumped to 21.4% in February, reduced to 10.1% in March and slowed to 9.1% in April. In the months ahead, it is expected to rise and feed into core inflation, pumping up headline inflation.

And this has spilled over into core inflation, Mutebile said.

Mugume also appeared to be worried. Rising food prices will reduce the speed at which inflation will fall in the coming months, he said. That is why the governor is not easing monetary policy now.

For business people whose expectation of interest rate reductions seems increasingly futile, this is bad news. But analysts say it was necessary and not unexpected.

No choice

We have no choice, Laurence Bategeka, acting principal and Research Fellow at Makerere Universitys Economic Policy Research Centre, told The Independent. External shocks will always be there and if you dont prepare for them, they will feed into the price system and exert pressure on general price levels.

Bategeka agreed with the prediction that in the months ahead food supply will fall, which will cause food prices to soar.

Even now it is supposed to be the rain season but we do not have much rain. That means our harvests may not be good at the end of the day, he said. We need to rely on the central banks monetary policy at whatever cost.

The economist urged government to invest in agriculture, transport and industry, so as to increase the volume of Ugandas exports and improve the balance of payments …so that what we are facing now may not again affect us in future.

Bategeka however warned the central bank against investing its expectations for monetary stability in locally produced oil, which he said was a double-edged sword as its outcome would depend on how revenue was spent, an issue BOU has no control over. Public discussions of the countrys future oil fortune have been replete with the term resource curse, driven by the fear that poor management of oil revenues and corruption in the sector could foster high levels of poverty and inequality and undermine other sectors of the economy.

My fear is when such money comes there is always much appetite for spending it on unproductive ventures, which also causes inflation, he said. So even if we got that money it is not automatic that it will help.

Not hawkish

Razia Khan, the Africa head of research at Standard Chartered Bank, said in a statement to The Independent on May 2 that BOUs CBR decision was not a big surprise to the market, in view of the 5.5% rise in food prices reported by the Uganda Bureau of Statistics consumer price index (CPI) for April.

The Governors statement on oil prices remaining a risk- factor, and that non-food inflation remains very sticky … is not an entirely hawkish statement, Khan said.

Our own view at Standard Chartered is that the CPI will continue to decelerate gradually to 16% year-on-year until September 2012, when the base effect should push it to single digits once again, Khan told The Independent.

With the policy rate currently at 21%, there will still be plenty of scope for interest rate easing once BOU is more comfortable with its assessment of the risks.

Khan also expressed worry about the exchange rate and said it will continue to be a key determinant of policy decisions in the future.

According to Bank of Uganda, the exchange rate remained relatively stable during April, depreciating by only 0.85% over the month to Shs 2,506 per US dollar from Shs 2,485 in April and March respectively, but compared to April last year, quite significantly by 5.9%.

The shillings marginal depreciation was attributed to low corporate demand mainly from the oil, manufacturing and telecommunication sectors and from banks covering short dollar positions.

Bategeka argues, like Bank of Uganda, that export growth in the recent past has in part supported the exchange rate, but this is about to end. In its April 2012 monetary policy report, BOU says that export growth for coffee had started to decline in expectation of a large harvest in Brazil.

BOU is worried that in the months ahead, export growth for most goods and services will be subdued, reflecting a combination of weak external demand, fall-out from the Sudan conflict which is Ugandas largest export market, and declining coffee prices. The shilling will weaken further.

The youth factor

Bategeka on the other hand blames government for failing to mobilise strong institutions to guide its most valuable resource – the youth – to be productive.

Our youth wake up every morning to play cards and do sports betting instead of engaging in agriculture to increase food on the market, he said. It is high time we got our hands dirty especially now when global markets are becoming so unpredictable.

Indeed the Uganda NGO Directory seems to cement Bategekas argument. The directory indicates that 24% of Ugandas fast-growing population are young people between 18-30 years.

Every year, over 100,000 job seekers graduate from higher institutions of learning in Uganda, the majority aged 23-30yrs. Of these, more than 83 percent are unemployed, ranking Uganda second only to Niger among countries with the highest unemployment rates in the world.

If this number were deployed in production, especially of food etc, Mutebile would have a better chance of seeing prices stabilise and bringing inflation under control.

Health care reform: good for business

May 14, 2012


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Last week, theUS Supreme Courtheard six hours of oral arguments for and against the constitutionality of the new health care law. As a small business owner, I am not a constitutional scholar, but I can definitively say this: the Affordable Care Act is cutting my health care costs and helping my business.

My wife and I run an auto repair shop in Columbia. We started as a small, family-business in 1978. Now, were a well-respected business with 19 employees, a long string of awards and a reputation for service.

One of the biggest barriers to growing a successful business has been the rising cost of health insurance. Were committed to offering insurance coverage, but over the past 10 years it has become a real struggle to keep up with the costs.