Interest Rates: Hungarian central bank (NBH) Governor Zsigmond Járai is quoted on Wednesday as saying that "It was a bad decision...A 25 basis point hike would have signaled that we are defending the inflation goal".
The problem is, what do you do when there are very few good decisions available. Raising rates holds inflation, but raises the forint (which makes exporting difficult) and raises the cost of government borrowing (incidentally there are a hell of a lot of short term bonds changing hands at the moment).
Meantime Járai reasserts his commitment to price stability:
Hungary's central bank (NBH) has not given up its aim of price stability as it is trying to prevent that an economic slowdown comes with rising inflation, Governor Zsigmond Járai said on Wednesday.
"The following period will be an era of uncertainties with toned down growth and inflation risks. The objective of the central bank is to avoid staglflation and so it does not give up its endeavours to reach price stability, Járai told a conference.
The NBH's Monetary Council decided to keep the base rate on hold at 8.00% on Monday, after five successive monthly rate hikes of 200 basis points in total, but Járai said that an interest rate hike was still on the cards.
"If we see that the inflation target is in danger, the NBH will tighten monetary policy," Járai said.
The bank in its quarterly inflation report cut its forecast for 2008 average annual inflation to 4.1% from 4.2%, above its medium-term target for 3%, confusing some analysts who had expected a rate hike.
At the same time, the NBH slashed its core inflation forecast for 2008 to 4.0% from 4.4%.
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Monday, November 27, 2006
Thursday, November 23, 2006
Flextronics Reduce Staff
Obviously it is impossible for me to comment on individual cases, and the reasons why Flextronics lost their order with the 'important client' which means that 30% of the 2,000 odd workforce will now be laid off. I would simply say that if you look at the comparatively high value of the forint, and take into account the rather high rate of inflation, then this type of problem is only to be expected.
Flextronics International Ltd., the world's largest manufacturer of custom-made electronics, is firing about 30% of staff at one of its four Hungarian plants after losing a major client.
About 2,000 permanent and temporary employees currently work at the factory in Nyiregyháza, northeast Hungary, Péter Papp, the director of human resources for eastern Europe, said in a telephone interview today. “We have hired more than 1,000 workers in the past six months at the plant and with this major client taking away production we need to cut jobs,” Papp said. “The dismissal of 590 by early February is the worst-case scenario because we'll try to help them find jobs within the company.” Flextronics also has plants in Tab, southwest Hungary, Zalaegerszeg in the west and Sárvár in the northwest. The company will employ just under 10,000 after the Nyiregyháza dismissals, Papp said, adding the company will remain one of the Hungary's 10 largest employers. Papp declined to identify the client that canceled its contract or say which product Flextronics made for it, except that it was sold in large volumes around Christmas. Napi Gazdaság reported the job cuts news earlier today.
Flextronics International Ltd., the world's largest manufacturer of custom-made electronics, is firing about 30% of staff at one of its four Hungarian plants after losing a major client.
About 2,000 permanent and temporary employees currently work at the factory in Nyiregyháza, northeast Hungary, Péter Papp, the director of human resources for eastern Europe, said in a telephone interview today. “We have hired more than 1,000 workers in the past six months at the plant and with this major client taking away production we need to cut jobs,” Papp said. “The dismissal of 590 by early February is the worst-case scenario because we'll try to help them find jobs within the company.” Flextronics also has plants in Tab, southwest Hungary, Zalaegerszeg in the west and Sárvár in the northwest. The company will employ just under 10,000 after the Nyiregyháza dismissals, Papp said, adding the company will remain one of the Hungary's 10 largest employers. Papp declined to identify the client that canceled its contract or say which product Flextronics made for it, except that it was sold in large volumes around Christmas. Napi Gazdaság reported the job cuts news earlier today.
Lajos Bokros the Hungarian Cavallo?
Domingo Cavallo is perhaps best known to economic history as the financial supremo who leaped to the headlines during his term as Argentina's Economy Minister in 2001 as he battled with the looming economic crisis which finally burst in January 2002. (Not everyone of course shares this view and an alternative point of view on Domingo Cavallo can be found here).As Robert Barro noted:
In March, 2001, President Fernando de la Rúa's new Economy Minister, Ricardo López Murphy, failed when a reasonable program of curtailing public spending hit a political roadblock. Now there is talk in the markets of default on Argentina's foreign debt.
Out of desperation, the President has turned to his political rival, Cavallo, to save the economy a second time.
Now it seems Lajos Bokros is offering himself for a somewhat similar role in the context of Hungary's growing economic crisis. Of course, the parallels do not end there, since Cavallo was also the architect of Argentina's economic reform process during his tenure at the Ministry in 1991:
Things changed in 1991, when Domingo Cavallo took over as Economy Minister. His reforms were pro-market and featured fixing the peso at 1-to-1 parity with the U.S. dollar. He also pushed trade liberalization and reforms of public finance and the banking system. Despite the recession of 1995, induced by the Mexican peso crisis, Argentine per capita GDP grew at an average rate of 4.8% during the Cavallo years, through 1996.
And of course Lajos Bokros - currently Chief Operating Officer and professor of the Central European University (CEU) - was Finance Minister and father of an aggressive austerity package back in 1995:
Lajos Bokros, Hungary's former Finance Minister and the father of an aggressive but inevitable austerity package in 1995, said he would assume the position of Prime Minister if he was allowed to execute his own adjustment programme.
Bokros, who is currently Chief Operating Officer and professor of the Central European University (CEU), also said the country is in a political and moral crisis in respect of the fact that the governments which had been overspending and pushed the country into indebtedness can hardly ask for sacrifices from the people.
In an interview with weekly Heti Válasz, the former World Bank Director reiterated that Hungary needed a multi-insurance model in healthcare a market-based higher education and sweeping reforms in the pension regime.
With regards to the pension system Bokros said it could not be allow leaving one third of the population wrapped in cotton and let the working people carry all burden. The current system even encourages people to withdraw from the labour market via early or disability retirement, he added.
With respect to the tax cut plans of main opposition party Fidesz, Bokros said taxes would need to be reduced but that it could not be done without holding back spending more than presently.
At a conference of the central bank (NBH) Bokros said on Wednesday that what is currently hanging over Hungary is not the threat of bankruptcy or a financial crisis but the shadow of falling behind.
Growth is hampered by Hungary's huge twin deficit and the fiscal adjustment package will make Hungary the slowest growing emerging market next year, he added.
Bokros stressed the importance of structural reforms and pointed out the quality and availability of public services have been eroding, which undermines social solidarity.
Now the parallels with Argentina's situation in 2001 do not end here. Both countries share the problem of finding themselves on an unsustainable economic path, and in need of urgent measures which go beyond what the incumbernts are (or were) offering.
In Hungary's case Bokros is right to draw attention to the fact that tax increases will only add to Hungary's problems in terms of attaining the growth which is needed to support public services. He is also right that Hungary's health and pensions systems are at the heart of the problem.
But here the situations differ. Argentina had a currency peg, while Hungary's forint is, at least in theory, free floating. However since Hungary badly needs to retain foreign investment, and also needs to keep inflation in check, there is little alternative to relatively high interest rates, but these precisely (at least for the time being) maintain the forint at a relatively high level, which of course produces the same problem in exporting which Argentina suffered. These high interest rates also make the cost of servicing the government debt rather high, and this fact alone, as we have seen here, contributes to the difficulties in reducing the deficit.
The other big difference between Hungary and Argentina is the demographic one. Argentina was a comparatively high fertility developing economy, with, by and large, the phenomenon known as the demographic dividend out there in front of it. Hungary unfortunately belongs to that group of countries who went through a large part of their demographic transition before they became economically rich. As such the future lying out in front of Hungary is inevitably a complicated one, with or without the present economic conundrum. Fertility is at the lowest-low level (or see the file linked to here) and Hungary is set to age rapidly as the currently low life expectancy rises and rises. So the demographic changes which are facing Hungary involve more of a demographic penalty than a demographic dividend.
And Bokros is right to draw attention to the social spending dilemma which Hungary faces. He is also right that the pension and health systems badly need reform. The question is, as people enter a necessary private pillar, where does the money come from to finance the earlier PAYGO system, and how do you prevent the quality and availability of public services from eroding (which Bokros says he wants to do) if what you are going to do is reduce spending on them significantly? Somehow the numbers here just don't add up.
At the end of the day all comparisons are rather limited in their value. But what worries me most here is that I just can't see a sustainable path for Hungary to take hold of, and that, believe me, is the most worrying thing of all. Simply telling people that what they need is an austerity package if you have no clear idea of how the hell it can all work is only likely to mean that you end up as Cavallo did, only as I said Hungary isn't Argentina, and the end product of all this prevarication won't be a pretty sight.
In March, 2001, President Fernando de la Rúa's new Economy Minister, Ricardo López Murphy, failed when a reasonable program of curtailing public spending hit a political roadblock. Now there is talk in the markets of default on Argentina's foreign debt.
Out of desperation, the President has turned to his political rival, Cavallo, to save the economy a second time.
Now it seems Lajos Bokros is offering himself for a somewhat similar role in the context of Hungary's growing economic crisis. Of course, the parallels do not end there, since Cavallo was also the architect of Argentina's economic reform process during his tenure at the Ministry in 1991:
Things changed in 1991, when Domingo Cavallo took over as Economy Minister. His reforms were pro-market and featured fixing the peso at 1-to-1 parity with the U.S. dollar. He also pushed trade liberalization and reforms of public finance and the banking system. Despite the recession of 1995, induced by the Mexican peso crisis, Argentine per capita GDP grew at an average rate of 4.8% during the Cavallo years, through 1996.
And of course Lajos Bokros - currently Chief Operating Officer and professor of the Central European University (CEU) - was Finance Minister and father of an aggressive austerity package back in 1995:
Lajos Bokros, Hungary's former Finance Minister and the father of an aggressive but inevitable austerity package in 1995, said he would assume the position of Prime Minister if he was allowed to execute his own adjustment programme.
Bokros, who is currently Chief Operating Officer and professor of the Central European University (CEU), also said the country is in a political and moral crisis in respect of the fact that the governments which had been overspending and pushed the country into indebtedness can hardly ask for sacrifices from the people.
In an interview with weekly Heti Válasz, the former World Bank Director reiterated that Hungary needed a multi-insurance model in healthcare a market-based higher education and sweeping reforms in the pension regime.
With regards to the pension system Bokros said it could not be allow leaving one third of the population wrapped in cotton and let the working people carry all burden. The current system even encourages people to withdraw from the labour market via early or disability retirement, he added.
With respect to the tax cut plans of main opposition party Fidesz, Bokros said taxes would need to be reduced but that it could not be done without holding back spending more than presently.
At a conference of the central bank (NBH) Bokros said on Wednesday that what is currently hanging over Hungary is not the threat of bankruptcy or a financial crisis but the shadow of falling behind.
Growth is hampered by Hungary's huge twin deficit and the fiscal adjustment package will make Hungary the slowest growing emerging market next year, he added.
Bokros stressed the importance of structural reforms and pointed out the quality and availability of public services have been eroding, which undermines social solidarity.
Now the parallels with Argentina's situation in 2001 do not end here. Both countries share the problem of finding themselves on an unsustainable economic path, and in need of urgent measures which go beyond what the incumbernts are (or were) offering.
In Hungary's case Bokros is right to draw attention to the fact that tax increases will only add to Hungary's problems in terms of attaining the growth which is needed to support public services. He is also right that Hungary's health and pensions systems are at the heart of the problem.
But here the situations differ. Argentina had a currency peg, while Hungary's forint is, at least in theory, free floating. However since Hungary badly needs to retain foreign investment, and also needs to keep inflation in check, there is little alternative to relatively high interest rates, but these precisely (at least for the time being) maintain the forint at a relatively high level, which of course produces the same problem in exporting which Argentina suffered. These high interest rates also make the cost of servicing the government debt rather high, and this fact alone, as we have seen here, contributes to the difficulties in reducing the deficit.
The other big difference between Hungary and Argentina is the demographic one. Argentina was a comparatively high fertility developing economy, with, by and large, the phenomenon known as the demographic dividend out there in front of it. Hungary unfortunately belongs to that group of countries who went through a large part of their demographic transition before they became economically rich. As such the future lying out in front of Hungary is inevitably a complicated one, with or without the present economic conundrum. Fertility is at the lowest-low level (or see the file linked to here) and Hungary is set to age rapidly as the currently low life expectancy rises and rises. So the demographic changes which are facing Hungary involve more of a demographic penalty than a demographic dividend.
And Bokros is right to draw attention to the social spending dilemma which Hungary faces. He is also right that the pension and health systems badly need reform. The question is, as people enter a necessary private pillar, where does the money come from to finance the earlier PAYGO system, and how do you prevent the quality and availability of public services from eroding (which Bokros says he wants to do) if what you are going to do is reduce spending on them significantly? Somehow the numbers here just don't add up.
At the end of the day all comparisons are rather limited in their value. But what worries me most here is that I just can't see a sustainable path for Hungary to take hold of, and that, believe me, is the most worrying thing of all. Simply telling people that what they need is an austerity package if you have no clear idea of how the hell it can all work is only likely to mean that you end up as Cavallo did, only as I said Hungary isn't Argentina, and the end product of all this prevarication won't be a pretty sight.
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