Is a storm brewing in Hungary?

"As expected, things are currently strained between the Hungarian government and both the International Monetary Fund and the European Commission. To get a better understanding of the situation and its potential economic impact, I visited Budapest this week. It was very telling that one of my meetings with the Hungarian central bank was cancelled by the governor, and this is a perfect illustration of the present political and economic tensions. Country visits are a vital piece of our emerging market debt team’s investment process and provide a unique perspective on the country’s fundamentals, political environment, leading economic indicators and business sentiment. Particularly effective in times of political transition, these research trips can provide a heightened level of analysis and understanding of the country’s markets and are very effective in shaping our investment views. (...)

With elections slated for early 2014, the Hungarian prime minister Viktor Orban’s focus is on re-election. He wants growth. Therefore, fears of unorthodox monetary policy on the horizon, with no possibility of protection from the ‘Simor Backstop’, have led to weakness in the Hungarian forint (although overall risk premium has so far remained low). This is a country that still carries considerable exposure to foreign currency debt and, as such, is vulnerable to a depreciating currency. Policies to absorb the cost of the currency loans are likely and could encourage the leadership to maintain favourable exchange rates in the near term. However, the details of such policies are not yet clear."