Devaluation of Currency across Hungary - Essay Example

Answer There are different factors that might lead to devaluation of currency across Hungary such as soaring trade deficits, higher prices or inflation, decrease in foreign remittances, decrease in Foreign Direct Investment (FDI) and subsequent decline in inflow of dollar which is used for almost all international payments and receipts. Now I would like to throw light on the above mentioned factors that would clarify the impact of these factors. Trade deficit occurs when country exports to foreign countries are lower than the imports from these foreign nations. This means that the products produced within Hungary are sold to other countries in fewer quantities and monetary amounts than the products purchased from those nations. Since all the transactions are carried out in US Dollar, this trade deficit would increase pressure over country’s foreign reserves thus demand from importers (for dollar) will surge and would possibly result in lowering the monetary value of Hungary currency. Perhaps, the most important factor that could result in increasing trade deficit is reversal of international oil and commodity prices because today international economies are coming out of recession and are demanding more oil, food and other commodities to fulfill their domestic needs and oil requirements. Oil prices have already recovered to a level of 75-80$ per barrel and are expected to increase further in near future in the wake of better economic outlook and forecasts. This would put great pressure over Hungarian government because it would increase the trade deficit and further deteriorate HUF-Dollar parity. The dollar-HUF disparity (at present the exchange rate is 170 HUF per dollar) is perhaps a major reason of inflation (higher prices) which currently stands at 3% and could increase in near future amid higher international prices of various products. The rule is simple and clear: the higher the exchange rate, the more expensive the imports and prices will observe an upward trend in domestics for these imported products thereby causing inflation. Moreover, the rise in prices will also lower down the purchasing power of people in Hungary; therefore, would result in greater unrest and lower economic growth. People are bound to cut down their expenses to improve their savings. On the flip side, the weakening of US Dollar against international currencies such as Euro, Pound, Japanese Yen etc because of USA’s surging trade deficit and various internal factors might not aggravate the exchange rate in Hungary and could therefore result in a much better economic outlook within the country. However, in case of strong US Dollar and reversal of international prices, Hungary’s trade deficit could increase thus resulting in inflation and higher exchange rates. In other words, the HUF would depreciate further in near future. Answer 2: My business of creating a new subsidiary of Hybat Corporation by initiating a green-field venture in Hungary is subject to both economic and transaction exposure because of Hungary’s fluctuating exchange rates as revealed by Business forecast report (2009) that they “hit all-time-low of HUF 317.70 / EUR in March” and there experts have forecasted that they would be “HUF 264 / EUR by the end of 2009”. Moreover, it was also forecasted that they would come in at “HUF 255.00 / EUR by end-2010”. (marketresearch.com, 2009) So it has now become evident that Hybat Corporation is prone to economic and transaction exposure since Hungary’s could observe a decrease in Foreign Direct Investment, corporate earnings and cash flows. It would directly affect Hybat’s earnings and might result in huge losses with the passage of time because Hybat is willing to sell its vehicles not only to domestic clients but also to export its produce to potential clients in East and Central Europe. The fluctuation in exchange would adversely affect the export earnings of Hybat because the increase in value of HUF would result in lesser export revenue which might not be enough for Hybat to cover its all operating expenses. Hybat Corporation is not subject to Translation or Accounting Exposure because it is expected that it would keep all its assets, liabilities and equities in HUF rather in a foreign currency such as US dollar although it is a US-based organization. Therefore, it might not face any losses due to the changes or going fluctuations in exchange rates. However, the strong HUF (weak dollar) would benefit the company in a way that it would get more US dollars when it would convert its HUF earnings in dollars. Answer 3: Economic and Financial Factors: The most important economic factor that could adversely affect Hybat Corporation in Hungary is the declining trend in GDP owing to economic recession and global economic downturn. Although Hungary was able to fight with decreasing global demand and shrinkage in international economy in 2008 / 2009 that resulted in Hungary’s trade deficit, yet it is expected that Hungary would take some time to completely come out of recession. Its exchange rates are still higher and currency (HUF) depreciated against major currencies such as Euro and dollar. It is, therefore, detrimental for any organization to initiate a new venture unless the organization has ability to assimilate economic losses for some time. Hybat could absorb those losses in initial stages because it is a multinational organization and has mammoth financial resources. Political Factors: According to Hungary Business forecast report (2009), “Political stability in Hungary remains weak, with parliament’s vote on the country’s 2010 budget remaining the largest threat to the life of the current coalition government in the near term”. The economic experts and pundits were mainly “concerned when acrimonious disagreements over the government’s plans to impose necessary fiscal austerity measures next year led Prime Minister Gordon Bajnai to threaten to resign if parliament did not approve his planned spending cuts, thereby elevating the risk of early general elections”. This precarious political climate, instability and lack of mutual trust would certainly go against Hybat Corporation which is interested to initiate a new green-field venture in Hungary. (marketresearch.com, 2009) Conclusion: In short, Hybat Corporation could start a new green-field venture in Hungary because without any doubt, it is lucrative in nature since consumers have inclination to acquire Hybrid cars. Despite this market potential, it must not be forgotten that there are certain economic, financial and political factors (as mentioned above) that must be taken into account before taking any investment and business decisions by the strategic planners of the corporation. The venture might incur losses in beginning but then there are greater chances of generating huge profits once the recession is completely over and demand reaches its peak. References: “Hungary Business Forecast Report Q1 2010” Available at http://www.marketresearch.com/map/prod/2494872.html “Economic Exposure” Available at http://www.investopedia.com/terms/e/economicexposure.asp “Transaction Exposure” Available at http://www.investopedia.com/terms/t/transactionexposure.asp “Translation Exposure” Available at http://www.investopedia.com/terms/t/translationexposure.asp Bibliography: (2009). “Think tank says political and economic risk in Hungary at all-time high” Available at http://www.politics.hu/20090604/think-tank-says-political-and-economic-risk-in-hungary-at-alltime-high “Hungary Business Forecast Report Q1 2010” Available at http://www.marketresearch.com/map/prod/2494872.html (2010). “Hungary Isnt Another Greece........Now Is It?” Available at http://hungaryeconomywatch.blogspot.com/ (2009). “HUNGARY International Reserves and Foreign Currency Liquidity” Available at http://www.imf.org/external/np/sta/ir/hun/eng/curhun.htm “Economic Exposure” Available at http://www.investopedia.com/terms/e/economicexposure.asp “Transaction Exposure” Available at http://www.investopedia.com/terms/t/transactionexposure.asp “Translation Exposure” Available at http://www.investopedia.com/terms/t/translationexposure.asp Read More