Hungary on a roll from forced swapping out of Swiss franc loans

China's booming share market may be grabbing investors' attention but spare a thought for Hungary: the Budapest stock market has risen 30 per cent year to date, just as much as Shanghai, and is up by more than a fifth in dollar terms.

Hungary is doing well more generally and - critically for regional bragging rights - no longer appears to be lagging Poland, to which it is so often compared unfavourably. After GDP expanded by 3.6 per cent in 2014, the Hungarian central bank expects another year of growth above 3 per cent and, in the absence of inflation, is happily salami slicing interest rates lower.

Meanwhile, the forint is stable at a time when Turkey's lira, the South African rand and other high-beta EM currencies are plumbing new depths. It is all remarkably different from a couple of years ago, when the economy was contracting, the currency wobbling and Hungary's CDS premium shooting through the roof.

So what has changed? Lower oil prices are helping, of course, and so is reviving demand in Germany, the destination for a good slug of exports. But that holds true for most neighbouring countries too. The key difference is consumer confidence, which is rising more sharply in Hungary than elsewhere in eastern Europe. Households are benefiting from rising real incomes as inflation has declined and from increased employment as the economy has picked up.

Most importantly, however, has been the forced conversion of consumer foreign-currency loans into forint, removing a big uncertainty that had been depressing spending.

Late last year, Budapest forced almost all households to swap up to $12.5bn of FX loans - mostly mortgages taken out in the early 2000s and denominated in Swiss francs - into local currency. What seemed like a capricious move by Hungary's autocratic Prime Minister Viktor Orban turned out to be an inspired decision that has saved many families from near financial ruin after Switzerland abandoned its euro currency floor in January and the Swiss franc jumped by almost 20 per cent.

Without that forced hedge, the depreciation of the forint against the franc would have added some Ft700bn ($2.5bn) to household debt.

What it has done, of course, is impose losses on the banking sector, which the government had already hit in recent years with a bank levy and a financial transaction tax. While Mr Orban cares little about that, since most of the country's banks are ultimately foreign owned, the result has been to stifle credit creation and this remains the biggest obstacle to higher growth in the medium term.

For now, though, Hungary is reaping the economic gains and Mr Orban can point gleefully at Poland, where half a million households are still weighed down by their Swiss franc loans.

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