Bloomberg: Eastern European Currency Gains Spur Shopping Trips

Eastern European Currency Gains Spur Shopping Trips (Update1)

Dec. 31 (Bloomberg) -- Record gains by currencies in the four biggest nations that joined the European Union in May have boosted consumers' spending power and spurred trips to Austria, Germany and beyond for clothes, ski trips and even groceries.

The Polish zloty is the world's best-performing currency this year, gaining 15 percent against the euro and 25 percent against the dollar. The Hungarian forint has risen 7 percent versus the euro and 16 percent against the dollar, while the Czech and Slovak koruna are up 6 percent against the euro and 15 percent against the dollar.

``The purchasing power of the people from those new EU countries increased quite markedly and their presence will be felt more on the markets'' of Western Europe, said Radek Maly, who follows Eastern European currencies as head of research and treasury at Citibank in Prague. ``They will be able to afford to spend more, either through tourism or by individual spending.''

The former communist countries' EU membership has reduced the risk for foreign investors, boosting benchmark stock indexes and generating demand for the currencies. Budapest's BUX index is the world's third-best performer this year, adding 78 percent in dollar terms, while Prague's PX50 is up 72 percent, ranking fourth. Warsaw's WIG20 index gained 49 percent and ranks eighth.

Shares of Budapest-based OTP Bank Rt., the biggest bank by market value in the 10 new EU members, rose 109 percent, and PKN Orlen SA, Poland's largest oil company, has advanced 56 percent.

EU Dynamics

Polish bonds with a maturity of at least 10 years are the world's best performers this year, returning 28 percent in euro terms. Hungarian five-year debt has returned 23 percent, according to Bloomberg data.

``It's a reflection of the dynamics flowing from EU entry, foreign direct investment and convergence towards the euro,'' said Elizabeth Gruie, an emerging markets economist at BNP Paribas in London. ``It's also because of investors' appetite for yield. Central banks have been aggressive in keeping monetary policy tight'' as currency strength fights inflation.

A strong forint encourages shoppers such as Otto Szabo, a 30- year-old swimming-pool builder from Gyor in northwest Hungary, to make a weekly, hour-long drive to neighboring Austria for clothes, food and drink.

Austria Cheaper

``Everything is cheaper here, even food,'' said Szabo, heading into Vienna's Shopping City Sued mall, one of Europe's largest malls. ``When I want to buy a good suit, I go to Vienna, not to Budapest.''

Companies including Ford Motor Co. are building or expanding plants in the new EU states, where economic growth is twice the pace of the older members. The European Commission on Oct. 26 said it expects Poland and the Czech Republic, the two largest economies among the new entrants, to grow 4.9 percent and 3.8 percent next year, compared with 2 percent in the 12 euro-sharing nations.

Dearborn, Michigan-based Ford, the second-largest U.S. carmaker, said on Dec. 2 it plans to invest 300 million euros ($409 million) to build a transmission plant in Slovakia.

Central banks in Eastern Europe are keeping interest rates high to support their currencies and hold down inflation to meet terms for adopting the euro later this decade. Poland's benchmark borrowing cost is 6.5 percent and Hungary's is 9.5 percent, compared with the European Central Bank's main refinancing rate of 2 percent.

Growing Appetite

Currency appreciation lowers inflation by cutting import costs and euro aspirants must bring their inflation rates to within 1.5 percentage points above the average of the three EU members with the lowest rates.

Poland's annual inflation rate was 4.5 percent in November while in Hungary it was 5.8 percent.

While gross average wages in the new EU states are around $800 a month, compared with more than $4,000 in Germany, a growing and better-paid middle class is getting an appetite for travel and higher-quality goods from abroad.

Marek Svoboda, a 54-year-old ski buff from the Czech Republic, sat on a ski lift in Bad Hofgastein, Austria, last week, enjoying the mountain view.

A year ago, a double room at the Norica Hotel in the Austrian resort, at 679 euros for the week, cost him 22,510 koruna. This year, the same room cost 2,000 koruna less. The ski pass, at 171 euros per person for the week, is now almost 1,000 koruna cheaper for a couple.

``It's really worth the five-hour drive,'' Svoboda said. ``I might have come anyway, but this makes it better.''

Paying Off

Milena Valdova, the owner of Matylda s.r.o., a Prague-based travel agency, said interest in one-day Christmas shopping trips to Vienna, Nuremberg, Passau and Dresden has increased.

``These trips are selling much better this year than last,'' Valdova, 41, said in a phone interview. ``It pays off to buy a whole range of goods in Germany and Austria.''

Still, the strength of Eastern European currencies is hurting exporters, including Polish copper producer KGHM Polska Miedz SA, who get less revenue after exchanging dollars and euros earned abroad.

``We've got a strong zloty and its effects are not good for us,'' said Tomasz Szelag, director of currency risk at Lubin- based KGHM, Poland's biggest exporter. ``We do hedging and high copper prices also provide a natural hedge so we're OK, but we're not happy with the current exchange rate.''

Raba Rt., a Gyor, Hungary-based axle and truckmaker, reported on Nov. 9 that its nine-month operating loss widened to 8.2 billion forint because of the currency's appreciation.

Hungarian Law

Hungary's government has repeatedly called on the central bank to cut interest rates faster to stem the forint's gains, on concern it will lead to job cuts.

A new law to increase Prime Minister Ferenc Gyurcsany's influence over who will sit on an expanded rate-setting council was signed by the president on Dec. 20 and will take effect as of the central bank's January meeting.

``Exporters are being killed by the strong forint,'' said Bela Balog, Raba's chief financial officer. ``Our company is very badly affected by the persistently strong exchange rate. If this is sustained in the long term, it will damage the whole economy. We're pleased to see any initiative aimed at weakening the forint.''