Effects of exchange rates on trade balance

The article assesses the impact of the euro’s exchange rate changes on the commercial balance of the four Visegrad countries.

Over the last few months (especially since the beginning of 2003), the value of the euro has risen sharply on foreign exchange markets. How have the currencies of the 4 Visegrad countries behaved? What impact did the exchange rate changes have on the commercial balance of these countries?

In nominal terms, the exchange rates of these 4 countries moved according to three patterns.

In Hungary, where the forint has been fluctuating since the beginning of the year between 235 HUF/€ and 275 HUF/€, the central bank is experiencing great difficulty in stabilising the currency within its target zone (250-260 HUF/€). After two increases of 300 basis points (in June and Nov. 2003) the intervention rate has now reached 12.5%, a very high level in Europe.

Since January 2003, both the Czech Republic and Slovakia have been managing to control the evolution of their currencies (between 31-32 CZK/€ for the former country and 41-42 SKK/€ for the latter) without modifying their intervention rate and even, in the case of the Czech Republic, by lowering it.

Finally, the value of the Polish zloty dropped sharply against the euro in 2002 (15%) and since the beginning of 2003 (14%).

What is the current impact on trade balances?

In order to measure this, the real effective exchange rates (REER), are normally used, as they are calculated integrating the relative weight of trading partners and the evolution of consumer prices. Only Poland (see graphic) has significantly improved the international cost competitiveness of its exports (by a combination of a much lower inflation than in the euro zone and a strong nominal depreciation).

There is usually a 6 to 12 months’ lag between a variation in the REER and its possible impact on trade balances*. Over the period one can therefore expect a favourable impact on the trade balances of Poland and the Czech Republic and a less favourable one for Slovakia and Hungary. As far as their trade balance is concerned (see graphic), the Polish deficit is stabilising, in the Czech Republic and in Slovakia it is strongly decreasing, especially since December 2002, whereas between the end of 2002 and mid-2003 Hungary recorded a deterioration of about 60% in its commercial deficit.

The link between the REER and trade balance is therefore not systematic. Indeed, if Poland manages to gain directly from a weaker zloty, which seems moreover to satisfy the various economic players at the moment, in the medium term a country’s competitiveness relies on many more elements like the degree of specialisation, factor productivity, price levels and production cost…. Thus, in the case of Slovakia and the Czech Republic, sectoral effects stimulated exports. In the first country, Volkswagen, the biggest exporter, increased its production by 69% between January and September 2003, whereas in the Czech Republic the increase in exports is generally more widespread throughout all the industrial sectors in which the country is specialised.

In Hungary, on the other hand, the situation is causing more concern: the commercial balance has been sharply deteriorating since the end of 2002, whereas the forint’s real appreciation amounted to only about 10% during the same period and is stable/decreasing since January this year. Exports fell by about 20% between November 2002 and February 2003, compared with a fall in imports of approximately 10%. The former were affected by the departure of IBM as well as by the production of the X-Box and the latter were stimulated by a domestic demand that remained vigorous. Even though an improvement in the global situation is expected in 2004, the markets are not convinced that the exchange rate defended by the NBH is sustainable in the long term if the present macroeconomic context is taken into account. The current orientation of the commercial balan ce can only confirm their view.

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