After the focus of Sace of last December, we give space to a new update on the Hungarian economic and financial situation. Atradius has in fact prepared a Country Report relating to Hungary which shows the situation of considerable uncertainty weighing on Budapest.
The main factors of concern relate on the one hand to the economic slowdown in the wake of the slowdown of the euro area, and on the other to structural and public budget weaknesses. Concretely, the analysis of some economic indicators can give a sense of these weaknesses: first of all, the change in GDP will have a negative sign and will be equal to 0,8% in relation to the decline in private consumption (-2,7%). What continued to make a positive contribution to GDP growth also during 2009 was net exports. The unemployment rate is always above ten percentage points (11%), while the deficit stands at 4,2%.
In this critically critical situation, the action of the Government and its Prime Minister Orban is concentrated on one-off measures capable of improving the accounts for a short period of time rather than on medium-long term structural measures. These measures also contravene the indications from the IMF and the EU going in the completely opposite direction to openness to the market such as for example the appropriation of part of private pension funds by the Government to reduce the debt burden and to pay state pensions and levies on banks to accept the repayment of foreign currency loans at off-market exchange rates.
This situation has prompted international investors to close or downsize their positions in Hungarian forint generating on the one hand a drop in foreign direct investment in the country and on the other a downward pressure on the forint which in the second half of 2011 lost more than 15 % of its value against Euro. The depreciation of the currency has two immediate but opposite effects. A depreciation usually leads to an increase in the country's competitiveness on international markets and this is reflected in the good performance of exports; however the same depreciation has a negative effect on those who have taken out a loan denominated in foreign currency (ie the majority of loans granted in Hungary). These tensions are obviously unloaded on the government bond market which at the end of 2011 recorded a surge in interest rates above 8%, a level considered excessively expensive to refinance the Hungarian debt.
Despite the outright refusal by the Government to implement the measures requested by the IMF and the European Union, the prohibitive costs of refinancing Hungary's debt forced Prime Minister Orban to initiate a legislative review that would allow for a bailout by the two institutions.
From the point of view of the production structure, the construction sector shows no signs of recovery, continuing the negative trend that has now lasted for 7 years. The main problems that led to a reduction in the sector's output of 7,8% in 2011 can be identified in the decrease in public and private demand, in a surplus of productive capacity, in the high rates of liquidation procedures and in the reduction of financing of the sector by many Hungarian commercial banks.
The Hungarian economy's exit from the crisis will depend immediately mainly on the outcome of the consultations between the government and the IMF/EU, however the adoption of a medium-long term structural approach appears necessary aimed at radically modifying the economic-productive structure of the country. It is not clear whether this can happen with a markedly populist government like the one currently in power.
Attachments: Atradius_Country_Report_Hungary_March_2012.pdf
