Hungary Autos Report Q4 2009

Hungary's economy officially entered recession in the fourth quarter of 2008 and has been hit by a combination of rising macroeconomic concerns since, from an over-leveraged and vulnerable banking system, to the parlous state of the current account deficit and declining FDI. This has impacted new car sales in Hungary, which fell 52% year-on-year (y-o-y) to 39,429 units in H109, estimates from the Hungarian Car Importers Association (MGE) have shown. BMI attributes this to a fall in domestic spending, and we expect the country's GDP to contract 6.4% in real terms this year. Hungary's recession is expected to be deeper than in most European countries. This will have an adverse effect on the country's autos industry on two fronts; firstly, domestic sales will decline as consumers tighten their spending on high-ticket items such as cars. Secondly, falling export demand will force manufacturers to cut production and dismiss workers. Additionally, economic slowdown will prevent businesses from making new investments, a direct reflection of which can be seen in the commercial vehicle sales results for H1. The MGE has estimated that light commercial vehicle (LCV) sales fell 55% y-o-y, prompting MGE chairperson, Gabor Gyozo, to forecast 2009 sales of just under 15,000 units; 19,209 commercial vehicle units were sold in 2008, according to BMI estimates.

Meanwhile, changes to Hungary's tax laws are expected to have a number of effects on the market. VAT on cars was raised to 25% on July 1, up from 20%, while excise tax was also hiked, both likely to dampen any nascent rise in demand in the coming months. However, lower employment taxes (lower corporate tax rates and lower employer social security contributions) should serve to limit fiscal deterioration while still reducing firms' incentives to fire workers. This is crucial as a wave of downsizing is sweeping the sector. Audi, one of Hungary's largest exporters, suspended car production in Hungary in April for a week and output was reduced in parts of the company's engine plant. The company's unit also reportedly plans to halt production for almost a month in August. Meanwhile, In July 2009, Japanese car parts supplier Desno announced it was to lay-off 800 workers at its plant in Szekesfehervar from October 1.

The company reduced the number of shifts in December and introduced a four-day working week in January in a bid to avoid redundancies. However, the depressed nature of the market has made downsizing inevitable, in order for the company to secure the long-term future of the unit.

Although the fiscal situation will still deteriorate and unemployment will continue to soar, given Hungary's lack of financial room to manoeuvre, the new taxation package likely represents a reasonable attempt to mitigate some of the worst fallout of the economic crisis. Also, crucially it will involve compliance with the IMF-mandated reforms, allowing the country to continue receiving much needed credit from the body. Still, a pickup in the car market in 2009 looks highly unlikely. BMI has forecast a contraction in car units sold in 2009 on the back of the credit squeeze and some semblance of recovery is unlikely until the second half of 2010.