Hungary Business Forecast Report Q2 2008

Publication Date	February 2008
Publisher	Business Monitor
Product Type	Report
Pages	61
ISBN Number	1745-0578
Product Code	BMI00281

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Summary

Testing Times For Hungary Testing times are ahead for Hungary, with prospects of a sharp drop in external demand, in addition to ongoing fiscal tightening measures, threatening to undermine overall macroeconomic stability in the medium term. With Hungary's regional competitiveness increasingly waning amid eleven-year low real GDP growth data and low levels of direct investment into the economy, we believe that there may be growing pressure on the government to resume spending programmes towards the latter part of 2008. This view is underpinned by positive developments in Hungary's public finances, with the government currently forecasting a 4.0% of GDP budget deficit for this year. However, in line with the government's declining popularity, and mounting political pressure, we caution that a breakdown of the ruling coalition and a policy reversal could set back Hungary's euro convergence programme for several years. Going forward, the government's ability to stay the course on reforms in 2008 will be key, in order that earlier public spending cuts remain sustainable into the longer term.

Controversy over the Hungarian Socialist party-led coalition government's extensive reform programme is mounting, with the latest healthcare reform bill, passed in parliament in mid-December, facing yet another challenge. Although widely praised by the investment community for inviting private investment into Hungary's 22 health insurance funds and encouraging competition, the bill produced widespread protests and strikes towards the end of 2007. Suffering yet another setback following months of coalition bickering over the healthcare reform proposal, the reforms will now require amendments - to be presented at the time of writing - as Hungarian President Laszlo Solyom has refused to sign off on the new bill. According to the president, the bill was drafted too hastily, failed to secure public and professional support, and does not guarantee equal healthcare for Hungarian citizens.

Rising prospects of a more pronounced slowdown in external demand will present new challenges for the Hungarian economy in 2008. A sharp slowdown in economic activity in the US and across the eurozone will weigh heavily on Hungary's economy. We have been highlighting for some time now that in light of austere fiscal tightening measures, Hungary's external sector will be the key driver of economic growth well into the medium term. Indeed, severe cuts to public spending and tax hikes in late 2006 have seen real GDP growth experience a marked decline, dropping to an 11-year low of 0.9% y-o-y during the third quarter of 2007. As a result, BMI revised down its economic growth outlook for 2007, to a mere 1.5%, from a previous forecast of 2.6%.

The anticipated slowdown in external demand, on the back of declining US and eurozone growth expected for this year, will affect Hungary's export sector and see manufacturing output decline going forward. In turn, this will generate a deterioration in the corporate sector's loan portfolio quality, as the risk of NPLs is set to increase. The expected decline in profitability will also weigh on income growth, which will raise the risk of defaults on household loans, and loans to companies with exposure to the retail sector. Mortgage lenders, such as FHB Mortgage Bank are particularly vulnerable to a worsening in the quality of household loan portfolios. With estimated real GDP growth of 1.5% in 2007, and expected final household consumption growth of 1.5% in 2008, following an estimated contraction of 1.2% last year, Hungarian banking sector asset quality could decline further in 2008.

Content

Executive Summary
Testing Times For Hungary
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Political Outlook
Reform Programme At Risk
The continuation of the Hungarian coalition government's reform programme will increasingly come under
pressure in 2008, as public dissatisfaction with ongoing fiscal tightening measures is rising. We see a risk to
the ruling Socialist party's policy conti
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
More Trouble In 2008
While the Hungarian economy continues to recover from its fiscal tightening hangover, we caution that a sharper
than previously expected slowdown in economic growth in the US and eurozone will present a further downside
risk to the economy in 2008. However
Fiscal Policy
A More Rosy Picture
Hungary's public finances will continue to improve as government revenues surprise to the upside.
Balance Of Payments
Slower Demand To Weigh On Exports
We generally foresee an improvement in Hungary's external position over the long term, however, caution that
a sharp decline in external demand could see the current account deficit widen above our forecast this year.
Monetary Policy
Rates To Come Down In 2008
Despite consumer price inflation coming in slightly above expectations at the end of 2007, we believe that recent
improvements in the inflationary picture will justify a resumption of the National Bank of Hungary's rate cutting
cycle as early as Q108.
Banking Sector
Profitability At Risk
The slowdown in economic activity continues to undermine corporate and household loan portfolio quality,
raising the risk of more significant defaults on bank loans.
Chapter 3: Special Report
Looking Beyond 2008
The Future Of The World, In Three Acts
US: The Rebalancing Act
Unwinding The Imbalances
We believe that a substantial, multi-year shift in the US external accounts is under way.
Business Monitor International Ltd
hungary Q2 2008
China: What If We're All Wrong?
Our Core Scenario For China
We are retaining our positive headline growth projections for China across the forecast period to 2012, with
our expectations of the continued success of the urbanisation process and export-driven growth model
underpinning our assumptions.
Japan: Immigration Key To Long-Term Growth
Demographic Woes Portend Long-Term Decline
Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Latest Developments
Although Hungary's commercial law system is effective and well developed, proceedings are often protracted
and courts often struggle to cope with large workloads. Reforms conducted in 2003 have not produced any
tangible results.
Institutions
Infrastructure
Market Orientation
Operational Risk
Chapter 5: Key Sectors
Tourism
Executive Summary
BMI forecasts that the sector will provide employment for over 215,000 people by 2012 (our extended forecast
period).
Industry Forecast
Hospitality Overview
Oil & Gas Report
Executive Summary
BMI forecasts suggest that, in spite of the rapid growth in demand for gas, it will still account for just 24.9% of
primary energy demand in 2011, with much of the increased market share reflecting power generation usage.
Market Overview
Market Overview - Hungary
List of Tables
- Table: Hungary Cabinet & Other Key Posts (As Of January 2008)
- Table: Economic Activity
- Table: Fiscal Policy
- Table: Balance Of Payments
- Table: Monetary Policy
- Table: BMI Legal Framework Ratings
- Table: Emerging Europe FDI
- Table: Top Export Destinations
- Table: BMI Trade Ratings
- Table: Hungary Tourism - Historical Data And Forecasts
- Table: Hungary Travel Industry - Historical Data And Forecasts
- Table: Hungary Power - Historic Data & Forecasts

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Product features / use

Scope	Expert Insight/Opinion
Level	General Industry Strategies
Data	Detailed Market Forecasts
Profiles	Profiles of Key Companies
Features	Contains SWOT Analysis
Extra Info	Consumer Trends Highlighted