Hungary Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	68
ISBN Number	not applicable
Product Code	BMI03437

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Summary

2009 To Bring Deep Recession The principal factor affecting the Hungarian economy will be a deep recession owing to both external and domestic influences. We expect eurozone GDP to contract sharply in 2009, recovering to only mediocre growth in 2010, which will weigh significantly on demand for Hungarian exports. In particular, with Germany entering technical recession in Q308, demand for high-value Hungarian manufactured goods (such as auto-parts) is likely to continue to suffer. The domestic economic outlook is similarly dire, with credit markets set to remain restricted, construction and retail sales contracting, unemployment rising and consumer and business sentiment hitting record lows. In turn, this recessionary outlook is set to impact upon political stability. We expect the Hungarian Socialist Party (MSZP) minority government to endure through 2009, due mainly to the de facto backing of the Alliance of Free Democrats (SZDSZ). However, we caution that the government's policy-making ability and reformist drive will remain curtailed by public unpopularity and parliamentary weakness.

The Hungarian MSZP government, which has ruled as a minority since May 2008, secured a crucial political victory on December 15, by securing the passage of its 2009 draft budget through the national assembly. The bill passed with support from the SZDSZ, confirming our long-held view that while the small economically liberal party disagrees with much Socialist policy, it is simply not in a position to risk promoting a government collapse and thus a parliamentary election, due to its own unpopularity. We expect this trend to continue, and the price will be ineffective, hamstrung policy-making. On the international front, Hungary's EU and NATO membership should ensure that the country remains on good terms with its neighbours and secure from external aggression.

Hungary's recession, which we expect to run throughout 2009 and into 2010, will impact both economic policy-making and the country's external position. We expect monetary policy to follow a trend of incremental monetary easing, with the National Bank of Hungary's (NBH) key base rate set to fall from 10.00% at the start of the year to 7.50% by the end as the bank seeks to stimulate the flagging economy. The only constraint on even deeper cuts will be the NBH's fear of the forint weakening too much, which could pose risks to the banking sector given the large portion of Hungarian loans denominated in foreign currencies. Fiscal policy, by contrast, will be limited in its stimulatory reach. The government would certainly like to do more, but the budgetary consolidation conditions of the IMF and EU in exchange for EUR20.0bn of emergency financial aid will necessitate a spending roll-back in the face of collapsing revenues. Finally, the deep domestic recession and contraction of credit will force a re-balancing of Hungary's external asymmetries, and we expect to see the current account deficit narrow as imports and income debits fall.

Hungary's business environment remains broadly attractive in terms of infrastructure and availability of low-cost skilled labour. We caution that the global credit contraction will continue to hit Hungarian businesses hard, limiting firms' ability to invest and meet operating costs. The January Russia-Ukraine gas dispute has illustrated the vulnerability of central European industry to disruptions in Russian energy supplies; and further similar cut-offs remain possible.

Content

Executive Summary
- 2009 To Bring Deep Recession
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Government Likely To Survive In 2009
- The successful passage of the 2009 budget leaves the Hungarian Socialist government politically strengthened,
- and we expect it to survive through 2009 on the back of de facto support from the Free Democrats
- TABLE: HUNGAR IAN POLITICAL OVERVIEW
- Foreign Policy
- Relations With Slovakia To Remain Strained
- A November riot between ethnic Hungarians and ethnic Slovaks at a football match in Slovakia, and the
- subsequent political fallout, have served to sour relations between Budapest and Bratislava considerably
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Recession In 2009 Will Be Deep
- The latest industrial production data confirms our view that Hungary is heading for a deep recession in 2009,
- with little relief visible either domestically or from the export sector, and we have subsequently revised our GDP
- growth forecast down to -3.4%
- TABLE: ECONOMIC ACTIVITY
- Monetary Policy
- Further Monetary Easing Ahead
- Our core view is for the National Bank of Hungary to continue a trend of incremental easing throughout 2009 as
- disinflation continues apace and recession bites harder
- TABLE: MONETARY POLICY
- Balance of Payments
- Current Account Deficit To Fall As Imports Shrink
- Hungarys current account deficit is set to contract in 2009, as the recession and declining capital inflows
- cause imports to fall faster than exports
- TABLE: BALANCE OF PAY MENTS (EURO)
- Fiscal Policy
- Revenue Collapse To Necessitate Spending Rollback
- Hungarys general budget deficit is set to shrink in 2009 as IMF-agreed fiscal consolidation results in reduced
- public spending
- TABLE: FISCAL POLICY
- Exchange Rate Policy
- Forint To Hit New Lows In 2009
- Hungarys weak macroeconomic outlook points towards further forint depreciation in 2009
- TABLE: EXCHANGE RATE POLICY
Chapter 3: 10-Year Forecast
- The Hungarian Economy To 2018
- Euro-Adoption To Underpin Convergence
- We continue to hold a reasonably sanguine view on Hungarys real economic convergence prospects with the
- eurozone over the long term
- TABLE: LONG -TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political
- upheaval in China
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will
- combine to spell trouble for the financial services sector in 2009
- TABLE: Banks Leverage Ratios
- TABLE: Assets As % of Home Country GDP
- TABLE: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- TABLE: Exposure As % of Tot al Exposure To Region
- TABLE: Banks Foreign Exposure (US$ mn)
- TABLE: Exposure As % of National GDP
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- Market Orientation
- TABLE: EUROPE, FDI ANNUAL INFLOWS
- TABLE: BMI TRADE RATINGS
- TABLE: TOP EXPORT DESTINATIONS
- Operational Risk
Chapter 6: Key Sectors
- Food & Drink
Executive Summary
- Growth in the sector is being driven by premiumisation of brands, as Hungarians increasingly view consumable
- products as status symbols (this factor particularly applies to alcoholic drinks), as well as by increasing health
- concerns and the need for convenience
- TABLE: HUNGARY ALCOHOLIC DRINKS CONSUMPTION INDICATORS HISTORIC DATA & FORECASTS
- IT
Executive Summary
- BMI still expects solid growth in many IT market segments over the next few years, despite the sharp declines
- in domestic consumption forecast for the medium term
- TABLE: HUNGARY S IT SECTOR HISTORIC DATA & FORECASTS, 2006 - 2013
Chapter 7: BMI Global Assumptions
- Global
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: GLOBAL AND REGIONAL REAL GDP GROWTH, % CHG Y-O-Y
- TABLE: DEVELOPED STATES, REAL GDP GROWTH FORECASTS
- TABLE: EMERG ING MARKETS, REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- TABLE: EMERG ING MARKET EXCHANGE RATES