Hungary Business Forecast Report Q3 2009

The Worst Recession Since The Transition To Capitalism

In 2009, Hungary is heading for its worst economic contraction since its 1991 transition to market capitalism from a centrally planned economy. We forecast real GDP growth to come in at -6.4% and 0.1% in 2010, as domestic consumption, foreign capital inflows and export demand all collapse.

The 3.6% economic contraction that we project for the eurozone will be a particular problem for Hungarian exporters, as well as weighing on inwards FDI and bank lending. The effects of global demand destruction will be compounded in Hungary by the need to undergo a long-winded deleveraging process as the massive burden of consumer loans is unwound, which will impact both household consumption and domestic investment. This severe recession will raise risks of further instability in domestic politics. With Prime Minister Ferenc Gyurcsany having already resigned, citing his desire to clear the way for a broader crisis-management administration, we stress that the incoming cabinet of Prime Minister Gordon Bajnai will take over in a time of national difficulty not seen since Hungary's post-communist transition.

Prime Minister Gordon Bajnai took office on April 14 after the premature resignation of his predecessor, and has since appointed Peter Oszko - the erstwhile head of Deloitte's Hungarian unit - as finance minister. Bajnai and Oszko are political independents who have pledged to focus on managing the economic crisis and restoring financial stability, principally via an extensive programme of fiscal consolidation. While this focus on the economy is encouraging, we caution that the new government's dependence on Socialist Party support, coupled with its extremely low popularity, may curtail its ability to pursue the extensive reform measures necessary. On the international front, Hungary will remain firmly committed to its deepening integration with NATO- and EU-led counterinsurgency and peace-building missions - as a recent armoured vehicle acquisition illustrates - due to the security and economic benefits that these two alliances provide.

The deep recession that Hungary will suffer this year will have an extensive impact throughout the economy. Indeed, while the recession itself will be painful, we expect the sharp contraction of GDP to correct a number of burdensome asymmetries. The current account deficit is likely to narrow to 3.6% of GDP in 2009, after soaring to 8.5% in 2008, as imports and profit repatriation both contract. The fiscal deficit is similarly likely to fall to 3.0% of GDP this year, from 3.4% last year, as an inevitable contraction of revenues is more than offset by Bajnai's extensive fiscal austerity programme reining-in spending. Inflation should also fall to only 2.0% year-on-year (y-o-y) by endyear as weak demand weighs on price growth, from 3.5% at end-2008, although forint weakness will pose a significant upside risk to this outlook.

Hungary's business environment will remain hamstrung by the scarcity of credit in 2009, as global financial conditions remain distinctly unfavourable and as the deleveraging process runs further.

Bureaucracy and the still-significant role of state enterprises will also prove barriers to business flexibility, hampering innovation and competition. That said, the combination of relatively low wages with relatively high skills will remain appealing to those investors that do still have capital to spare.