Hungary Business Forecast Report Q4 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	68
ISBN Number	not applicable
Product Code	BMI04094

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Summary

Deep Recession Followed By Low Trend Growth In the Hungary Q409 Business Forecast Report we focus on the medium-term growth outlook for this Central European economy which has been hit hard by the ongoing global economic crisis.

We expect the 2009 recession to be followed by a period of relatively low trend growth through 2013, as external demand for key exports remains subdued, in addition to our expectation that the deleveraging process across CEE still has much further to run. We also provide analysis of the country's banking sector, which we expect to come under significant strain through the medium term. That said, we have been encouraged by the formation of Prime Minister Gordon Bajnai's technocratic government, and expect parliament to push through necessary yet unpopular fiscal austerity measures in the 2010 budget by October. Nevertheless, with the opposition Fidesz party remaining firmly ahead in public opinion polls, we expect to see a change in government following next year's parliamentary elections, which could pose a risk to badly-needed structural-economic reforms going forward.

Parliament passed the government's proposed 2010 tax laws on June 29, with 211 parliamentarians voting in favour compared to 152 against. The tax bill represented a key package of legislation required for Budapest to comply with IMF and EU stipulations governing the provision of Hungary's EUR20bn Stand-By Arrangement (SBA), and represents a positive development for Hungary in several ways. Indeed, not only will the bill help limit fiscal deterioration and help ensure future tranches of SBA credit, but it also represents a major positive development for political stability and policymaking through to April 2010, when the next parliamentary election is scheduled to occur.

While emergency EU-IMF financing has hitherto provided a key source of external capital during Hungary's financial crisis, we maintain our view that over the medium term, balance of payments risks will remain pronounced. Indeed, with the country's 17-month SBA due to expire in March 2010, and external financing conditions set to remain constricted through the medium term, we caution that foreign investment is not likely to suddenly flow back into the economy, particularly for a country with as high an economic risk profile as Hungary. Moreover, with the possibility of a 'double-dip' recession scenario emerging (which we have been highlighting as a key risk since Q408) in the eurozone and US continuing to gain traction, we caution that risks to balance of payment's stability in Hungary will remain in play through to 2010.

On June 9, it was reported that the Croatian Competition Agency has conditionally approved the managerial takeover of national energy company Industrija Nafte (INA) by Hungary's MOL. The deal, struck between MOL and the Croatian government in January, has already been sanctioned by the European Commission. In the current decade, MOL has pursued an aggressive expansion strategy in the Eastern European downstream segment, making it one of the largest home-grown players in the region. However, we caution that its turnover will come under pressure through 2009 and 2010 as global energy demand remains depressed.

Content

Executive Summary
Deep Recession Followed By Low Trend Growth
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Tax Bill Success To Help Government Cling On
- The Hungarian government's success in getting a key package of tax laws passed in parliament will help it to
- retain power through to a scheduled April 2010 parliamentary election, which in turn bodes well for economic
- policymaking
- Table: Political Overview
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Protracted Low Growth To Follow 2009 Crisis
- Hungary's economy is set for a protracted period of low growth going forward, with 2009's economic crisis
- followed by an average rate of real GDP expansion of 2.4% between 2010-2013
- TABLE: ECONOMIC ACTIVITY
- Banking Sector
- IMF Intervention To Mitigate FX Risks
- The Hungarian banking sector is set to pay for years of excessive leverage in 2009 and 2010, and this will result
- in a marked contraction of credit, severely impeding economic growth through the medium term
- TABLE: CURRENT ACCOUNT
- Balance Of Payments
- Capital Inflows Underpin BOP Stability. For Now
- The sudden inflow of external capital into the Hungarian economy in the first quarter of 2009 as a result of
- Budapest's 17-month Stand-By Arrangement with the IMF has significantly reduced the risks of a balance of
- payments crisis scenario emerging
- Exchange Rate Policy
- Forint Depreciation To Resume In Medium Term
- The Hungarian forint is set to depreciate again by end-2009, as the Q209 global market rally loses momentum
- and the country's dire macroeconomic fundamentals start to reassert themselves
- TABLE: EXCHANGE RATE
- Monetary Policy
- Rate Cuts Off The Short-Term Agenda
- Hungarian inflation is likely to remain above-target in the short term as a consequence of indirect tax increases,
- and this is in turn likely to tie the hands of the National Bank of Hungary when it comes to stimulatory monetary
- policy
- TABLE: MONETARY POLICY
- Fiscal Policy
- Budget Deficit To Remain Above 3.0% Through 2013
- We maintain our view that Hungary's fiscal deficit is set to exceed the IMF-mandated ceiling of 3.9% of GDP in
- 2009, and project the budget shortfall coming in at 4.1% as tax revenues collapse amidst the economic downturn
- TABLE: FISCAL POLICY
- Regional Outlook
- Devaluation Of Fixed Pegs Will Fuel Financial Instability
- We hold to our view that the Baltic and Bulgarian pegs will be devalued, while simultaneously cautioning that this
- will pose significant risks to Western European banks and Eastern European investor sentiment
- Regional Outlook II
- Real Sector Deterioration Is The Key Risk Now
- The immediate crisis risks facing the Central and Eastern European (CEE) banking sector in Q408 have subsided
- markedly through H109, with the stabilisation of global credit markets mitigating the risks of capital flight in the
- short term
Chapter 3: 10-Year Forecast
- The Hungarian Economy To 2018
- Euro-Adoption To Stabilise Economy
- We continue to hold a reasonably sanguine view on Hungary's real economic convergence prospects with the
- eurozone over the long term
- Table: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Special Report
- The Fate Of ???Chindia'
- Overview
- Although China and India will continue to grow during the global recession of 2009-2010, they are not immune to
- the downturn, and face a number of risks in the near term
- China And India SWOT
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 Framewo rk Ratings
- Infrastructure
- Market Orientation
- Table: Europe, FDI Annual Inflows
- Table: BMI Trade Ratings
- Table: TOP EXPORT DESTINATIONS
- Operational Risk
Chapter 6: Key Sectors
- Tourism
- Executive Summary
- This quarter, BMI has revised down its forecast for foreign visitor arrivals to Hungary in 2009, with negative
- growth of 8% y-o-y now expected
- Table: Hungary's Tourism Indust ry, 2006-2013 (US$mn, unless ot herwise st ated)
- Retail
- Executive Summary
- Key drivers of growth in the Hungarian retail market over the next few years will be increased economic prosperity
- (despite the current financial crisis), easier access to credit, and the demand for premium products
- Table: Key Retail Indicators, 2007-2013
Chapter 7: BMI Global Assumptions
- Global Assumptions
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: GLOBAL & REGIONAL REAL GDP GROWTH
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- TABLE: EMERG ING MARKET EXCHANGE RATES