Hungary Infrastructure Report Q2 2009

Since the last quarterly report, Hungary's infrastructure outlook has worsened further, reflecting the economic slowdown that is sweeping the globe in the wake of the credit crisis. Using BMI's new methodology for forecasting, we now expect Hungary's construction industry to be worth HUF799.4bn (US$4.08bn) in 2009. That's US$1bn less than we forecast only one quarter ago. In percentage terms, that's 13.26% less than in 2008. After annual contractions of 8.36% in 2008 and 11.86% in 2007, the booming Hungarian infrastructure sector has become a distant memory. BMI now expects another year of contraction in 2010, of 3.13%, before construction growth resumes in 2011. Only three months ago, we expected growth to resume in 2010.

Construction accounts for just over 3% of Hungarian GDP. But the rest of the economy isn't doing any better. BMI expects GDP to contract by 3.4% in 2009, more than the government's own forecast for a 2.5%-3.0% contraction, and the risk is that the contraction will be even more severe. Even in 2010, BMI expects only the slightest economic growth of 0.1%. Unemployment already crept up to an average monthly rate of 8% in the final three months of 2008 and many analysts expect that figure to increase as employers respond to worsening conditions.

If there is a bright spot in Hungarian infrastructure, it's in the civil engineering works that are continuing, albeit at a much slower pace, despite the slowdown. But government borrowing is starting to cause worries. The central bank has warned of the dangers of too much debt. If the downturn continues - and every week seems to bring a postponement in the timing of global recovery - the government is going to be hard pressed to do anything that can protect infrastructure activity from the general economic climate.

Hungary has already turned to the IMF for loans to help it through the crisis and must now work to meet IMF conditions on deficit spending. Standard & Poor's warns that the country faces a long, painful period of adjustment. Hungarians' exposure to foreign loans, especially denominated in Swiss francs, makes the country extremely vulnerable. The direction of inflation should argue for monetary easing, but the rising government debt and international uncertainty may force the central bank to keep interest rates painfully high.

The economic climate seems to be straining the political climate. The EU energy commissioner felt obliged to wrap the prime minister's knuckles for his comments about financing for the Nabucco oil pipeline. Government announcements about projects can at times seem designed to stimulate optimism.

The danger is that economic anxiety leads to overstating the benefits of existing projects and the likelihood of potential ones.

Hungary's biggest construction companies are already feeling the pinch. Vegyepszer's revenues are on a precipitous descent and the company has announced several hundred office layoffs. Strabag's problems stem from Russia, where it has placed many of its growth ambitions for the next decade.