Hungary Infrastructure Report Q3 2009

Hungary's infrastructure outlook for 2009 has improved marginally since BMI's previous report, but the sector will still be much worse than it was last year. We now expect the construction industry's value for the year to be HUF960bn (US$4.69bn). That is better than the HUF799.4bn (US$4.08bn) we foresaw only a quarter ago, but it's not much to cheer about. The revised figure still represents a real decline of 11.33% for the sector. Our figures do, however, show that Hungary's 2009 decline is coming off of a much better 2008 than previously expected. And rather than a contraction of 3.13% in 2010, we now expect the sector to show minuscule growth.

Construction would therefore account for almost 4% of Hungarian GDP. The growing importance of the sector is explained by the sharp deterioration in the rest of the economy. BMI expects GDP in 2009 to contract by 6.4%, dragged down by falling consumption, declining foreign investment and weak exports.

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.

Hungary has become increasingly dependent on EU funding to proceed with its projects. The National Development Agency is quick to announce new projects, but its announcements are noticeably short on details about contractors and schedules. Nevertheless, some projects are showing signs of real progress.

The M3 motorway, for example, looks like it will have the funding to move to the construction phase this year.

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 rap 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.