Hungary Infrastructure Report Q4 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 continue to expect the construction industry's value for the year to be HUF960bn (US$4.69bn). The figure represents a real decline of 11.33% for the sector. The latest data from the country's statistical office are showing a sharp deterioration in construction spending, but there are some surprising pockets of growth. We still expect 2010 to bring minuscule growth, with a healthier rebound in 2011.

Construction accounts for almost 4% of Hungarian GDP. The importance of the sector is explained by the sharp deterioration in the rest of the economy; as the broader economy improves in 2010, construction should begin to represent a smaller proportion of the total. 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 we expect the rate at the end of 2009 to be 14%.

Hungary has become increasingly dependent on EU funding to proceed with its projects. The National Development Agency has been quick to announce new projects, but its announcements are noticeably short on details about contractors and schedules. Nevertheless, there is progress. MTI-Econews reported a noticeable number of cornerstones being laid in the latest quarter on a range of logistics centres throughout the country.

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 has warned 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 central bank went so far as to tell journalists it would ask the government to limit banks' retail lending, especially in foreign currencies, believing that the competition for customers was incurring systemic risks. But the vulnerability is less today than it was several months ago. The central bank felt confident enough to cut interest rates a full percentage point in July, an indication that the worst of the crisis is over. The central bank specifically cited the stability of the currency and investors' appetite for Hungarian debt. A government official also told Dow Jones that the government may not draw on the remainder of the EUR20bn IMF credit line this year.

The economic climate is forcing the government to take steps that could prove to be politically fraught.

The prime minister called for a freeze on hiring in the public sector to save HUF1bn (US$5.3mn). But the freeze is meant to explicitly exclude involvement in European Union labour projects. Prime Minister Gordon Bajnai also told local governments that they would have to cut spending in 2010.

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