Population 9.962 million
GDP 128.844 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
1.2 |
1.7 |
-1.3 |
-0.3 |
|
Inflation (yearly average) (%)
|
4.9 |
3.9 |
5.8 |
4.8 |
|
Budget balance (% GDP)
|
-4.3 |
4.2 |
-2.9 |
-4.2 |
|
Current account balance (% GDP)
|
1.1 |
0.9 |
1.1 |
1.8 |
|
Public debt (% GDP)
|
81.3 |
80.6 |
74 |
75.5 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Efficient infrastructures and regulatory framework
- Continued progress in prudential supervision of banks
- Diversified economy
- Skilled labour force
- Important stock of foreign direct investments
WEAKNESSES
- High public debt
- Considerable need for external finance and insufficient accumulation of foreign exchange reserves
- Exchange rate volatility
- High exposure of borrowers to exchange rate risk
- Authoritarian drift of the political power
Risk assessment
Economy fragile and dependent on the evolution of eurozone debt crisis
The Hungarian economy entered into recession from the second half of 2011 and stayed in recession until 2012 following the worsening of domestic demand. Exports also slowed due to the European crisis. In 2013, growth will again be hit by high levels of public and private debt. Although the Central Bank cut its benchmark interest rate 4 times to boost growth in the second half of 2012 (from 7% to 6%), investment and private consumption contracted in 2012. Nonetheless, this expansionary monetary policy is expected to continue in 2013. But these measures will provide only moderate relief to households, which face a decrease of their disposable income and a high, though stabilised, unemployment rate (10.5%). Private consumption will decline again in 2013. Moreover, in a context of high borrowing, the interest rate cuts will first help bank deleveraging. Bank profitability will continue to be affected by the regulation adopted in late 2011, which authorises households with debts in foreign currency (especially in Swiss franc) to repay the balance of their loans in local currency. Besides, Hungary has the highest bank taxes in Europe. Investment will also be limited by tighter credit supply. The trade balance will drive growth in 2013. On the supply side, the relatively good orientation of the automotive sector will drive exports. Indeed, many high-end manufacturers are present in Hungary and their models aimed at the strongly growing emerging markets will benefit Hungary’s economy. On the domestic scene, difficulties will persist, in particular in the construction, metallurgy and retail trade sectors. Inflation is likely to be well above 3% due to agricultural price pressure in early 2013 and the Central Bank’s expansionary monetary policy.
Negotiations with the IMF begun in January 2012 could fail
Hungary is the most indebted country in Central Europe. To reduce the debt, Prime Minister Victor Orban has introduced an unconventional macro-economic adjustment policy based on lower consumption taxes, the institution of taxes on non-transferable activities (banks, telecommunications, energy) and nationalisations (pension funds). Budapest needs to refinance about 5.6 billion euros of debt securities and repay 4.5 billion euros to the IMF in 2013, of which nearly half in the first quarter. Talks have started for a loan of 15 billion euros over 3 yeas. However, the government rejects the IMF conditions since January 2012. The IMF wants to see a change to the flat-rate income tax threshold (16%) and to taxes on banks and businesses.
In 2013, the current account surplus is likely to increase due to an improvement in the trade balance. However, despite the adjustment efforts since 2009, there is still a substantial need for external finance. In a context of increased investors’ risk aversion, sources of finance are likely to dry up, whether these are FDIs, portfolio investments or bank loans granted by the parent companies (60% of Hungarian bank assets are held by eurozone banks). In this context, the volatility of the forint is likely to remain marked, with investor mistrust fuelled both by the eurozone crisis and the unpredictability of the macro-economic policies. Private sector debt in foreign currency remains considerable, much of it denominated in Swiss francs. Coface’s payment record could be affected.
Very controversial political environment
The government, which took office in May 2010 and is led by Viktor Orban of the nationalist centre-right party (Fidesz), was elected as a reaction to the adjustment measures put in place by the previous government under the first IMF agreement. Whether the government will redirect the macro-economic policy under a new IMF programme remains unclear. Relations with the European Union are difficult, as the EU has accused Hungary of violating the independence of the judiciary. The independence of the Hungarian Central Bank is also the subject of debates, which will intensify in early 2013 due to the appointment in February of a new governor.
