HUNGARY: Not all plain sailing
Hungary has recently found itself in a sweet spot, with inflation falling and bond yields low. But this is too good to last, economists warn
April was a good month for Viktor Orban, the Hungarian prime minister, and his centre-right Fidesz administration. Certainly for a government three years into its four-year term, and facing a recession the economy contracted by 1.7% last year things seemed on the up.
As a glance at the government website reveals, Orban was busy with ceremonial duties cutting ribbons at the expansion of a rolling stock manufacturer (Swiss-based Stadler a 13.6 million euros investment) and laying the cornerstone for the 200 million euros ($264 million) extension to Legos plastic plant at Nyiregyhaza, in the job-starved north-east.
Pomp, perhaps, but jobs in the pipeline nonetheless.
Meanwhile, the markets largely welcomed the Funding for Growth programme announced by Gyorgy Matolcsy, the newly appointed central bank governor albeit more because it involved modest amounts (500 billion forints, or about 1.7 billion euros) that would not put the forints exchange rate in danger and which would be designed to stimulate the small-business sector.
More fundamentally, a clutch of positive macroeconomic data surfaced: inflation in March came out at just 2.2%, and on April 23 the central bank cut the base rate to 4.75% both figures at levels not seen since the 1970s.
Better still, the general government deficit for 2012 as measured by Eurostat came in at a mere 1.9% of GDP, while bond yields and CDS spreads were at all-time lows.
Several economic indicators have signalled that Hungary is becoming more and more robust and confidence in the country is increasing, the governments media office stated on April 18.
It also emphasized that the deficit result meant that Hungary should be removed from the European Commissions Excessive Deficit Procedure (EDP), under which governments who spend more than 3% of GDP risk incurring restrictions on EU structural funding something the Orban government is desperate to avoid.
Hungarys fiscal deficit-to-GDP ratio was seventh-best within the EU, equal to that of Finland, and far better than the EU average, the government boasted. Last year, in the EU as a whole, 17 member states had government deficits that breached the 3% statutory limit... this data substantiates expectations that on the basis of statistics, Hungary must exit the [EDP].
TOO GOOD TO BE TRUE?
This is seemingly a long way from the grim days of early 2012, when heavily-indebted Hungary was promising to go to the IMF for a bail-out without pre-conditions. But if it all seems perhaps a little too good to be true, critics say thats because it is or, more accurately, because it fails to tell the whole story.
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Take jobs: yes, the employment rate was up, but the government conveniently forgot to mention that unemployment hit 509,000, or 11.8%, versus 11.7% a year earlier.
In the real economy, despite expansion by the likes of Stadler, Lego and the auto industry, foreign investors remain wary noting the unpredictability of the Orban government, whose punitive taxation policies, coupled with nationalistic rhetoric, have shaken foreign players in major sectors, including banks, retail, utilities and telecoms.
The banks, which agreed with the government in late 2011 that the special tax on assets would be halved from 2013, were dismayed when some months later the government announced that not only would the tax remain unchanged, but the sector would be further burdened by a financial transaction tax of 0.2% from this year. As a result, the banking sector, which lost 240 billion forints (830 million euros) in 2011, followed by 161 billion forints in 2012, expects to be hit by additional taxes of 400 billion forints this year.
As Mihaly Patai, president of the Hungarian Banking Association, said in April: For sure, you cant drain the blood [of banks] forever. The last three years has meant losses for the sector, and only a few banks remained profitable. There has been a 35% reduction in credit in the past four years... without credit the Hungarian economy cannot grow.
Lajos Bokros, finance minister in the 19956 socialist-liberal government, concurs, warning: Investment is down to 16% [of GDP]. This is not enough to sustain current levels of production.
And while nobody questions the fact that inflation is at record lows, this is largely the result of a high base (value added tax was raised to 27% in 2012) and government intervention in utility prices energy distributors were ordered to reduce household prices by 10% from January, a policy more redolent of the communist command economy, Bokros notes.
Could Matolcsys stimulus make a difference? Not really, say economists. Its small; there are issues of size, eligibility, margins and risk. We dont know too much about this yet, but if it was so great and so simple, it would have been hammered out already, one finance professional tells Emerging Markets.
As for the record-low bond yields, that is more to do with cheap money looking for yields than a vote of confidence in Hungary, analysts say.
The Hungary story remains one that investors are happy to buy with a contained outlook over the next six months, Peter Attard Montalto of Nomura wrote in a note at the end of April, adding: The worries remain in the long term, once the liquidity tide goes out globally.
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