Hungary fears mount as analysts eye toxic economic cocktail
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Emerging Markets

Hungary fears mount as analysts eye toxic economic cocktail

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Low inflation, falling FDI and an enfeebled banking sector are fuelling concerns over Hungary’s economic outlook

Hungary’s economy is facing a toxic combination of low inflation, tumbling foreign direct investment and an autocratic government determined to interfere in the country’ banking system, analysts have warned.

Foreign direct investment (FDI), a key measure of the strength of this outward looking economy, was negative in the first nine months of 2013, according to the OECD. Foreign corporates stripped $2.4bn out of the country in the quarter to September 2013.

“Hungary needs to invest to grow, and it needs FDI,” said Neil Shearing, chief emerging market economist at London-based Capital Economics. “Signs that FDI is falling as a percentage of GDP is a big concern.”  

Inflation is another area of pressing concern. Consumer prices inched down 0.1% year-on-year in April, and have been hovering at close to zero since October, “surprising” investors on the downside, Commerzbank said in a research note. Weak inflation forced the central bank to cut interest rates by 10bp in April, to 2.6%, and economists warned that the trick might need to be repeated to stave off rising concerns of long term deflation.

Perhaps even more worrying is Hungary’s enfeebled banking sector, with foreign banks being increasingly targeted by the president, Viktor Orbán. The country’s premier, who returned for a second stint as leader in 2010, has said he wants to see at least half of the banking industry return to Hungarian hands.

Local Hungarian banks are being targeted by central authorities too. Last year, Hungary became the first country in Europe to introduce a surcharge on financial services, ranging from withdrawals to bank transfers.

The EBRD reckons Hungary has the highest banking sector tax in the world. “Our biggest concern in Hungary relates to the weakness of its banking sector,” said Shearing. “But there are also problems relating to growth, and also to policy uncertainty, which is an issue you don’t see elsewhere in the region, in the likes of Poland and the Czech Republic.”

EBRD officials have warned that an overhang of non-performing loan (NPLs) continue to hold back the country’s recovery. While Hungary’s economy “rebounded” well last year, growing by 1.1% year on year, according to Capital Economics, much of the expansion was driven by one-off factors such as cuts in utility tariffs and a final disbursement of European Union funds.

Other challenges, on the policy side, will emerge in August, when the country’s central bank, run by Gyorgy Matolcsy, officially revamps its monetary policy to buy more Hungarian forint-denominated government bonds. Some are encouraged by the move, which should cut external borrowing and boost growth. But many others are concerned at the perceived state takeover over of a central bank now under the purview of Matolscy, a key ally of Orbán.

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