Bloomberg News

Hungary Recession Probably Extended Last Quarter

November 14, 2012

Hungary’s recession probably continued in the third quarter as austerity measures hurt domestic demand, the euro region’s debt crisis weakened exports and western banks withdrew funding.

The economy shrank 0.1 percent in July-September from the previous three months, a third consecutive quarterly decline, according to the median estimate of seven economists in a Bloomberg survey. Gross domestic product shrank 1.3 percent from a year earlier, a poll of 19 analysts showed. The statistics office will report the data at 9 a.m. in Budapest today.

Hungary is in its second recession in four years as trade and banking links with the slumping euro area drag down growth. Foreign lenders forced to pay Europe’s largest bank levy are withdrawing capital and funding, restricting credit. Measures to cut the budget deficit to avoid a freeze of European Union development funds are hurting business and consumer confidence.

“It’s weakness in the domestic economy combined with a difficult external environment and the government has been busy trying to trim back the budget deficit,” Nigel Rendell, an analyst at Medley Global Advisors in London, said by phone yesterday. “It’s really hard to find any areas of growth in Hungary.”

The forint traded at 285.07 per euro at 5:50 p.m. in Budapest yesterday. It has gained 10.4 percent against the euro this year, the world’s best performance, as Hungary has benefited from stimulus by the U.S. Federal Reserve and the European Central Bank, investors’ hunt for higher-yielding assets amid record-low rates in the developed world and speculation that the government is nearing a loan accord with the International Monetary Fund.

IMF Talks

Hungary requested aid a year ago as its credit rating was cut to junk. Talks for a loan of about 15 billion euros ($19 billion) were delayed multiple times because of the Cabinet’s resistance to legal and economic conditions set by the IMF and the EU.

Hungary’s 100 billion-euro economy is the fourth-largest among the EU’s eastern members after Poland, the Czech Republic and Romania, according to Eurostat figures.

The Czech statistics office may say today that the economy contracted 0.2 percent in the third quarter from the previous three months, Romania may say that its GDP was unchanged in the quarter, while Poland on Nov. 30 may report 0.2 percent expansion from the previous quarter, according to separate surveys of economists.

Eastern European credit growth has stalled because of the euro region’s recession and a withdrawal of funding by the western lenders that dominate the market, with Hungary being one of the worst affected, the Vienna Initiative group of international lenders and regulators said Nov. 12.

CDS, Bonds

The cost to insure Hungarian government debt against non- payment with five-year credit-default swaps was 289 basis points yesterday, falling from as high as 735 points Jan. 5, data compiled by Bloomberg show. The yield on the benchmark 10-year forint-denominated government bond was 6.88 percent yesterday, down from 9.9 percent at the end of last year.

The central bank on Oct. 30 reduced the two-week deposit rate for a third month by a quarter-point to 6.25 percent as policy makers grew more concerned about the recession than inflation. There’s still room to cut the EU’s highest borrowing costs as Hungary’s risk assessment improves and the inflation goal remains within reach on the policy horizon, central bankers Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky said Nov. 5.

Rate Outlook

Bartfai-Mager, Gerhardt and Kocziszky were among the four non-executive Monetary Council members who outvoted Magyar Nemzeti Bank President Andras Simor and his two deputies to cut rates the past three months, according to the central bank.

Credit to households shrank 14 percent this year from last and loans to companies are down 6 percent, Morgan Stanley (MS:US) said in an Oct. 26 report citing its own and the central bank’s calculations.

“Hungary has seen the sharpest contraction in credit in central and eastern Europe,” Pasquale Diana and Jaroslaw Strzalkowski, London-based economists at Morgan Stanley, wrote in the report. It’s “a clear sign that not only is the credit channel not working, but banks are also continuing to retrench aggressively.”

Hungary’s economy will expand 0.3 percent next year and 1.3 percent in 2014 after contracting 1.2 percent this year, according to the EU’s Brussels-based executive.

GDP Outlook

The government last month cut its GDP forecast to a contraction of 1.2 percent this year from 0.1 percent growth and predicts an expansion of 0.9 percent in 2013. Growth may reach 1.4 percent in 2013 as investments by companies such as Daimler AG and Volkswagen AG (VOW) yield results, Economy Minister Gyorgy Matolcsy said last week.

In its latest spate of austerity measures, the government backtracked on a pledge to cut the EU’s highest bank tax in half and said it will increase a planned tax on bank transactions, introduce a levy on utility companies’ infrastructure, reduce local-business benefits and raise taxes on employee benefits.

“The economy is characterized by weak potential growth, partly caused by policy uncertainty and increasingly distortionary taxes, most notably very high extra burdens on the financial sector,” the European Commission said in a Nov. 7 report.

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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