Credit crunch, did someone use the expression credit crunch?
Monday, December 24, 2007
Merry Xmas and A Happy New Year
Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.
Credit crunch, did someone use the expression credit crunch?
Credit crunch, did someone use the expression credit crunch?
Friday, December 21, 2007
Hungary On The Doorsteps of a Recession?
Hungary Facing Stagflation?
Oh how I do wish I could have something more in the spirit of a yuletide message for the people of Hungary at this point. Unfortunately this is not the case, and entering in media-res as it were, directly onto the topic in hand, things are really begining to move quite quickly in Hungary now, as one external observer after another begins to realise that policy in Hungary may now be well and truly stuck in a cul-de-sac (or even double bind). Indeed, unfortunately, as we will see below, I fear that they may soon start to move even more quickly. The first bit of relevant news in recent days has been the publication by PNB Paribas of an analysis entitled "Stagflation Fears".
Well First There Is the Inflation
Of course, one head of the stagflation coin is the inflation part, and in Hungary's case, inflation has been running at far higher levels than anyone would have hoped for when the austerity package was introduced in the autumn of 2006. As we can see from the chart, it has been persistenly and troublingly high throughout 2007, and although it dropped significantly in September (as some of the earlier one-off austerity hikes started to drop out of the system) it has been on the rebound again since, reaching 7.1% in September.
Oh how I do wish I could have something more in the spirit of a yuletide message for the people of Hungary at this point. Unfortunately this is not the case, and entering in media-res as it were, directly onto the topic in hand, things are really begining to move quite quickly in Hungary now, as one external observer after another begins to realise that policy in Hungary may now be well and truly stuck in a cul-de-sac (or even double bind). Indeed, unfortunately, as we will see below, I fear that they may soon start to move even more quickly. The first bit of relevant news in recent days has been the publication by PNB Paribas of an analysis entitled "Stagflation Fears".
Well First There Is the Inflation
Of course, one head of the stagflation coin is the inflation part, and in Hungary's case, inflation has been running at far higher levels than anyone would have hoped for when the austerity package was introduced in the autumn of 2006. As we can see from the chart, it has been persistenly and troublingly high throughout 2007, and although it dropped significantly in September (as some of the earlier one-off austerity hikes started to drop out of the system) it has been on the rebound again since, reaching 7.1% in September.
And inflation at this point is far from having been "bled" from the system despite the apparently tight monetary policy being applied by the central bank, and the auterity package from the central government. One indication that inflationn is far from being purged is provided by the recent agreement reached by Hungarian government with public sector employee representatives to raise wages by 5% on average in 2008. This would seem to me to put in immediate question the realism of the governments notional inflation target of 4.8% annual average inflation for 2008. (Note that the austerity package announced in the autumn of 2006 said wages in nominal terms would not go up in 2007 and 2008., however the government is justifying the agreement by indicating that the fiscal adjustment package remains intact since the number of employees in the public sector has been reduced by 6% (45,000 people) in the past 12 months, and hence the total cost to the treasury will not rise (actually this is a really ropey bogus argument, since you do have to take into account the cost of those who remain unemployed, but even more to the point one needs to know just how many of the people who left public service were offered some sort of early retirement, and again the cost of the pensions which accrue here do also need to be accounted for). But this does not mean that this rate of increase will not become a landmark for private sector workers, in a situation, remember, where the value of real wages - which have been falling as the chart below reveals - have to continue to decline, given that the forint (or if you prefer the REER) can't. Have to continue to decline that is, if Hungary is to be able to attain a significant export lead recovery, which is, I would argue, at this point in Hungary's history about the only path available.
What we can see immediately is that the bulk of the reduction in real wages (which has been real enough, and can be see from the consumption data below) has not been a cost efficiency in Hungarian business activity, but a transfer of fiscal obligations from the government debt onto the individual employee via social security contributions. So really, in a round about way, the cost of Hungary's population ageing problem is being transfered from the government onto the wagearner consumer. And I'm sure it hurts. The thing is, the fact that much of this has been a bookeeping exercise (the whitening of undeclared wages, etc) doesn't get us out of the inflation problem which has been produced at the same time (and one is immediately put in mind here of Germany, and that infamous 3% VAT hike to pay for the health system, and the way that sent domestic consumption shooting downhill in a way which is not un-reminiscent of what has happened in Hungary). So the fact that wages are now set to rise at around 5% in the public sector in 2008 (and the fact that this is only the public sector simply doesn't cut any ice as an argument, given that wages in the private sector have risen consistently faster than those in the public sector throughout 2007) should lead us to imagine that we could easily be looking at headline inflation in the 6% to 7% range in 2008, and at exporters struggling to mantain competitiveness in the face of a high forint and rising internal costs (assuming that is that the forint doesn't tank in the meantime, which may not be a realistic assumption, see below). So you can't just hand yourself out a 5% wage rise and hope that in some miraculous way you can get a consumer "feel good" effect and say 3% headline inflation. Things just don't work like that in the real world, and not when you are in the sort of situation which Hungary is in they don't.
And Then There is the Stagnation
In addition to the inflation problem, the Paribas analysts also stressed Hungary's weak consumption and investment activity, and pointed to the type of economic gridlock which results from needing to apply at one and the same time stringent fiscal and monetary policy, while in the background internal demand simply collapses, and exporters, who are doing a valiant job under the circumstances let it be said, struggle under the weight of the high value of the forint, which cannot, let it be noted, be allowed to drift downwards (which would be one sensible move under the circumstances) due to the problem of private indebtedness and all those Swiss Franc loans. I think the consumption problem is clear enough:
and if your not convinced by this, then you could try looking at retail sales, which tell a very similar story:
And if you are interested in Gross Fixed Capital Formation (investment) try this chart for construction:
As Paribas indicate, the only driving force of economic growth in Hungary in the near future is likely to be exports, but since the external demand situation is deteriorating by the day Hungary this may be insufficient to prevent Hungary falling off into recession (think Japan here).
This is the second report issued about Hungary by a major investment bank in quick succession (the other was Merill Lynch), and both of them have drawn attention to the combination of stagnant growth and high inflation under which Hungarian policy is labouring. The difficulty is that the need to maintain the value of the forint at or near its present levels (or otherwise all those with external debts - mainly households - will start to experience what they call in the parlance "distress". So no one anticipates drastic moves in monetary policy - which the situation surely merits, just look how the Fed is responding to a much milder problem in the US - and interest rate easing moves are expected to be limited. Paribas si - even in the face of the near recession call - sticking to its outlook for an interest rate reduction to 6.5%, while Merrill Lynch is predicting an even more aggressive reduction to 6.25%. None of this, of course, will be to the liking of yield driven financial investors, and the forint will certainly become rapidly vulnerable as monetary policy steadily moves down this path as it surely has to.
Large November Sell-Off In Forint Denominated Assets
In addition we have just learnt from the Magyar Nemzeti Bank that foreign investors sold-off vast amounts of forint denominated financial assets in November. The curious thing is that the forint only weakened slightly, despite the fact that approximately HUF 750 billion of instruments were virtually dumped onto the local market in very short order. One explanation for this curious situation may well be the high demand for euro and Swiss franc denominated consumer loans in Hungary, a demand which has possibly even accelerated during the pre-Christmas shopping season. But if this is the explanation it does leave us with the very awkward question of what exactly happens when the demand for such loans slackens, and the associated flows start to dry up.
The trend towards forint divestment really got going in October, but the monthly rate was not extraordinary (approximately HUF 70 billion net). As a result the forint remained reasonably stable against the euro at around 251 throughout the month.
During the period from the end of September to the end of November, foreign investors sold a huge HUF 800 billion worth of Hungarian instruments in the short term forex market. Of this, increased swap positions accounted for HUF 500 billion (new synthetic short forint positions), while stock and government bond sales amounted to HUF 200 billion and HUF 100 billion, respectively. At the same time, even if on a smaller scale according to MNB, foreign investors were busily opening positions against the forint in the options markets.
The growing unease about higher risk instruments in the context of the ongoing global credit squeeze is undoubtedly the main driving force behind the sale of the Hungarian instruments, this and a growing wariness about Hungary's vulnerability in the face of a global downturn.
Hungary's recent macroeconomic performance and the absence of any sort of optimistic outlook have undoubtedly also played a role, and in particular the high level of external indebtedness of individual Hungarian citizens, the high current account deficit, the weak internal demand situation and the general concerns about ongoing and long lasting slow economic growth.
The central bank's figures reveal that foreign investors divested large amounts of Hungarian stocks in November (continuing a trend that really got started back in August). According to Portfolio Hungary - who have examined the available information on ownership structures and share prices, OTP and Magyar Telekom are likely to have borne the brunt of the sell off.
What was new this time round though was the divestment of Hungarian government bonds (mostly in the secondary market), which accounted for a significant part of forint sales in November.
In this way HUF 750 billion was pulled straight out of the market in November. As I say, the really striking thing is how this major capital transfer was only slightly reflected in the EUR/HUF rate.
One possible explanation for this surprising situation is the rage for foreign currency denominated consumer loans that continues to grip Hungary. The volume of new mortgage loans climbed to the previously unseen level of HUF 130 bn in October, and this increase was almost exclusively attributable to the increase in CHF-denominated loans (HUF 120 bn). Detailed data from the National Bank show that while the monthly amount of new CHF-denominated housing loans rose to the exceptional level of HUF 55-60 bn, mortgage loans for consumption purrposes (ie "refis" or liquidity extraction, not to buy houses) became almost inexplicably fashionable, rising by 30% month-on-month to reach the unprecedented level of HUF 62.5 bn.
Naturally such transactions create a large increase in demand for the forint (the banks flows coming in), a trend which is in and of itself more than likely powerful enough to have offset the negative impact of lost investor confidence on the exchange rate.
Moral Hazard and the Coming Correction
Clearly this situation is now really very very delicate, one strong push and a whole pack of cards can come tumbling down. Borrowing today to pay back yesterday is a dangerous policy at the best of time, but when your currency might be about to fall of a cliff (think what happens when the demand for new loans dries up) it has to border on recklessness if you are borrowing unhedged in another currency. And remember, when the bonfire starts (not the one of our vanities I hope) in Eastern Europe (and it may not start in Hungary at all in the first place) it will undoubtedly rapidly spread from one of the "at risk" countries to another.
What all this suggests to me is that a lot of Hungarians are trying to maintain current consumption by borrowing forward aginst their homes (ie some sort of "consumption smoothing) in the hope and expectation that rising property values in the future will help them sweat off the debt. If this rise does not materialise, then the very least that can be said is that all of this will need, at some point, to be clawed back from current consumption. All of this also represents a new form of moral hazard for the central bankers over at the ECB and indeed for the EU Commission itself, since all this borrowing in Swiss Francs has to be based on the assumption that with so many people doing it the Hungarian authorities will never dare to let the forint slide (you know, there's safety in numbers) or, pushing the buck back one stage further, the EU Commission and the ECB won't let the worst things come to the worst.
But this is very dangerous thinking, since in the first place there are a lot of people now out there riding around on the back of the same idea (think Italian government debt, for eg), and people may be seriously overestimating the ability of the political and monetary authorities to contain such a large and complex set of problems. It should also not go un-noted that the whole weight of the ECB is currently not able to stop the spread of the growing credit crunch across the entire eurozone and beyond (even if the most recent massive injection has temporarily stopped the rot). Thus they may well not be able to stop Spanish homeowners (some 75% of whom are on variable Euribor related mortgages) from really feeling the pain, and believe me if they could do this, they would, since having the Spanish economy well and truly down and out as we enter the next downturn is the last thing in the world they want.
Lastly and just as importantly, as I have been arguing, all of this puts the Hungarian central bank in a real double bind, since they cannot ease monetary policy at this point without precipitating a tremendous weakening in the forint, so interest rates are high and need to stay high, and meanwhile Hungarian domestic demand gradually gets strangled, at the same time as the ongoing internal inflation and the negative external environment act as a strong brake on export growth.
Now, as I said at the start of this post, my impression is that the recession Hungary is now entering is likely to be a protracted and difficult affair. In order to justify this assumption (which we will have time enough to think about in due course) I would need to get into Hungary's very special demography - which I have attempted to do in my Just Why Is Hungary So Different From The Rest of the EU10? post. But, as you may have noticed, I have managed to write all the above with barely a mention of this contentious topic, so I think I will leave it at that for now. As they are want to say over in San Diego "Sufficient Unto the Day is the Evil Thereof". Reputedly that is just before they "whack" you, so, exercising caution as the better part of valour, I will now take my leave of you.
Hungary Foreign Trade October 2007
Hungary's October foreign trade surplus exceeded the EUR 41.6 million preliminary figure by EUR 6 million, according to a revised Central Statistics Office report. Thus the country's total foreign trade gap for the first 10 months of 2007 was down EUR 356 million, a mere 16% of the deficit in the same months of 2006.As can be seen from the chart below, since the summer of 2007 the situation has improved considerably.
On a year-on-year basis, October saw exports and imports grow by a respective 17.4% and 13.5%, a 3.8 percentage point difference in the growth rates. The year-on-year increase in exports significantly exceeded that of imports in each month since February 2007, the much impoved performance of Hungary's foreign trade balance therefore does not come as a complete surprise. If we look at the chart below, we can see that while the annual rates of increase of imports and exports do track each other somewhat (indicating a high level of intermediate processing, or transit) the rate of increase in exports is clearly consistently above that of imports.
It will now be very interesting to see the third quarter balance of payments data, since remember Hungary's problem is that just as quickly as she earns a little bit extra from all that hard export payment, off out it goes again in the form of interest payments on loans and dividends on equities.
On a year-on-year basis, October saw exports and imports grow by a respective 17.4% and 13.5%, a 3.8 percentage point difference in the growth rates. The year-on-year increase in exports significantly exceeded that of imports in each month since February 2007, the much impoved performance of Hungary's foreign trade balance therefore does not come as a complete surprise. If we look at the chart below, we can see that while the annual rates of increase of imports and exports do track each other somewhat (indicating a high level of intermediate processing, or transit) the rate of increase in exports is clearly consistently above that of imports.
It will now be very interesting to see the third quarter balance of payments data, since remember Hungary's problem is that just as quickly as she earns a little bit extra from all that hard export payment, off out it goes again in the form of interest payments on loans and dividends on equities.
Hungary October 2007 Retail Sales
October saw retail sales in Hungary decline for the 10th month in a row month-on-month (by 0.2%), the Central Statistics Office reported today. Apparently, pre-Christmas shoppers have been leaving major purchases until later, although demand for consumer loans was thought to suggest increased activity. The continued decline of retails sales on a month-on-month basis bodes ill for Hungary's Q4 GDP growth. On a year-on-year basis, retail sales diminished by 4.1% in October, as opposed to 4.6% in September.
The 10 months to October saw a 2.7% decline, mostly due to the fiscal consolidation that started last summer, higher taxes and a sudden jump in Hungary's inflation rate.
In October, grocery and convenience stores reported a 3.3% drop in sales compared with the same month of 2006 (inreal terms), which compares with a 4.7% slump in non-food retail.The sales figures of car retailers indicate that the slump may be over in the auto industry, with 2.4% year-on-year growth registered by the Central Statistics Office in October. At the same time, motor fuel sales increased by 3.9% year-on-year.
Retail sales are now back where they were in August 2005, and something else that nobody really seems to be thinking about over the longer term, is how you can really talk about increasing retail sales and sustaining them when Hungary's population is not only ageing, it is also declining, as highlighted yesterday by the statistical office:
The 10 months to October saw a 2.7% decline, mostly due to the fiscal consolidation that started last summer, higher taxes and a sudden jump in Hungary's inflation rate.
In October, grocery and convenience stores reported a 3.3% drop in sales compared with the same month of 2006 (inreal terms), which compares with a 4.7% slump in non-food retail.The sales figures of car retailers indicate that the slump may be over in the auto industry, with 2.4% year-on-year growth registered by the Central Statistics Office in October. At the same time, motor fuel sales increased by 3.9% year-on-year.
Retail sales are now back where they were in August 2005, and something else that nobody really seems to be thinking about over the longer term, is how you can really talk about increasing retail sales and sustaining them when Hungary's population is not only ageing, it is also declining, as highlighted yesterday by the statistical office:
In the first ten months of 2007 there were fewer live births and more deaths compared to the same period of the previous year. Remarkably fewer couples got married than one year before. According to the preliminary data 81 339 children were born, 110 093 inhabitants died and 36 755 couples got married. The degree of natural decrease was higher than in January–October 2006. The population size of the country was estimated to be 10 052 thousands at the end of the period.
Tuesday, December 18, 2007
Hungary Construction Output October 2007
Well Hungary's agony continues, and unfortunately it is far from over yet. The volume of construction industry output in Hungary grew by 3% month-on-month in October, according to data released today by the KSH (the Central Statistics Office). As Portfolio Hungary point out - trying to put a brave face on this - this is a faster rate than anything we have seen in any of the last 5 months, reported today. This slight acceleration alleviated the impact of a major year-on-year slump despite the high 2007 base.
In October 2007 the volume of the construction activity decreased in Hungary by 20.1%according to unadjusted indices and by 21% according to data adjusted for working days when compared with October 2006.
In the first ten months of 2007 output was 11.5% below the level of the same period in 2006. In comparison with September production increased by 3%, according to indices adjusted seasonally and by working days. The output of complete constructions and civil engineering decreased 26.5%, compared to October 2006, and was in January-October 16.6% lower than in the same period of 2006.
The production of building installations decreased in October by 5.8%, and that of building completion was down by 12.6%. According to unadjusted indices the construction of buildings fell by 19.5% and that of civil engineering was by 20.9% lower than in October 2006. From the beginning of 2007, construction of buildings went down by 8.1% while that of civil engineering was down by 15.7% when compared with the same period of the previous year. According to data adjusted seasonally and for working days, construction of buildings grew by 4.1% and that of civil engineering increased by 0.7%, in comparison with the previous month.
The stock of orders at the end of October was 34.5% below the level for the same month in 2006. Within this group, the stock of orders for building construction decreased by 3.1% while that for civil engineering was down by 51.9%. The volume of new orders was up by 44.3%% when compared with October 2006. Within this the new contracts for buildings increased by 46.7%, and those for civil engineering rose by 41.8%. The growth – besides the low base of the previous year – is due to contracts signed for commercial and industrial buildings as well as for two stations of the new underground line. In the first ten months the volume of new orders was by 14% lower than in the same months of the previous year.
As even the ever optimistic Portfolio Hungary observes:
In October 2007 the volume of the construction activity decreased in Hungary by 20.1%according to unadjusted indices and by 21% according to data adjusted for working days when compared with October 2006.
In the first ten months of 2007 output was 11.5% below the level of the same period in 2006. In comparison with September production increased by 3%, according to indices adjusted seasonally and by working days. The output of complete constructions and civil engineering decreased 26.5%, compared to October 2006, and was in January-October 16.6% lower than in the same period of 2006.
The production of building installations decreased in October by 5.8%, and that of building completion was down by 12.6%. According to unadjusted indices the construction of buildings fell by 19.5% and that of civil engineering was by 20.9% lower than in October 2006. From the beginning of 2007, construction of buildings went down by 8.1% while that of civil engineering was down by 15.7% when compared with the same period of the previous year. According to data adjusted seasonally and for working days, construction of buildings grew by 4.1% and that of civil engineering increased by 0.7%, in comparison with the previous month.
The stock of orders at the end of October was 34.5% below the level for the same month in 2006. Within this group, the stock of orders for building construction decreased by 3.1% while that for civil engineering was down by 51.9%. The volume of new orders was up by 44.3%% when compared with October 2006. Within this the new contracts for buildings increased by 46.7%, and those for civil engineering rose by 41.8%. The growth – besides the low base of the previous year – is due to contracts signed for commercial and industrial buildings as well as for two stations of the new underground line. In the first ten months the volume of new orders was by 14% lower than in the same months of the previous year.
As even the ever optimistic Portfolio Hungary observes:
However, CSO noted that the promising figures are mostly due to the low statistical base as well as the contracts for two subway stations as part of Budapest's Metro 4 project, in addition to commercial and industrial buildings. Overall, contracts fell 14% in the first 10 months of the year compared with the corresponding months of 2006.
Monetary Policy in Hungary
Hungary's central bank kept the European Union's highest benchmark interest rate unchanged yesterday after surging food prices and rising oil costs, coupled with stubbornly high annual wage increases have meant that inflation has not come down the way everyone was hoping it would.
The bank's 12 policy makers, led by President Andras Simor, left the two-week deposit rate at 7.5 percent yesterday, deciding to hold the rate as it was, although the possibility of a quarter-point cut was also discussed.
A summer drought which ravaged crops and drove food prices higher have not helped the bank's efforts to subdue inflation. Neither has the rising cost of crude oil, and both these factors make it difficult for policy makers to lower borrowing costs as the bank looks to avert second-round effects.
Forward-rate agreements now indicate that investors have scaled back expectations for rate cuts during the next four months. The spread between the four-month forward rate and the base rate fell to 2 basis points from an average of 18 basis points in the past three months. A basis point is equivalent to 0.01 percentage point.
Hungary's inflation rate rose to 7.1 percent in November from 6.7 percent in October, rising for a second month. The increase was driven by food prices surging 11.6 percent in a year and the cost of household energy jumping 12.3 percent. Bank president Andras Simor also warned that forthcoming increases in regulated prices such as electricity could further derail disinflation.
With inflation at current levels, policy makers pledged to focus on ``cooling'' expectations to avert second-round effects. The bank said it will monitor wage negotiations between unions and corporate leaders as an indicator of expectations. Central bank representatives met with union and corporate leaders earlier this month to discuss the possible consequences of wage increases. Simor today said the central bank calculated with 7.7 percent private industry wage growth when preparing its latest inflation forecast. That corresponds to a wage agreement of about 6 percent, he added.
The central bank can't consider other economic policy objectives, even with growth at the slowest pace in 11 years, Simor said. Economic expansion in the third quarter was 0.9 percent from a year ago.
The bank feel that economic growth has probably "bottomed" but I am not so sure. In any event all are agreed that the rebound probably won't be quick, as domestic demand is unlikely to accelerate rapidly, and especially not with these tight interest rates. So the only question left is, how long can the central bank hold out against ever slower domestic demand in the face of a worsening external environment, which will make getting export growth no easy matter. Especially with strong internal inflation and the forint where it is now.
The bank's 12 policy makers, led by President Andras Simor, left the two-week deposit rate at 7.5 percent yesterday, deciding to hold the rate as it was, although the possibility of a quarter-point cut was also discussed.
A summer drought which ravaged crops and drove food prices higher have not helped the bank's efforts to subdue inflation. Neither has the rising cost of crude oil, and both these factors make it difficult for policy makers to lower borrowing costs as the bank looks to avert second-round effects.
``The opportunity to lower interest rates will open when economic processes suggest that the risk of inflation effects spreading through expectations will lessen and international money and capital market tendencies turn out more favorably for the Hungarian economy,''The biggest problem, however, is the background isssue of the non-forint denominated debt (also know as the Swiss mortgages issue) since it is the existence of this liability on the household balance sheet at this point which makes it virtually unthinkable for the central bank to contemplate any aggressive monetary easing for fear of a provoking fall in the forint and creating large scale household financial distress. The problem is that the scale of this problem is only growing worse. The Central Bank recently reported that in October 2007 non-forint denominated household indebtedness once more accelerated, and in particular households were contracting these loans (using the home as security) for present consumption purposes (ie not for house purchases). Maintaining high domestic interest rates in this environment will only lead to more of this, and thus the problem will be even worse when the correction does eventually come.
Forward-rate agreements now indicate that investors have scaled back expectations for rate cuts during the next four months. The spread between the four-month forward rate and the base rate fell to 2 basis points from an average of 18 basis points in the past three months. A basis point is equivalent to 0.01 percentage point.
Hungary's inflation rate rose to 7.1 percent in November from 6.7 percent in October, rising for a second month. The increase was driven by food prices surging 11.6 percent in a year and the cost of household energy jumping 12.3 percent. Bank president Andras Simor also warned that forthcoming increases in regulated prices such as electricity could further derail disinflation.
With inflation at current levels, policy makers pledged to focus on ``cooling'' expectations to avert second-round effects. The bank said it will monitor wage negotiations between unions and corporate leaders as an indicator of expectations. Central bank representatives met with union and corporate leaders earlier this month to discuss the possible consequences of wage increases. Simor today said the central bank calculated with 7.7 percent private industry wage growth when preparing its latest inflation forecast. That corresponds to a wage agreement of about 6 percent, he added.
The central bank can't consider other economic policy objectives, even with growth at the slowest pace in 11 years, Simor said. Economic expansion in the third quarter was 0.9 percent from a year ago.
The bank feel that economic growth has probably "bottomed" but I am not so sure. In any event all are agreed that the rebound probably won't be quick, as domestic demand is unlikely to accelerate rapidly, and especially not with these tight interest rates. So the only question left is, how long can the central bank hold out against ever slower domestic demand in the face of a worsening external environment, which will make getting export growth no easy matter. Especially with strong internal inflation and the forint where it is now.
Thursday, December 13, 2007
Hungary Inflation November 2007
Hungary's consumer prices rose by 7.1% year on year in November, the Central Statistics Office (KSH) has reported yesterday. The figure is up from 6.7% in October and 6.4% in September, and is definitely not good news since it will complicate monetary policy even further, even if it is not entirely unexpected. The increase largely attributable to fuels price increases, but the prices of processed food and milk also continued to rise.
Tuesday, December 11, 2007
Rising Forint
Following on from my extensive analysis yesterday, I couldn't help having my attention drawn to the news today that Hungary's forint is once more gaining ground versus the euro after inflation accelerated for a second month, reinforcing speculation the central bank won't lower the European Union's highest interest rates. This really is a crazy situation when more inflation effectively strengthens your currency. You lose out both ways, since your prices rise, and your goods become more expensive in oreign currency.
Hungary's inflation rate climbed to 7.1 percent in November, from 6.7 percent a month earlier while the central bank's main interest rate is currently at 7.5 percent.
The forint rose to 251.80 per euro by 11:05 a.m. in Budapest today, from 252.00 yesterday. The currency is now 4 percent above its 10-month low of 262.38 per euro reached on Aug. 17.
The central bank left the two-week deposit rate unchanged at the November meeting as policy makers pledged to focus on ``cooling'' inflation expectations to prevent the effects of surging food and fuel prices from spreading across the central European economy.
Here it is a case of this way you lose, and that way you lose too.
Hungary's inflation rate climbed to 7.1 percent in November, from 6.7 percent a month earlier while the central bank's main interest rate is currently at 7.5 percent.
``Before the inflation report some traders bet on a rate cut, but today's data boosted belief the central bank won't reduce borrowing costs,'' said Jaroslaw Janecki, chief economist at Societe Generale in Warsaw. ``There is even some speculation we may see a rate rise and this is supportive for the forint.''
The forint rose to 251.80 per euro by 11:05 a.m. in Budapest today, from 252.00 yesterday. The currency is now 4 percent above its 10-month low of 262.38 per euro reached on Aug. 17.
The central bank left the two-week deposit rate unchanged at the November meeting as policy makers pledged to focus on ``cooling'' inflation expectations to prevent the effects of surging food and fuel prices from spreading across the central European economy.
Here it is a case of this way you lose, and that way you lose too.
Monday, December 10, 2007
Just Why Is Hungary So Different From The Rest of the EU10?
According to the Hungarian Statistics Office (KSH) gross domestic product grew in Hungary by just 0.3% on a quarter by quarter basis from to July-September 2007. The KSH also took the opportunity to reduce their growth figure for the second quarter to zero, which was down from the previous 0.1% estimate.
On a year on year basis, economic growth in Q3 was just 0.9% according to unadjusted data or 1.0% if you prefer your figures to be adjusted for seasonal and calendar effects. In either case this is a very low reading end especially when you bear in mind the very rapid growth we are seeing in many other EU10 countries, and all the indications are that this figure is likely to drop further. Which raises three questions directly in our minds: a) why is Hungary so different from the rest of Eastern and Central Europe, b) where is Hungary headed, and c) what can we learn from Hungary about the future path of those EU10 economies who are now visibly overheating, after they have passed through their inevitable "correction" that is.
Looking at the evolution of Hungary's GDP on a year on year basis, the slowdown is evident. The first thing that strikes you when you look at the chart below is that annual growth rates seem to have peaked in 2004 (that is before the correction and fiscal adjustment of 2006), growth slowed entering 2005, and it was at this point that the expansion in the fiscal deficit became important, but it was a fiscal expansion to try to arrest a general downward tendency in the rate of output expansion(very reminiscent in its way of things we have seen in Japan and Italy if we work our way back through the data). And on a year on year basis Q3 2007 represents yet another step backwards, since the comparative figure for Q2 was 1.2%. And this process seems set to continue, and I would go so far as to say that no-one at this point has any idea where the bottom is on this one.
The engine behind what little growth Hungary is now getting continues to be industrial output which registered a 7.4% yr/yr growth in Q3, and this output was pulled along to a considerable extent by the 14.6% export growth which was registered.
The main drag on growth was, unsurprisingly, final household consumption, which declined by 2.0% yr/yr. Previously, the slowest pace of growth in recent memory was back in 1996 when the fiscal adjustment package of Economy Minister Lajos Bokros pushed growth to below 1% y-o-y.
If we now come to look at the evolution of GDP shares for some of the components, we will see, for example, that both agriculture and construction have been more or less stable in recent years (ie we have not had any sort of dramatic construction lead boom in recent years. On the other hand, if we look at manufacturing and real estate and financial services, we will see that the latter have clearly grown in importance in relation to the former, which is in many ways a pretty normal development.
On a quarterly basis, the largest growth was observed in industry (3.1%), followed by services (1.3%) and transport, storage and communications (0.9%). Consumption expenditure of households fell by 0.8% yr/yr and 0.2% q/q, while public consumption fell by 3.8% yr/yr and 3.2% on a quarterly basis.
Exports rose by 4% q/q (vs. 2.0% in Q2) and imports increased by 5.9% from the previous quarter, against a q/q decline of 0.3% in Q2. What this means is that while Hungary has now managed to achieve a small goods trade surplus:
The rise in imports pegs pretty closely on to the the coat-tails of the rise in exports, something for which the very strong value of the forint must undoubtedly bear some responsibility, since as the euro rises, and the forint clings on to par with the euro, the general tendency of opening the doors to products from China and other low-cost manufacturers (as well of course Japan, and a now much cheaper and more competitive United States) must have a reflection of the Hungarian import situation.
So it is really rather cold comfort that the 0.3% q/q growth obtained in Q3 is the largest so far this year, firstly because, as Portfolio Hungary indicate, it is disappointingly small and secondly, because it would really be very premature to start speaking of any kind of upswing even in the short term.
Hungarian central bank (NBH) Deputy Governor Ferenc Karvalits is quoted this morning as saying he believes the central question is not whether the growth rate of the Hungarian economy will start to increase but to what extent and up to which point. I think he is basically right, but he forgets one additional issue, when it will stop falling, and how much farther it still has to fall? Certainly if we look at the path of domestic retail sales, there is no sign at all that we are done yet.
And to this slowdown in private consumption we need to add future purchasing power, since real wages are also falling in Hungary. If we look at the chart below, the sharp improvement in the negative real wage tendency which we can observe in September 2007 is due to the base effect of the austerity package tax and social security measures introduced in September 2006 having moved out of the calculations (since these meant that between September 2006 and August 2007 net wages rose much more slowly than gross wages) and hence the change does not reflect any sudden spike in actual wages paid, and of course, inflation continues to be strong.
And when we come to think about public consumption it is important to bear in mind that the Hungarian government - according to its own latest Dec 1st estimates - is still running a fiscal deficit this year of 6.2% of GDP. The government are committed to reducing the deficit further next year, so this has naturally to be subtracted from GDP: that is we are going to face more fiscal tightening. In fact, what is incredible is that Hungary is currently only able to get 1% y-o-y GDP growth despite this whopping fiscal stimulus. Which is why a close examination is needed of just how Hungary got into this mess in the first place, and in that context why it is that Hungary is so apparently different from the rest of the EU10.
Obviously the presence of fiscal deficits has been one issue.
But again, and in the end, what is so striking is just how little "bang for the buck" (or forint) Hungary has been getting for all this fiscal stimulus. As I pointed out above, a lot of the sparkle had already been going out of Hungary's GDP growth some time before the fiscal correction came into force.
In addition monetary policy is likely to remain restrictive. The current Central Bank base rate of 7.5% is the highest in the European Union, and there is little room for any substantial reduction given the rate of domestic inflation - the government has just agreed to raise public sector wages by an average 5% in 2008, so it is hard to see inflation being anywhere near the "comfort zone" yet awhile.
Ideally, even considering the current inflation, given the state of domestic demand, you might have though that some element of monetary loosening would be desirable, especially since this would probably serve to weaken the currency, and this would help exports and in so doing increase that at present very minimal trade surplus. But it is just here that we hit one of Hungary's biggest headaches moving forward, the Swiss Franc Mortgages.
The use of non-local-currency denominated loans has become a widespread phenomenon in Eastern Europe in recent years. In Hungary the most common currency for such purposes is the Swiss Franc and around 80% of all new home loans and half of small business credits and personal loans taken out since early 2006 have been denominated in Swiss francs. A similar pattern of heavy dependence on foreign currency denominated loans is to be found in Croatia, Romania, Poland, Ukraine (US dollar) and the Baltic States, although the mix between francs, euros, the dollar and the yen varies from country to country.
First off, here's a chart showing the evolution of outstanding mortgages with terms over 5 years since the start of 2003. As we can see the outstanding debt is now over 5 time as big as it was then.
Now if we look at the growth of forint denominated mortgages over the same period, we can see that while they initially expanded very rapidly, they peaked around the start of 2005, and since that time they have tended to drift slightly downwards.
Then if we come to look at the growth of non-forint mortgages, we will see that since early 2005 the rate of contraction of such mortgages has increased steadily.
The Magyar Memzeti Bank (the Hungarian central bank) recently published the October edition of its bulletin on Household and non-financial corporate sector interest rates, interbank lending rates (careful PDF). This bulletin contains a lengthy summary of the state of play with non-forint denominated loans to individuals, and in particular a section on Swiss Franc loans in Hungary.
According to the Bank, following a moderation in the demand from Hungarian households for Swiss franc-denominated consumer loans, a sharp turnaround in demand occurred in October. The monthly volume of new mortgage loans for consumption purposes (ie not for buying homes, refis) leaped by 30% to reach an all-time high. It is also a noteworthy that even before the start of the real Christmas season the volume of new CHF-denominated consumer credit jumped by 25% from September, setting yet another historic high.
The amount of new mortgage loans rose to the previously unseen level of HUF 130 bn in October, and this increase is almost exclusively attributable to the increase in CHF-denominated loans (HUF 120 bn). Detailed data from the bank show that while the monthly amount of new CHF-denominated housing loans rose to the exceptional level of HUF 55-60 bn, mortgage loans for consumption purposes (ie "refis" or liquidity extraction, not to buy houses) became pretty fashionable, rising by 30% month on month to reach the level of HUF 62.5 bn.
Within these new mortgage loans, the ratio of foreign currency to total loans increased to 92.5%, setting yet another record. What all this suggests to me is that a lot of Hungarians are trying to maintain current consumption by borrowing forward in the hope and expectation of rising property values in the future. If this rise does not materialize, then the very least that can be said is that all of this will need, at some point, to be clawed back from current consumption. This whole process also represents a new form of moral hazard for the central bankers, since such borrowing in Swiss Francs is based on the assumption that with so many people doing this the Hungarian authorities will never dare to let the forint slide (you know, there's safety in numbers) or, pushing the buck back one stage further, the EU Commission and the ECB won't let it happen.
But this is very dangerous thinking, since in the first place there are a lot of people now out there riding around on the back of the same idea (think Italian government debt, for eg), and people may be seriously overestimating the ability of the political and monetary authorities to contain such a large and complex set of problems. It should not go un-noted that the whole weight of the ECB is currently not able to stop the spread of the growing credit crunch across the entire eurozone and beyond. Secondly, and just as importantly, all of this puts the Hungarian central bank in a real double-bind, since they cannot ease monetary policy at this point without precipitating a tremendous weakening in the forint, so interest rates stay high, and Hungarian domestic demand gradually gets strangled, while all the inflation puts a strong brake on export growth.
The translation problem that all these foreign currency loans may represent for Hungary, and some of the other EU10 economies where this kind of borrowing has become popular, are a matter which has been addressed by Claus Vistesen in this post. But what exactly is translation risk? Well let's take a standard type definition, such as this one from investopedia.com. Translation risk is "The exchange rate risk associated with companies that deal in foreign currencies or list foreign assets on their balance sheets. The greater the proportion of asset, liability and equity classes denominated in a foreign currency, the greater the translation risk".
Now as Claus points out much of the literature here refers to companies, and most of the words spent on the subject have been devoted to the description of companies' exchange rate risk when operating in foreign countries under insecure exchange rate systems and obviously subsequently how this risk can be hedged through the use of derivatives, or simply by adequately calibrating the denomination of the stock of liquid assets held on the balance sheets. But the issue in Eastern Europe is that the majority of this credit has been extended to households through loans intermediated by foreign financial institutions and thus it is unhedged, and even more to the point this borrowing is being facilitated either by bank flows or inward FDI which is what enables the current account at the end of the day to balance. The big problem will come if ever the direction of these capital flows reverses, and this is precisely why the Hungarian central bank is constrained in the way it can loosen monetary policy, since it simply cannot afford to either risk a reversal in the flow of funds, or a sharp rise in the cost of private debt servicing should the forint weaken significantly in value.
Those analysts who focus only on the secondary issue of steering inflation expectations are missing the bigger part of the problem here. As we are now seeing in the United States, and as we may well be about to see in an ECB context (indeed arguably we have already seen, since the inflation data treated alone may well have warrented an ECB raise this month) if expectations are your only problem, then the central bank can afford to be more flexible than many imagine.
It's the Demography?
So to return to where we started, just what is it that makes Hungary so different. The simple answer is that I don't know, but I know that it is, and that we need to keep digging. The philosopher Francis Bacon held that the important thing about doing science was to know how to put the right questions to nature, and the answers we get to some extent depend on the questions we ask. My intuitions tell me that Hungary's very special demography has something to do with it all, but others do not agree, and do not ask this type of question. But if we come to look at the demography, there are some things which we can hardly fail to notice. In the first place Hungary's population has been falling, and for many years now, in fact it peaked around the start of the 1980s.
Now something has to be said here. Noone knows what the long term consequences of having a declining (and ageing) population like this is going to be. We don't know, because quite simply we have never been here before. In previous periods, after a war or a plague, when population had fallen the Malthusian homeostatic mechanism of increasing wages lead to increased fertility, and this in and of itself corrected the problem. Indeed in some parts of Eastern Europe (though not Hungary) we are seeing a demographically driven form of wage inflation, but this is not leading to a homeostatically corrective rise in fertility because, quite simply, the old correlation between increasing wealth and increasing fertility has now been broken. More money today does not mean more children, indeed under certain circumstances it may mean less. So basically we don't know where we are going here, and my advice is don't let anyone convince you otherwise.
Having said all this, intuitively less people ought to constitute less domestic demand pressure, but this issue is undoubtedly more complex than this.
Turning now to fertility, it is worth noting that, apart from a brief episode in the late 1970s, Hungary has in fact been struggling with below replacement fertility since the early 1960s. The only real "novelty" about the 1990s is that Hungary transited from below replacement fertility, to lowest-low fertility (1.2/1.3 Tfr region).
Returning then, and in a demographic context to Deputy Central Bank Governor Ferenc Karvalits' question about how far and to what extent Hungarian growth will recover, as we have noted, domestic demand has been in virtual free-fall in recent quarters. What is not clear is when (ot whether) this component will ever recover to the extent of being able to drive growth, since now start to get into age-related elements (which I know not many people agree with me about at this stage, but still).
As a result of ongoing low fertility, and rising life expectancy, Hungary's median age is, of course, climbing steadily, and calibrating the macroeconomics of this ageing process in the context of Eastern Europe's comparatively low male life expectancy (ie calibrating how domestic consumption loses its relative strength as median age rises, in the way we have seen in Germany, Japan and Italy) is something noone has done at this point to my knowledge. In fact most people you talk to don't imagine that this is important, but then most of them didn't imagine that Hungary would fall into the hole it is currently falling into. As we can see below, Latvia and Hungary, despite having started the 1990s at not such a great distance from Germany, now have considerably lower median ages (please click on image for better viewing).
But this lower population median age is hardly a positive outcome, since it is not due to higher fertility or strong inward migration. Rather it is due to their much lower male life expectancy.
As we can see, male life expectancy is considerably lower in both Hungary and Latvia, than it is in Germany, and this must have consequences for economic behaviour and performance. Increasing the working life to 67 and beyond as they have in Germany is just not the same proposition at all in a lower life expectancy society like the other two, nor is the issue of getting employment participation rates among the over 60s comparable given the evident health problems of one part of the population.
So while we would not normally expect domestic consumption to run out of steam until the median age reaches 41/42 (this is the sort of lesson we can garner from Germany, Italy and Japan) there may be good reasons for imagining that this median age needs rounding down somewhat in the Latvian and Hungarian contexts. I will certainly stick my head out and say that the property boom which is now in the process of petering itself out in Latvia, like the 1992 one in Japan, and the 1995 one in Germany, is very likely to be the last of its kind we will see there, high median age societies just don't work like this. They do not ride on the backs of credit driven booms, and I would have thought that the reasons why would be obvious. Indeed, if we look at the proportion of construction in Hungarian GDP, this sort of confirms my suspicions, since in general terms this has not constituted a large share.
Indeed what we can note, as might be expected, is a very strong weather-driven annual cycle, and if there is any sort of trend discernible, it is ever so slightly downwards rather than upwards. This, again would fit in with a gradually ageing and declining population. The position is only confirmed if we come to look at the housing cost index.
So the first thing that strikes us is a local boom which we can see in the early months of this year, and which has since faded (and this is more than likely associated with a removal of public housing subsidies, a sharp rise in rents, and therefore a shift in the relative appeal of purchased property - always, of course, on low interest Swiss loans - and all of this at a time when internal demand is to all intent and purpose collapsing). Before this we can note the surge in prices in 2003/04. My guess is that this is/was Hungary's property boom, and that this phase has now come and gone. This also helps explain how the Hungarian fiscal side got into such a mess in 2005, as the government was increasingly having to shoulder the load against a faltering domestic demand. All of this is, as I say, very different from other parts of the EU10.
In conclusion then, we can assume that given sufficient determination by the central bank to hang on at all costs to the value of the forint, and absent a major external exodus from Hungary on the backs of a more general crisis, the systematic and sustained tightening on all fronts will eventually produce nominal as well as real wage deflation, especially if we sink into a deepish recession, which seems to look all but unavoidable when we come to think about the third factor - external conditions - which are almost certainly going to deteriorate over the next 6 to 9 months, as the powerhouse economies of the eurozone - Italy, Spain and Germany (France is the only semi-brightish star on the horizon) are all slowing mightily even as I write. So the message here is now twofold. Strap yourself in tight, since it is going to be a very bumpy ride, and secondly, Hungary is now about to join that honoured group, the export dependent economies. Of course, how rich she will ever get to be due to all the structural difficulties must remain a very open question.
On a year on year basis, economic growth in Q3 was just 0.9% according to unadjusted data or 1.0% if you prefer your figures to be adjusted for seasonal and calendar effects. In either case this is a very low reading end especially when you bear in mind the very rapid growth we are seeing in many other EU10 countries, and all the indications are that this figure is likely to drop further. Which raises three questions directly in our minds: a) why is Hungary so different from the rest of Eastern and Central Europe, b) where is Hungary headed, and c) what can we learn from Hungary about the future path of those EU10 economies who are now visibly overheating, after they have passed through their inevitable "correction" that is.
Looking at the evolution of Hungary's GDP on a year on year basis, the slowdown is evident. The first thing that strikes you when you look at the chart below is that annual growth rates seem to have peaked in 2004 (that is before the correction and fiscal adjustment of 2006), growth slowed entering 2005, and it was at this point that the expansion in the fiscal deficit became important, but it was a fiscal expansion to try to arrest a general downward tendency in the rate of output expansion(very reminiscent in its way of things we have seen in Japan and Italy if we work our way back through the data). And on a year on year basis Q3 2007 represents yet another step backwards, since the comparative figure for Q2 was 1.2%. And this process seems set to continue, and I would go so far as to say that no-one at this point has any idea where the bottom is on this one.
The engine behind what little growth Hungary is now getting continues to be industrial output which registered a 7.4% yr/yr growth in Q3, and this output was pulled along to a considerable extent by the 14.6% export growth which was registered.
The main drag on growth was, unsurprisingly, final household consumption, which declined by 2.0% yr/yr. Previously, the slowest pace of growth in recent memory was back in 1996 when the fiscal adjustment package of Economy Minister Lajos Bokros pushed growth to below 1% y-o-y.
If we now come to look at the evolution of GDP shares for some of the components, we will see, for example, that both agriculture and construction have been more or less stable in recent years (ie we have not had any sort of dramatic construction lead boom in recent years. On the other hand, if we look at manufacturing and real estate and financial services, we will see that the latter have clearly grown in importance in relation to the former, which is in many ways a pretty normal development.
On a quarterly basis, the largest growth was observed in industry (3.1%), followed by services (1.3%) and transport, storage and communications (0.9%). Consumption expenditure of households fell by 0.8% yr/yr and 0.2% q/q, while public consumption fell by 3.8% yr/yr and 3.2% on a quarterly basis.
Exports rose by 4% q/q (vs. 2.0% in Q2) and imports increased by 5.9% from the previous quarter, against a q/q decline of 0.3% in Q2. What this means is that while Hungary has now managed to achieve a small goods trade surplus:
The rise in imports pegs pretty closely on to the the coat-tails of the rise in exports, something for which the very strong value of the forint must undoubtedly bear some responsibility, since as the euro rises, and the forint clings on to par with the euro, the general tendency of opening the doors to products from China and other low-cost manufacturers (as well of course Japan, and a now much cheaper and more competitive United States) must have a reflection of the Hungarian import situation.
So it is really rather cold comfort that the 0.3% q/q growth obtained in Q3 is the largest so far this year, firstly because, as Portfolio Hungary indicate, it is disappointingly small and secondly, because it would really be very premature to start speaking of any kind of upswing even in the short term.
Hungarian central bank (NBH) Deputy Governor Ferenc Karvalits is quoted this morning as saying he believes the central question is not whether the growth rate of the Hungarian economy will start to increase but to what extent and up to which point. I think he is basically right, but he forgets one additional issue, when it will stop falling, and how much farther it still has to fall? Certainly if we look at the path of domestic retail sales, there is no sign at all that we are done yet.
And to this slowdown in private consumption we need to add future purchasing power, since real wages are also falling in Hungary. If we look at the chart below, the sharp improvement in the negative real wage tendency which we can observe in September 2007 is due to the base effect of the austerity package tax and social security measures introduced in September 2006 having moved out of the calculations (since these meant that between September 2006 and August 2007 net wages rose much more slowly than gross wages) and hence the change does not reflect any sudden spike in actual wages paid, and of course, inflation continues to be strong.
And when we come to think about public consumption it is important to bear in mind that the Hungarian government - according to its own latest Dec 1st estimates - is still running a fiscal deficit this year of 6.2% of GDP. The government are committed to reducing the deficit further next year, so this has naturally to be subtracted from GDP: that is we are going to face more fiscal tightening. In fact, what is incredible is that Hungary is currently only able to get 1% y-o-y GDP growth despite this whopping fiscal stimulus. Which is why a close examination is needed of just how Hungary got into this mess in the first place, and in that context why it is that Hungary is so apparently different from the rest of the EU10.
Obviously the presence of fiscal deficits has been one issue.
But again, and in the end, what is so striking is just how little "bang for the buck" (or forint) Hungary has been getting for all this fiscal stimulus. As I pointed out above, a lot of the sparkle had already been going out of Hungary's GDP growth some time before the fiscal correction came into force.
In addition monetary policy is likely to remain restrictive. The current Central Bank base rate of 7.5% is the highest in the European Union, and there is little room for any substantial reduction given the rate of domestic inflation - the government has just agreed to raise public sector wages by an average 5% in 2008, so it is hard to see inflation being anywhere near the "comfort zone" yet awhile.
Ideally, even considering the current inflation, given the state of domestic demand, you might have though that some element of monetary loosening would be desirable, especially since this would probably serve to weaken the currency, and this would help exports and in so doing increase that at present very minimal trade surplus. But it is just here that we hit one of Hungary's biggest headaches moving forward, the Swiss Franc Mortgages.
The use of non-local-currency denominated loans has become a widespread phenomenon in Eastern Europe in recent years. In Hungary the most common currency for such purposes is the Swiss Franc and around 80% of all new home loans and half of small business credits and personal loans taken out since early 2006 have been denominated in Swiss francs. A similar pattern of heavy dependence on foreign currency denominated loans is to be found in Croatia, Romania, Poland, Ukraine (US dollar) and the Baltic States, although the mix between francs, euros, the dollar and the yen varies from country to country.
First off, here's a chart showing the evolution of outstanding mortgages with terms over 5 years since the start of 2003. As we can see the outstanding debt is now over 5 time as big as it was then.
Now if we look at the growth of forint denominated mortgages over the same period, we can see that while they initially expanded very rapidly, they peaked around the start of 2005, and since that time they have tended to drift slightly downwards.
Then if we come to look at the growth of non-forint mortgages, we will see that since early 2005 the rate of contraction of such mortgages has increased steadily.
The Magyar Memzeti Bank (the Hungarian central bank) recently published the October edition of its bulletin on Household and non-financial corporate sector interest rates, interbank lending rates (careful PDF). This bulletin contains a lengthy summary of the state of play with non-forint denominated loans to individuals, and in particular a section on Swiss Franc loans in Hungary.
According to the Bank, following a moderation in the demand from Hungarian households for Swiss franc-denominated consumer loans, a sharp turnaround in demand occurred in October. The monthly volume of new mortgage loans for consumption purposes (ie not for buying homes, refis) leaped by 30% to reach an all-time high. It is also a noteworthy that even before the start of the real Christmas season the volume of new CHF-denominated consumer credit jumped by 25% from September, setting yet another historic high.
The amount of new mortgage loans rose to the previously unseen level of HUF 130 bn in October, and this increase is almost exclusively attributable to the increase in CHF-denominated loans (HUF 120 bn). Detailed data from the bank show that while the monthly amount of new CHF-denominated housing loans rose to the exceptional level of HUF 55-60 bn, mortgage loans for consumption purposes (ie "refis" or liquidity extraction, not to buy houses) became pretty fashionable, rising by 30% month on month to reach the level of HUF 62.5 bn.
Within these new mortgage loans, the ratio of foreign currency to total loans increased to 92.5%, setting yet another record. What all this suggests to me is that a lot of Hungarians are trying to maintain current consumption by borrowing forward in the hope and expectation of rising property values in the future. If this rise does not materialize, then the very least that can be said is that all of this will need, at some point, to be clawed back from current consumption. This whole process also represents a new form of moral hazard for the central bankers, since such borrowing in Swiss Francs is based on the assumption that with so many people doing this the Hungarian authorities will never dare to let the forint slide (you know, there's safety in numbers) or, pushing the buck back one stage further, the EU Commission and the ECB won't let it happen.
But this is very dangerous thinking, since in the first place there are a lot of people now out there riding around on the back of the same idea (think Italian government debt, for eg), and people may be seriously overestimating the ability of the political and monetary authorities to contain such a large and complex set of problems. It should not go un-noted that the whole weight of the ECB is currently not able to stop the spread of the growing credit crunch across the entire eurozone and beyond. Secondly, and just as importantly, all of this puts the Hungarian central bank in a real double-bind, since they cannot ease monetary policy at this point without precipitating a tremendous weakening in the forint, so interest rates stay high, and Hungarian domestic demand gradually gets strangled, while all the inflation puts a strong brake on export growth.
The translation problem that all these foreign currency loans may represent for Hungary, and some of the other EU10 economies where this kind of borrowing has become popular, are a matter which has been addressed by Claus Vistesen in this post. But what exactly is translation risk? Well let's take a standard type definition, such as this one from investopedia.com. Translation risk is "The exchange rate risk associated with companies that deal in foreign currencies or list foreign assets on their balance sheets. The greater the proportion of asset, liability and equity classes denominated in a foreign currency, the greater the translation risk".
Now as Claus points out much of the literature here refers to companies, and most of the words spent on the subject have been devoted to the description of companies' exchange rate risk when operating in foreign countries under insecure exchange rate systems and obviously subsequently how this risk can be hedged through the use of derivatives, or simply by adequately calibrating the denomination of the stock of liquid assets held on the balance sheets. But the issue in Eastern Europe is that the majority of this credit has been extended to households through loans intermediated by foreign financial institutions and thus it is unhedged, and even more to the point this borrowing is being facilitated either by bank flows or inward FDI which is what enables the current account at the end of the day to balance. The big problem will come if ever the direction of these capital flows reverses, and this is precisely why the Hungarian central bank is constrained in the way it can loosen monetary policy, since it simply cannot afford to either risk a reversal in the flow of funds, or a sharp rise in the cost of private debt servicing should the forint weaken significantly in value.
Those analysts who focus only on the secondary issue of steering inflation expectations are missing the bigger part of the problem here. As we are now seeing in the United States, and as we may well be about to see in an ECB context (indeed arguably we have already seen, since the inflation data treated alone may well have warrented an ECB raise this month) if expectations are your only problem, then the central bank can afford to be more flexible than many imagine.
It's the Demography?
So to return to where we started, just what is it that makes Hungary so different. The simple answer is that I don't know, but I know that it is, and that we need to keep digging. The philosopher Francis Bacon held that the important thing about doing science was to know how to put the right questions to nature, and the answers we get to some extent depend on the questions we ask. My intuitions tell me that Hungary's very special demography has something to do with it all, but others do not agree, and do not ask this type of question. But if we come to look at the demography, there are some things which we can hardly fail to notice. In the first place Hungary's population has been falling, and for many years now, in fact it peaked around the start of the 1980s.
Now something has to be said here. Noone knows what the long term consequences of having a declining (and ageing) population like this is going to be. We don't know, because quite simply we have never been here before. In previous periods, after a war or a plague, when population had fallen the Malthusian homeostatic mechanism of increasing wages lead to increased fertility, and this in and of itself corrected the problem. Indeed in some parts of Eastern Europe (though not Hungary) we are seeing a demographically driven form of wage inflation, but this is not leading to a homeostatically corrective rise in fertility because, quite simply, the old correlation between increasing wealth and increasing fertility has now been broken. More money today does not mean more children, indeed under certain circumstances it may mean less. So basically we don't know where we are going here, and my advice is don't let anyone convince you otherwise.Having said all this, intuitively less people ought to constitute less domestic demand pressure, but this issue is undoubtedly more complex than this.
Turning now to fertility, it is worth noting that, apart from a brief episode in the late 1970s, Hungary has in fact been struggling with below replacement fertility since the early 1960s. The only real "novelty" about the 1990s is that Hungary transited from below replacement fertility, to lowest-low fertility (1.2/1.3 Tfr region).
Returning then, and in a demographic context to Deputy Central Bank Governor Ferenc Karvalits' question about how far and to what extent Hungarian growth will recover, as we have noted, domestic demand has been in virtual free-fall in recent quarters. What is not clear is when (ot whether) this component will ever recover to the extent of being able to drive growth, since now start to get into age-related elements (which I know not many people agree with me about at this stage, but still).
As a result of ongoing low fertility, and rising life expectancy, Hungary's median age is, of course, climbing steadily, and calibrating the macroeconomics of this ageing process in the context of Eastern Europe's comparatively low male life expectancy (ie calibrating how domestic consumption loses its relative strength as median age rises, in the way we have seen in Germany, Japan and Italy) is something noone has done at this point to my knowledge. In fact most people you talk to don't imagine that this is important, but then most of them didn't imagine that Hungary would fall into the hole it is currently falling into. As we can see below, Latvia and Hungary, despite having started the 1990s at not such a great distance from Germany, now have considerably lower median ages (please click on image for better viewing).
But this lower population median age is hardly a positive outcome, since it is not due to higher fertility or strong inward migration. Rather it is due to their much lower male life expectancy.
As we can see, male life expectancy is considerably lower in both Hungary and Latvia, than it is in Germany, and this must have consequences for economic behaviour and performance. Increasing the working life to 67 and beyond as they have in Germany is just not the same proposition at all in a lower life expectancy society like the other two, nor is the issue of getting employment participation rates among the over 60s comparable given the evident health problems of one part of the population.
So while we would not normally expect domestic consumption to run out of steam until the median age reaches 41/42 (this is the sort of lesson we can garner from Germany, Italy and Japan) there may be good reasons for imagining that this median age needs rounding down somewhat in the Latvian and Hungarian contexts. I will certainly stick my head out and say that the property boom which is now in the process of petering itself out in Latvia, like the 1992 one in Japan, and the 1995 one in Germany, is very likely to be the last of its kind we will see there, high median age societies just don't work like this. They do not ride on the backs of credit driven booms, and I would have thought that the reasons why would be obvious. Indeed, if we look at the proportion of construction in Hungarian GDP, this sort of confirms my suspicions, since in general terms this has not constituted a large share.
Indeed what we can note, as might be expected, is a very strong weather-driven annual cycle, and if there is any sort of trend discernible, it is ever so slightly downwards rather than upwards. This, again would fit in with a gradually ageing and declining population. The position is only confirmed if we come to look at the housing cost index.
So the first thing that strikes us is a local boom which we can see in the early months of this year, and which has since faded (and this is more than likely associated with a removal of public housing subsidies, a sharp rise in rents, and therefore a shift in the relative appeal of purchased property - always, of course, on low interest Swiss loans - and all of this at a time when internal demand is to all intent and purpose collapsing). Before this we can note the surge in prices in 2003/04. My guess is that this is/was Hungary's property boom, and that this phase has now come and gone. This also helps explain how the Hungarian fiscal side got into such a mess in 2005, as the government was increasingly having to shoulder the load against a faltering domestic demand. All of this is, as I say, very different from other parts of the EU10.
In conclusion then, we can assume that given sufficient determination by the central bank to hang on at all costs to the value of the forint, and absent a major external exodus from Hungary on the backs of a more general crisis, the systematic and sustained tightening on all fronts will eventually produce nominal as well as real wage deflation, especially if we sink into a deepish recession, which seems to look all but unavoidable when we come to think about the third factor - external conditions - which are almost certainly going to deteriorate over the next 6 to 9 months, as the powerhouse economies of the eurozone - Italy, Spain and Germany (France is the only semi-brightish star on the horizon) are all slowing mightily even as I write. So the message here is now twofold. Strap yourself in tight, since it is going to be a very bumpy ride, and secondly, Hungary is now about to join that honoured group, the export dependent economies. Of course, how rich she will ever get to be due to all the structural difficulties must remain a very open question.
Saturday, December 08, 2007
Hungary Q3 2007 GDP Revisited
According to the Hungarian Statistics Office (KSH) gross domestic product grew by 0.3% quarter on quarter in the July-September period of 2007, based on seasonally adjusted first estimate figures released last Friday. The KSH also took the opportunity to reduce the Q2 growth figure to zero from the previous 0.1% estimate.
Economic growth in Q3 was 0.9% yr/yr according to unadjusted data and 1.0% according to figures adjusted seasonally and for calendar impacts (vs. a prelim ary estimate of 1.1%). The comparative figure for the previous quarter was 1.2% yr/yr (both adjusted and unadjusted).
The engine of growth continued to be industrial output which registered a 7.4% yr/yr growth, and this output contributed of course contributed considerably to the 14.6% export growth which was registered.
The main drag on growth was, unsurprisingly, final household consumption, which declined by 2.0% yr/yr. Previously, the slowest pace of growth in recent memory was back in 1996 when the fiscal adjustment package of Economy Minister Lajos Bokros pushed growth to below 1% y-o-y.
If we now come to look at the evolution of GDP shares for some of the components, we will see, for example, that both agriculture and construction have been more or less stable in recent years (ie we have not had any sort of dramatic construction lead boom in recent years. On the other hand, if we look at manufacturing and real estante and financial services, we will see that the latter have clearly grown in importance in relation to the former, which is in many ways a pretty normal development.
On a quarterly basis, the largest growth was observed in industry (3.1%), followed by services (1.3%) and transport, storage and communications (0.9%). Consumption expenditure of households fell by 0.8% yr/yr and 0.2% q/q, while public consumption fell by 3.8% yr/yr and 3.2% on a quarterly basis.
Exports rose by 4% q/q (vs. 2.0% in Q2) and imports increased by 5.9% from the previous quarter, against a q/q decline of 0.3% in Q2. What this means is that while Hungary has now managed to achieve a small goods trade surplus:
the rise in imports pegs pretty closely on the the coat tails of the rise in exports, something for which the very strong value of the forint must undoubtedly bear some responsibility, since as the euro rises, and the forint clings on to par with the euro, the general tendency of opening the doors to products from China and other low-cost manufacturers (as well of course Japan, and a now much cheaper and more competitive United States) must have a reflection of the Hungarian import situation.
So it is really rather cold comfort that the 0.3% q/q growth is the largest this year, firstly because, as Portfolio Hungary indicate, it is disappointingly small and secondly, because it would really be very premature to start speaking of any kind of upswing even in the short term.
It is important to bear in mind that the Hungarian government - according to its own latest Dec 1st estimates - is still running a fiscal deficit this year of 6.2% of GDP. The government are committed to reducing the deficit further next year, so this has naturally to be subtracted from GDP: we are going to face more fiscal tightening. What is incredible is that Hungary is currently only able to get 1% y-o-y GDP growth at the present time despite this whopping fiscal stimulus. One day we will need to get into a close examination of how it was we got here in the first place, and why Hungary is so apparently different from the rest of the EU10.
Also monetary policy is going to remain restrictive. The current rate of 7.5% is the highest in the European Union, and there is little room for any substantial reduction given the rate of domestic inflation - the government has just agreed to raise public sector wages by an average 5% in 2008, so it is hard to see inflation being anywhere near the "comfort zone" yet awhile. Of course, systematic tightening on all fronts will eventually produce nominal as well as real wage deflation, especially if we sink into a deepish recession, which seems to look all but unavoidable when we come to think about the third factor - external conditions - which are almost certainly going to deteriorate over the next 6 to 9 months, as the powerhouse economies of the eurozone - Italy, Spain and Germany (France is the only semi-brightish star on the horizon) are all slowing mightily even as I write.
Economic growth in Q3 was 0.9% yr/yr according to unadjusted data and 1.0% according to figures adjusted seasonally and for calendar impacts (vs. a prelim ary estimate of 1.1%). The comparative figure for the previous quarter was 1.2% yr/yr (both adjusted and unadjusted).
The engine of growth continued to be industrial output which registered a 7.4% yr/yr growth, and this output contributed of course contributed considerably to the 14.6% export growth which was registered.
The main drag on growth was, unsurprisingly, final household consumption, which declined by 2.0% yr/yr. Previously, the slowest pace of growth in recent memory was back in 1996 when the fiscal adjustment package of Economy Minister Lajos Bokros pushed growth to below 1% y-o-y.
If we now come to look at the evolution of GDP shares for some of the components, we will see, for example, that both agriculture and construction have been more or less stable in recent years (ie we have not had any sort of dramatic construction lead boom in recent years. On the other hand, if we look at manufacturing and real estante and financial services, we will see that the latter have clearly grown in importance in relation to the former, which is in many ways a pretty normal development.
On a quarterly basis, the largest growth was observed in industry (3.1%), followed by services (1.3%) and transport, storage and communications (0.9%). Consumption expenditure of households fell by 0.8% yr/yr and 0.2% q/q, while public consumption fell by 3.8% yr/yr and 3.2% on a quarterly basis.
Exports rose by 4% q/q (vs. 2.0% in Q2) and imports increased by 5.9% from the previous quarter, against a q/q decline of 0.3% in Q2. What this means is that while Hungary has now managed to achieve a small goods trade surplus:
the rise in imports pegs pretty closely on the the coat tails of the rise in exports, something for which the very strong value of the forint must undoubtedly bear some responsibility, since as the euro rises, and the forint clings on to par with the euro, the general tendency of opening the doors to products from China and other low-cost manufacturers (as well of course Japan, and a now much cheaper and more competitive United States) must have a reflection of the Hungarian import situation.
So it is really rather cold comfort that the 0.3% q/q growth is the largest this year, firstly because, as Portfolio Hungary indicate, it is disappointingly small and secondly, because it would really be very premature to start speaking of any kind of upswing even in the short term.
It is important to bear in mind that the Hungarian government - according to its own latest Dec 1st estimates - is still running a fiscal deficit this year of 6.2% of GDP. The government are committed to reducing the deficit further next year, so this has naturally to be subtracted from GDP: we are going to face more fiscal tightening. What is incredible is that Hungary is currently only able to get 1% y-o-y GDP growth at the present time despite this whopping fiscal stimulus. One day we will need to get into a close examination of how it was we got here in the first place, and why Hungary is so apparently different from the rest of the EU10.
Also monetary policy is going to remain restrictive. The current rate of 7.5% is the highest in the European Union, and there is little room for any substantial reduction given the rate of domestic inflation - the government has just agreed to raise public sector wages by an average 5% in 2008, so it is hard to see inflation being anywhere near the "comfort zone" yet awhile. Of course, systematic tightening on all fronts will eventually produce nominal as well as real wage deflation, especially if we sink into a deepish recession, which seems to look all but unavoidable when we come to think about the third factor - external conditions - which are almost certainly going to deteriorate over the next 6 to 9 months, as the powerhouse economies of the eurozone - Italy, Spain and Germany (France is the only semi-brightish star on the horizon) are all slowing mightily even as I write.
Friday, December 07, 2007
Hungary Trade Balance October 2007
Well, not all the news is bad all of the time, since Hungary posted a trade surplus of EUR 41.6 million in October, reducing the cumulative deficit for 2007 to EUR 362 m at the end of the tenth month, according to preliminary figures released by the Central Statistics Office (KSH) today.
October is the third month this year for which Hungary has posted a trade surplus (EUR 12 m in March and EUR 122.8 m in September). Still not everything about the numbers was good, since this does mark a step back from last months surplus. On the other hand these are still provisional numbers, but they do fit in with the falling back in industrial output in October.
The EUR 41.6 m October with a deficit of EUR 144.3 m in October last year, so the line is very much up, but as we shall see when we come to look at the GDP numbers, the export balance is the one leg Hungarian growth will have to stand on in the next few years, and the country is going to need more than this, since both domestic demand and government spending are going to be trending firmly down (there is going to have to be a hell of a lot more wage deflation in the pipeline yet awhile, if the forint can't be steered down due to the problem of the swiss mortgages.
October is the third month this year for which Hungary has posted a trade surplus (EUR 12 m in March and EUR 122.8 m in September). Still not everything about the numbers was good, since this does mark a step back from last months surplus. On the other hand these are still provisional numbers, but they do fit in with the falling back in industrial output in October.
The EUR 41.6 m October with a deficit of EUR 144.3 m in October last year, so the line is very much up, but as we shall see when we come to look at the GDP numbers, the export balance is the one leg Hungarian growth will have to stand on in the next few years, and the country is going to need more than this, since both domestic demand and government spending are going to be trending firmly down (there is going to have to be a hell of a lot more wage deflation in the pipeline yet awhile, if the forint can't be steered down due to the problem of the swiss mortgages.
Thursday, December 06, 2007
Hungary Industrial Output October 2007
Following four months of continuing growth, Hungary's industrial output dropped by 0.9% month on month in October, according to preliminary figures, adjusted seasonally and by working days, released by the Central Statistics Office (KSH).
Despite the drop Hungary's industrial output grew 8.5% year on year. As Portfolio Hungary point out it would not be wise to jump to too many conclusions about the significance of this just yet, not least since these are only preliminary figures. Also, the production index of the sector can produce rather spectacular rises and falls due to strong seasonal fluctuations in output at any particular enterprises. Again the base effect has also played a part in the downturn (since as we can see, in August performance in industry was strong). We should also take into account that there have been several long weekends and “working Saturdays", which may create uncertainties in seasonal adjustment.
On the other hand, the deceleration may also have deeper causes, since a drop in domestic output dynamics is a natural consequence of any downturn in the European Union, and this downturn is undoubtedly materialising.
Despite the drop Hungary's industrial output grew 8.5% year on year. As Portfolio Hungary point out it would not be wise to jump to too many conclusions about the significance of this just yet, not least since these are only preliminary figures. Also, the production index of the sector can produce rather spectacular rises and falls due to strong seasonal fluctuations in output at any particular enterprises. Again the base effect has also played a part in the downturn (since as we can see, in August performance in industry was strong). We should also take into account that there have been several long weekends and “working Saturdays", which may create uncertainties in seasonal adjustment.
On the other hand, the deceleration may also have deeper causes, since a drop in domestic output dynamics is a natural consequence of any downturn in the European Union, and this downturn is undoubtedly materialising.
Wednesday, December 05, 2007
Swiss Franc Loans Back in Fashion in Hungary?
Portfolio Hungary had a useful piece this week drawing our attention to the fact that the Magyar Memzeti Bank have just published the October edition of its bulletin on Household and non-financial corporate sector interest rates, interbank lending rates (careful PDF). There is a lengthy summary of the state of play with non-forint denominated loans, and in particular a section on Swiss Franc loans in Hungary. As this, and the associated long term translation problem these may represent are a matter, as many readers will know, very dear to my own heart, so I will take the liberty - in order to avoid repeating myself - of quoting them at some length. My own views and analysis can be found here.
According to the Bank, following a moderation in the demand from Hungarian households for Swiss franc-denominated consumer loans, the National Bank of Hungary (NBH) has noted a sharp turnaround in demand in October. The amount of new mortgage loans for consumption leaped by 30% from November to reach an all-time high. It is also a noteworthy that even before the start of the real Christmas season the volume of new CHF-denominated consumer credit jumped by 25% from September, setting yet another historic high.
The amount of new mortgage loans rose to the previously unseen level of HUF 130 bn in October, and this increase is almost exclusively attributable to the increase in CHF-denominated loans (HUF 120 bn). Detailed data from the bank show that while the monthly amount of new CHF-denominated housing loans rose to the exceptional level of HUF 55-60 bn, mortgage loans for consumption purrposes (ie "refis" or liquidity extraction, not to buy houses) became pretty fashionable, rising by 30% month on month to reach the level of HUF 62.5 bn.
Within these new mortgage loans, the ratio of foreign currency loans increased to 92.5%, setting yet another record. What all this suggests to me is that a lot of Hungarians are trying to maintain current consumption by borrowing forward in the hope and expectation of rising property values in the future. If this rise does not materialise, then the very least that can be said is that all of this will need, at some point, to be clawed back from current consumption. It also represents a new form of moral hazard for the central bankers, since such borrowing in Swiss Francs is based on the assumption that with so many people doing this the Hungarian authorities will never dare to let the forint slide (you know, there's safety in numbers) or, pushing the buck back one stage further, the EU Commission and the ECB won't let it happen.
But this is very dangerous thinking, since in the first place there are a lot of people now out there riding around on the back of the same idea (think Italian government debt, for eg), and people may be seriously overestimating the ability of the political and monetary authorities to contain such a large and complex set of problems. It should not go un-noted that the whole weight of the ECB is currently not able to stop the spread of the growing credit crunch across the whole eurozone and beyond. Secondly, and just as importantly as I am arguing, all of this puts the Hungarian central bank in a real double bind, since they cannot ease monetary policy at this point without precipitating a tremendous weakening in the forint, so interest rates stay high, and Hungarian domestic demand gradually gets strangled, while all the inflation puts a strong brake on export growth.
As far as housing loans go, the amount of new HUF-denominated loans remained at around HUF 10 bn in October and the total loan fee indicator was also largely unchanged (at around 13%). The ratio of CHF-denominated new housing loans was around 68%, not greatly changed from previous months.
The average interest rate and average APR on Swiss franc-denominated consumer loans with floating interest rates or with up to one year initial rate fixation fell to 6.38% and 9.23% respectively. The annualised average interest rate and average APR on Swiss franc denominated housing loans stood at 4.13% and 6.57% respectively.
The difference between the total payment cost of CHF and HUF-denominated mortgage loans has not changed and is still at 6.5 percentage points.
HUF-denominated consumer credit remained more-or-less unchanged at HUF 20 bn, while the interest rate (total) cost rose to a 6-month high of 25.6% even after two rate cuts from the central bank (is the credit crunch tightening reaching Hungary??). This underpins the assumption that Hungarian households that need this kind of access to liquidity are reasonably resistant to interest rate movements in this range, for whatever reason this may be.
The amount of new CHF-denominated consumer credit rose 25% to a historic high of HUF 62.5 bn in October, which was sufficient to send the ratio of CHF loans within total consumer credit to 80%, yet another all-time high.
Look now at the ratio betweem loans and deposits, we find that while household deposits increased by only HUF 150 bn (to around HUF 6,100 bn) over the 12-month period to October, loans went up by nearly HUF 800 bn since December 2006. That is, the entire Hungarian population is steadily indebting itself even to achieve the measly level of economic growth we are seeing.
We thus have to contemplate the possibility (assuming a stable HUF/CHF exchange rate, which is a rather strong assumption in today's conditions, that the amount of outstanding loans could reach and even exceed the amount of deposits by next spring. From a macroeconomic point of view, this is not earth shattering, but it will mean that households' net assets vis-á-vis financial institutions will be negative, and from here it is hard to discern what the implications of this will be, but if growth doesn't pick up strongly (and with the current value of the forint cramping exports given the pace of domestic inflation I don't see how it can) then we are running up against sustainability isssues in every department here.
According to the Bank, following a moderation in the demand from Hungarian households for Swiss franc-denominated consumer loans, the National Bank of Hungary (NBH) has noted a sharp turnaround in demand in October. The amount of new mortgage loans for consumption leaped by 30% from November to reach an all-time high. It is also a noteworthy that even before the start of the real Christmas season the volume of new CHF-denominated consumer credit jumped by 25% from September, setting yet another historic high.
The amount of new mortgage loans rose to the previously unseen level of HUF 130 bn in October, and this increase is almost exclusively attributable to the increase in CHF-denominated loans (HUF 120 bn). Detailed data from the bank show that while the monthly amount of new CHF-denominated housing loans rose to the exceptional level of HUF 55-60 bn, mortgage loans for consumption purrposes (ie "refis" or liquidity extraction, not to buy houses) became pretty fashionable, rising by 30% month on month to reach the level of HUF 62.5 bn.
Within these new mortgage loans, the ratio of foreign currency loans increased to 92.5%, setting yet another record. What all this suggests to me is that a lot of Hungarians are trying to maintain current consumption by borrowing forward in the hope and expectation of rising property values in the future. If this rise does not materialise, then the very least that can be said is that all of this will need, at some point, to be clawed back from current consumption. It also represents a new form of moral hazard for the central bankers, since such borrowing in Swiss Francs is based on the assumption that with so many people doing this the Hungarian authorities will never dare to let the forint slide (you know, there's safety in numbers) or, pushing the buck back one stage further, the EU Commission and the ECB won't let it happen.
But this is very dangerous thinking, since in the first place there are a lot of people now out there riding around on the back of the same idea (think Italian government debt, for eg), and people may be seriously overestimating the ability of the political and monetary authorities to contain such a large and complex set of problems. It should not go un-noted that the whole weight of the ECB is currently not able to stop the spread of the growing credit crunch across the whole eurozone and beyond. Secondly, and just as importantly as I am arguing, all of this puts the Hungarian central bank in a real double bind, since they cannot ease monetary policy at this point without precipitating a tremendous weakening in the forint, so interest rates stay high, and Hungarian domestic demand gradually gets strangled, while all the inflation puts a strong brake on export growth.
As far as housing loans go, the amount of new HUF-denominated loans remained at around HUF 10 bn in October and the total loan fee indicator was also largely unchanged (at around 13%). The ratio of CHF-denominated new housing loans was around 68%, not greatly changed from previous months.
The average interest rate and average APR on Swiss franc-denominated consumer loans with floating interest rates or with up to one year initial rate fixation fell to 6.38% and 9.23% respectively. The annualised average interest rate and average APR on Swiss franc denominated housing loans stood at 4.13% and 6.57% respectively.
The difference between the total payment cost of CHF and HUF-denominated mortgage loans has not changed and is still at 6.5 percentage points.
HUF-denominated consumer credit remained more-or-less unchanged at HUF 20 bn, while the interest rate (total) cost rose to a 6-month high of 25.6% even after two rate cuts from the central bank (is the credit crunch tightening reaching Hungary??). This underpins the assumption that Hungarian households that need this kind of access to liquidity are reasonably resistant to interest rate movements in this range, for whatever reason this may be.
The amount of new CHF-denominated consumer credit rose 25% to a historic high of HUF 62.5 bn in October, which was sufficient to send the ratio of CHF loans within total consumer credit to 80%, yet another all-time high.
Look now at the ratio betweem loans and deposits, we find that while household deposits increased by only HUF 150 bn (to around HUF 6,100 bn) over the 12-month period to October, loans went up by nearly HUF 800 bn since December 2006. That is, the entire Hungarian population is steadily indebting itself even to achieve the measly level of economic growth we are seeing.
We thus have to contemplate the possibility (assuming a stable HUF/CHF exchange rate, which is a rather strong assumption in today's conditions, that the amount of outstanding loans could reach and even exceed the amount of deposits by next spring. From a macroeconomic point of view, this is not earth shattering, but it will mean that households' net assets vis-á-vis financial institutions will be negative, and from here it is hard to discern what the implications of this will be, but if growth doesn't pick up strongly (and with the current value of the forint cramping exports given the pace of domestic inflation I don't see how it can) then we are running up against sustainability isssues in every department here.
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