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Friday, June 29, 2007

Current Account Deficit Reducing

According to the National Bank of Hungary the current account deficit amounted to EUR 1,102 million in the first quarter of 2007 (watch out PDF) or EUR 1,105 million, according to seasonally adjusted figures. The corresponding deficit figures for Q4 2006 were EUR 1,115 m and EUR 1,191 m.:

According to quarterly data, the downward trend of Hungary’s net financing requirement (i.e. the balance on its combined current and capital accounts), calculated using the top-down approach, continued in 2007 Q1. The net financing requirement amounted to EUR 1,048 million and it was EUR 985 million, or 4% of GDP, after adjusting for seasonal effects. Expressed in domestic currency terms, the net financing requirement was HUF 265 billion. The net financing requirement, derived as the combined current and capital account balance using the bottom-up method, was EUR 1,552 million and EUR 1,469 million seasonally adjusted. This was the equivalent of 6% of GDP.

In general the news is moderately good, since, while both goods imports and exports are rising, exports are rising more rapidly than imports, which is only natural given the contraction of internal demand which is taking place.The recent path of the deficit can be seen in the chart below.

Trade in goods continued to be in surplus, at EUR 117 million seasonally adjusted and at EUR 128 million not seasonally adjusted. According to the seasonally adjusted data, the surplus on services amounted to EUR 269 million, and EUR 140 million not seasonally adjusted.

On the income and transfer accounts balance side income on debt (interest) and income on equity (dividends) (see Chart below) continued their downward trend movement, although note that the negative income on equity (dotted red line) is up from the lows reached a year ago. In 2007 Q1, the seasonally adjusted deficit on income on debt amounted to EUR 473 million, and negative income on equity was EUR 1,122 million. The general trend of both these components remained unchanged: the deficits on both income on equity and income on debt rose evenly, as a result of (i) the continued rise in reinvested earnings and (ii) increasing cost of interest payments.

On the negative side, non-debt coverage of the current account deficit was negative for the second consecutive quarter (EUR -61million), leaving bond purchases of non-residents to cover the bulk of the Q1 current account deficit. Now the worrying thing about this is how the central bank are going to get interest rates down from the current 7.75% refi rate and attract bond purchasers to fund the deficit. This is going to become important later in the year, as the economy is now slowing noticeably (and this data on employment).

Also FDI inflows into Hungary declined to EUR 481 million in Q1 from EUR 2.2 billion a year earlier. JPMorgan's Nóra Szentiványi was quoted as saying that:

Over the past four quarters, FDI inflows fell to 3.4% of GDP while net FDI inflows amounted to just 0.7% of GDP due to the ongoing expansion of Hungarian companies abroad,"

she also noted that:

It is not too encouraging that foreign companies in Hungary are reinvesting less than they were in previous years (0.8% of GDP down from over 2% of GDP in 1997-2005),"

Central bank foreign exchange reserves amounted to EUR 17.0 billion at end-March 2007 up from EUR 16.4 billion at end-December 2006.

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