Friday, May 30, 2008
Domestic producer price inflation was running at 11.8% year on year in April (as compared with 10.8% year on year in March and 7.9% in April 2007) and in monthly terms prices were up by 1.0%, a slight increase on the 0.8% registered in the previous month (and 0.2% in April 2007).
Producer prices in the manufacturing industry dropped 0.3% month on month (vs. +0.1% in Mar) and 5.1% year on year (versus 4.4% in March) in the fourth month of the year.
Export sales prices in March rose by 2.6% year on year against an increase of 2.0% in the previous month and a decrease of 6.1% in April 2007. In monthly terms the KSH reported a 1.0% decline, following an 0.3% drop in March and a drop of 1.6% month on month in April last year.
Thursday, May 29, 2008
"Macroeconomic stress has been gradually building across Emerging Europe and is starting to reach critical levels. Several years of current account deficits and rapid credit growth have left a number of countries vulnerable to a rapid and difficult economic adjustment, a so-called hard landing," said Kenneth Orchard, a Moody's Vice President - Senior Analyst and author of the report.
In the meantime, however, Moody's sovereign ratings have barely changed, because its base case scenario remains a “relatively orderly reduction in growth and imbalances over time."
In an effort to promote transparency about the potential course of rating actions, Moody's has examined a stress scenario, which, if it were to materialise, would generate tangible negative rating pressure for some countries.
“We are most concerned about moderate to severe hard landings, defined as a rapid and difficult economic adjustment following an extended period of strong economic growth. Typically, the economy would contract substantially, and the current account deficit would sharply decline or even reverse. We would also expect to see problems in the financial sector, and possibly a decline in the value of the currency," Orchard elaborated.
The agency has identified 11 countries - ranging from Iceland to the much lower rated Baltic states - with large economic imbalances, i.e. high current-account deficits and a substantial increase in domestic credit to GDP ratios.
“The probability of these imbalances ending in hard landings has increased with the recent turmoil in the global capital markets," Orchard said.
“Although capital flows into the surveyed countries have been maintained so far, international banks and investors have become more risk averse and capital constrained," he added.
“Rising imbalances are reflected in the fixed income and credit default swap (CDS) markets, where CDS prices have risen and bond spreads have widened significantly since July 2007 and - for some countries - these markets are now factoring a material risk of default," Orchard noted.
He added, however, that downgrades might still not lead to an alignment with market CDS-implied ratings, “which in some cases have moved from being much more optimistic to much more pessimistic than Moody's sovereign ratings".
The analysis outlined in the report allows Moody's to consider the impact of moderate to severe hard landings on sovereign creditworthiness, projecting debt/GDP ratios for each country and evaluating liquidity outcomes.
Moody's said Bulgaria, the Czech Republic, Estonia, Iceland and Kazakhstan had demonstrated "excellent financial strength" and their rating would most likely be resilient to a severe but unlikely hard landing.
The second group of the three identified in the report that were differentiated by the potential impact of hard landing on sovereign ratings comprises Croatia, Poland and Romania, which, according to Moody's, were in a relatively strong position. Nevertheless, the agency said these could still be faced with a medium to large increases in public debt and so potentially a moderate downward ratings pressure.
The third group with Hungary, Latvia and Lithuania in it is the most vulnerable, and the ratings of these three would be “under significant pressure".
“This analysis means that the first signs of a materialisation of a - still unlikely - severe hard landing would require heightened attention from Moody's Sovereign Risk Unit," Orchard concluded.
The KSH said the number of unemployed was 323,400, while the number of employed totalled 3,850,400 in the February-April period. The latter figure compares with 3.844 m in Q1 and 3.902 m in the same period of 2007 (ie it was down by 1.35%). The number of unemployed dropped by 9,200 from the previous 3 month period but was up by 9,100 from the total in the same period of last year.
According to Eurostat data the EU harmonised jobless rate (ie the one which is comparable across countries) was 7.8% in Hungary in March.
The participation rate of the 15-64 age group was 61% in Feb-Apr, unchanged from Jan-Mar, but down 0.5 ppts from the same period a year earlier. The employment rate of the population aged 15-64 was 56.2% in the period examined, against 56.1% in the previous 3-m period and down 0.7ppt from Feb-Apr last year.
The KSH said 47.3% of all unemployed have been seeking jobs for a year or more (up from 45.4% in the previous 3 months). The average duration of joblessness came to 17.1 months, up from 16.4 in the previous 3 month period.
I think what few people are really contemplating at this point is - depending on the velocity of increase in household demand and the velocity of decline in the working age population - we may soon hit a point (if we haven't hit it already, see retail sales chart below) where retails sales may simply not (in constant price terms) ever rise again.
Monday, May 26, 2008
The increase brought Hungarian interest rates to their highest level since the 9.0%rate of January 2005.
The National Bank of Hungary (NBH) has also raised its forecast for 2009 annual average inflation to 4.2% from 3.6% in its latest quarterly Inflation Report released on today. This provides I think a big part of the explanation for the logic of today's decision.
Essentially it seems to me that with the forint trading band now abolished the currency will be very likely to come under sharp attack if any indication is given of downward movements (and this despite the recent record highs, which may well have been about taking the "ride up" on todays decision) and especially if Hungary's stagnant economy shows no signs of revival, which with interest rates at this level and fiscal policy tightening, and the eurozone slowing it is hard to see how it can (where would - apart from agriculture - the growth come from).
True, inflation remains stubbornly high:
but domestic demand is still declining. Retail sales, for example:
and the rate of increase in industrial output has weakened considerably:
while GDP is now almost stationary:
Friday, May 23, 2008
Hungarian retail sales dropped by 0.6% month on month in March, against an 0.2% fall in February, according to calendar and seasonal adjusted data from the Central Statistics Office (KSH). There was only one single months last year when the KSH reported a month on month rise. On a seasonal adjusted basis sales fell by 3.7% year on year in March (as compared with a revised -2.6% in February and -0.2% in Mar 2007).
Combined sales of cars, car parts and fuel (not a part of European statistical systems) totalled HUF 193.28 billion in March, down 2.8% year on year and contrasted with an increase of 2.6% in February. For Q1, the KSH reported a drop of 0.7% in annual terms in this category against a rise of 0.5% in Jan-Feb. Retail sale of cars and car parts declined by 4.4% year on year in March, following a 4.2% rise in February. For the Jan-Mar period the KSH detected a fall of 1.3% year on year, versus a rise of 0.5% in the first two months.
Monday, May 19, 2008
The KSH also reported a 2.5% month on month rise in construction industry output from February, according to seasonally and working day adjusted data. This compares with a 4.4% month on month increase in February and a 5.6% fall in March 2007.
In the first quarter, construction output was down by 19.2%, even more drastically than in the whole of 2007 (-14.1%) and also by more than in the first two months (-13.3%). There are basically two ways of looking this. The first of these is that the Hungarian construction industry is still declining at a serious rate, and the second is to emphasise that output has now been rising (on a seasonally adjusted basis) since January (see index chart below) and hence you might say that while the situation continues to be bad, and shows no sign of impending recovery, we may well have touched a local bottom in January, so the situation may well not deteriorate further, and may well now improve slightly. Certainly output in March was the highest since August 2007. Everything now depends, I think, on the evolution of other factors in the Hungarian economy and on how these are influenced by economic events outside Hungary's borders, ie by the external environment.
As reported by KSH:
The volume of building of complete constructions was down by 16.7% year on year in March, compared with a 20.2% fall in February and a 1.0% fall in Mar 2007. In Q1 there was a decrease of 21.6% in this sub-branch.
In building installations the statistics office reported a 10.4% year on year decline in March compared with a 27.4% fall in the previous month and a 10% drop in March 2007. In the January-March period the KSH reported a 16.7% year on year decrease.
The decrease in the volume at building completion remained largely stationary at 9.3% year on year compared with -10% in February. In this sub-branch there was a 5.2% year on year decline in March last year. The Q1 drop came to 20.9% year on year.
The stock of orders at the end of March (HUF 717.3 bn at current prices) was down by 23.6% from a year earlier. The stock of orders for buildings totalled HUF 371.8 bn in March, down 7.1% year on year, which compares with a rise of 8.4% in February and and a fall of -0.4% in March 2007.
In the civil engineering sector the stock of orders was down by 34.7% year on year (to HUF 345.4 bn), as gainst a drop of 35.0% a month earlier and a 47.7% decline in March 2007.
In terms of new orders, however, the picture has not really improved. Following a promising growth of 52% in January, new orders in the construction industry decreased by 14.8% year on yearr in February and 11.2% in March, totalling HUF 109.9 bn in the third month of the year. In March 2007, new orders were down 44.3% year on year.
New orders concluded in March in the buildings category were down 23% year on year at HUF 66.3 bn at current prices, which compares with a drop of 9.4% in the previous month and an 28.8% fall in March 2007.
For civil engineering, new orders grew by 15.7% year on year in March totalling HUF 43.6 bn in the third month, which compares with a decline of 22.6% in February and a plunge of 62.8% yr/yr in March 2007.
Friday, May 16, 2008
These result might well be thought to decrease base-rate hike expectations. This view is supported, among other factors, by the recent statements of vice-governor of NBH and Monetary Council member, Júlia Király, who indicated in a Reuters interview this morning that the base rate hike cycle will obviously reach its end sooner or later. This is clearly true, but it may well be significant that she is flagging this now.
Regular wage rises in the business sector are now the lowest since June of 2006. György Surányi, former NBH governor also expressed his doubts about the likelihood of double digit regular wage hikes in tha private sector in an interview published this morning.
The effect of the slowly decreasing inflation and the dynamic growth of net wages together led the real wage index (ie wage rises minus inflation) above zero in February. This index had been negative for quite some time now. In March, the annual increase of net wages, 8.7%, was slightly higher than the level of the annual inflation, 6.7%, which decreased a bit the real wage index in the last month. Between January and March 2007, real wages decreased by 0.7% on a yearly basis.
The number of workers employed increased to 2,747,000, up by 9,000 on February, but this level is still 1% lower than last March. In the public sector, lay-offs seem to have stopped. The number of public sector employees was back near 720,000, partly as a result of seasonal factors according to KSH.
In January–March 2008, some 1 million 941 thousand people worked in the private sector and 715 thousand in the public sector. The staff number of budgetary institutions on the whole decreased by nearly 5.6% while in the private sector it practically stagnated.
In the private sector there were 1,944,500 people employed, an increase of only 0.4% on the number employed in March 2007.
Thursday, May 15, 2008
Eszter Gárgyán, Citibank, Budapest
“According to comments from the Statistical Office, strong industrial performance supported growth in 1Q, which in our view is likely to diminish in the coming quarters as external demand from the euro area weakens."
“We expect a moderate drop in public services (health care and education), while construction and services related to household consumption are likely to remain weak, as we only expect a slow and gradual recovery in household consumption based on the recent drop in consumer sentiment."
“Our view is that strong 1Q GDP data reflected the Ministry of Agriculture's estimates of a strong agriculture harvest (this reflects the methodology used by the Statistical Office)."
“According to our estimate, if weather conditions remain favourable total agricultural output growth could be close to 30% this year, which is likely to partly offset weakening external demand. Such an outcome would result in GDP growth above 2% in 2008. Our current full-year GDP growth projection is 1.9%, as we see downside risks to the export outlook."
“In our view is that although consumption is likely to recover only slowly, the inflation outlook is jeopardised by the second-round effects of supply-side shocks. Therefore, monetary policy decision-makers are likely to put more emphasis on underlying inflation trends and the private sector wage outlook than on growth figures."
Wednesday, May 14, 2008
Core inflation, which strips out some volatile food and energy prices and is one of the central bank's most closely watched indicators, was 5.6 percent, compared with 5.3 percent in March. On the month, core prices were up 0.5 percent.
In April, the cost of food was 12.7 percent higher than a year earlier, the biggest annual increase since February 2007. Household energy inflation accelerated to 8.7 percent from 8.1 percent in March. Clothing prices increased 2.7 percent in the month.
The cost of health services dropped 18.2 percent from March and 12.6 percent from April 2007 after a referendum scrapped government-imposed fees on doctors visits and hospital stays.
Hungarian inflation has exceeded the central bank's 3 percent target since August 2006. The bank last revised its inflation forecasts in February, raising them to 5.2 percent for this year and 3.6 percent for 2009, up from a previous 5 percent and 3 percent.
Policy makers last month raised the benchmark interest rate to a three-year high of 8.25 percent and said they may lift it again as rising food and oil prices threaten to push up other costs like wages. The average monthly gross wage in February rose at an annual 13.4 percent rate.
Gábor Ambrus, 4Cast, London
“Hungarian Apr CPI came in at 6.6% y/y in line with mkt but above our call for 6.3% y/y. The structure is generally in line with our expectations, it is the food components that came in stronger than we had thought."
“Raw food up 1.9% m/m, processed food +1.4% m/m, a very sharp acceleration from Mar's reading. In raw foods it was pork that gave the big boost, indicating that the high feed prices are now trickling down to the meat chain."
Eszter Gárgyán, Citibank, Budapest
“The ending of hospitals and doctors' visiting fees decreased the headline CPI by 0.2 ppt (while other factors partially offset this development) in April, while excluding this one-off effect, seasonally-adjusted market service prices - which in our view are of primary importance to the trend in the inflation outlook - continued to rise to 6.2% YoY from 5.8%YoY in December 2007."
The forint traded at 249.52 per euro at 10:23 a.m. in Budapest, from 249.29 late yesterday. The currency reached a seven-month high of 248.68 yesterday. The yield on the benchmark three-year bond fell to 9.15 percent from 9.19 percent.
Tuesday, May 13, 2008
In a special report published today, Fitch noted that “full-cycle credit costs of foreign currency loans are hard to estimate, given the still adequate credit environment and overall favourable movements in foreign currency. In particular, foreign currency lending to retail borrowers is risky as these customers have typically no foreign currency income sources and are therefore unhedged."
“The asset quality of retail loan portfolios at Hungarian banks has not deteriorated materially to date. However, this needs to be seen in the light of a banking sector that, like in other CEE countries, has not yet been subject to a full economic cycle, irrespective of the economic slowdown since 2007," said Michael Steinbarth, Director in Fitch's Financial Institutions team.
“In addition, the HUF weakening has only been temporary so far and is not sufficiently long to pose serious asset quality problems for the banks," he added.
“The mostly favourable currency and interest rate movements so far have left borrowers and lenders with a perspective of limited downside risks," Fitch said, adding that it understands that while the National Bank of Hungary (NBH) has reacted to inflationary pressures stemming from a softer HUF to date, “it may prove risky to rely on the central bank to continue hiking rates if the HUF weakens further".
“In addition, the re-emergence of global inflationary pressures is also likely to pose another additional risk factor as potential global interest rates hikes could affect the asset quality of foreign currency loans extended by Hungarian banks."
Foreign currency loans have grown continuously over the last four-to-five years as interest rates on them are substantially lower compared to loans in HUF.
At end-2007, around 90% of new retail lending was in foreign currency, in particular in Swiss francs, Fitch noted, adding that retail loans in foreign currency totalled around HUF 3,216 billion or about a fifth of the banks' gross loan books.
At present “the banking sector is sufficiently capitalised and can withstand some external shocks," Fitch said, adding, however, that “this could change if there were to be multiple shocks, including a prolonged weakening of the HUF and a sharp correction of real estate prices".
Friday, May 09, 2008
The trade shortfall has been shrinking for two years as exports picked up and government measures to reduce the budget deficit have weakened consumer demand for imports.
Exports rose 3.9 percent from a year ago and imports increased 3.1 percent. In the month, Hungary sold 75 percent of its exports to the European Union, with 69 percent of imports arriving from within the EU.
The growth in exports of only 3.9% was down considerably from the much higher rates achieved in January and February, and this is the number to watch for in the months ahead.
Thursday, May 08, 2008
Output decreased by 2.6% month on month (vs. +2.3% in Feb), according to figures adjusted seasonally and by working days.
The KSH is scheduled to release detailed data on the industry on 15 May.
Bartosz Pawlowski, Toronto Dominion Bank, London
“March industrial output increased by 4.3%yoy (which means 1.9%yoy in unadjusted terms). This is the slowest pace of production growth since March 2005. Although a part of the weakness in March data can be explained by a much better February result, it seems that weaker exports are taking their toll on the Hungarian output."
“Industrial production has been trending downwards since early 2007 adding concerns that the economic growth will continue to disappoint. This is particularly the case given the ongoing weakness in consumer spending, as evidenced by negative growth of retail sales."
Gábor Ambrus, 4Cast, London
“Prelim Hungarian industrial output came in at 4.3% y/y, slightly above our 3.0% y/y forecast and a good margin below mkts 7.8% consensus. Unadjusted growth was even weaker at 1.9% y/y from 13.2% y/y last month. M/M swda growth estimated at a shocking -2.6%, though one has to note that last month's reading was distorted by the leap year effect and statistical methods for correcting for this distortion are not robust enough, given the general data volatility and lack of observations."
“We maintain that trend growth for the Hungarian industry should be around 5% this year, Feb overshot that level, Mar brought some correction on the downside. The same volatility was seen in the case of the Polish data for Feb/Mar, suggesting statistical effects are largely to be blamed."
Eszter Gárgyán, Citibank, Budapest
“We expect industrial exports to slow in the second half of this year as activity in Hungary's main export partners in the eurozone decelerates, as demonstrated by the drop in the latest business indicators and retail sales data in the eurozone."
“Therefore, we expect decelerating industrial performance to limit the improvement in the trade balance and slow the economic recovery in the second half of this year, thus GDP growth is likely to remain below 2% in 2008."
“As the MPC noted in the April statement, the disinflationary effects of the negative output gap on a wide range of goods and services has not been confirmed by the inflation data so far. Therefore, our view is that the MPC will maintain its hawkish stance despite the disappointing growth outlook and continue hiking rates if the inflation outlook is above the 3% target on a 5-8 quarter policy horizon."
“We expect the NBH's May Inflation Report to forecast that the headline inflation will only decline to the 3% target by the end of the 3Q09-2Q10 target horizon with significant upside risks."
Wednesday, May 07, 2008
In February 2008 the trade balance had a surplus of HUF 41 billion (EUR 149 million). The balance improved by HUF 54 billion (EUR 200 million) compared to the same month of 2007. The surplus compares with a deficit of EUR 79.5 million in January this year and a gap of EUR 50.8 m in 2007. As Portfolio Hungary wrly observes "It has not happened since 'time immemorial' that the 12-month trailing balance showed a surplus (EUR 32 m now)".
The steady and constant improvement in the external position can be clearly seen in the trade balance chart.
KSH also reported that Hungary sent 77% of its exports to the European Union and imported 68% of its goods from the EU in February.
Updated Tuesday May 6 2008
Hungary trade surplus in February was EUR 157 million, revised up from the preliminary EUR 149.3 m (see above), according to the Central Statistics Office (KSH) today. The 20% jump in Hungary's export volume does not reveal any impact at that point from the slowdown in the EU business sector, however the improved performance is largely attributable to a sharp increase in sales in Russia.
Exports in February totalled EUR 6,205 m, up 18% year on year, while imports totalled EUR 6,048 m , up 14% from the same month of 2007.
This improved export performance was to some extent attributable to strong growth in foreign sales in several product groups. The export volume of machinery and transport equipment jumped by 26% year on year in Jan-Feb. The engine behind growth - based on forint data at current prices - was telecommunications equipment, with 52% export and 63% import growth in annual terms. The export of mobile handsets doubled and their import grew 2.5 times year on year. The key market for mobile handsets remained Russia where exports were more than three times as large as in Jan-Feb last year. Some 13% of exports went to Russia, while more than 50% of the increased imports came from China.
While growth dynamics are the highest in machinery at transport equipment, this would not explain the surplus, since import growth is still larger than export growth in this sector. On the other hand, the increase in exports at manufactured goods was much larger than that of imports (12% and 7%, respectively). Looking at forint data at current prices, the sale of medical and pharmaceutical products grew by 30%, more than the overall export average. Exports of rubber manufactures leaped by 60% year on year. The substantial increase in foreign drug sales can be attributed to an over 60% rise in this product category going to Russia.