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Friday, October 17, 2008

OTP Bank Placed On S&P Watchlist, 2009 GDP Forecast Slashed By Government

Credit Rating Agency Standard & Poor's has placed its 'BBB+' long-term and 'A-2' short-term counterparty credit ratings on Hungary's OTP Bank and OTP Mortgage Bank on CreditWatch with negative implications.

This rating action follows the similar CreditWatch placement of the ratings on Hungary (BBB+/Watch Neg/A-2) 15 October, which in turn reflects S&P's concerns over mounting financial-sector funding pressures and their potential to raise general government debt materially.

“The ratings on OTP reflect its dominant domestic market position, strong and soundly managed business and earnings diversification in Central and Eastern Europe (CEE), and strong profitability. These factors are partly offset by the potentially volatile and risky operating environment in CEE countries, credit risks from rapid loan growth and significant domestic foreign currency lending, and the bank's moderate capitalization," S&P said late on Thursday.

GDP Forecast Slashed

Hungary's Finance Minister János Veres announced this morning (Friday) that he was slashing the official 2009 economic growth outlook to an annual 1.2% from the present 3.0%. My feeling is that this is still far to optimistic (growth is likely to be negative in 2009) but it is at least in the right direcetion.

Veres announced the new estimates for the 2009 Budget at a meeting of the National Interest Reconciliation Council (OÉT). The latest projection for 2009 inflation is 3.9% against the previous 4.3%.

Veres also confirmed earlier announcements that the budget deficit target was brought down to 2.9% of GDP from 3.2% for 2009. Given everything which is happening out there, and the sharp slowdown in GDP growth which is to be anticipated, I can't see how they can possibly hope to stick by this, but still, the credibility problem is their's, not mine.

Ferenc Gyurcsany Promises Measures to Help Hard Hit CHF Mortgage Payers

Also, this morning (Friday) in Bloomberg:

Hungary is drawing up proposals to help borrowers whose foreign currency-denominated loan payments rose as the forint weakened, Prime Minister Ferenc Gyurcsany said. The government is in talks with banks and will present proposals next week that will “significantly ease” the burden of borrowers, Gyurcsany said today in a public television interview. The forint has been battered along with Hungarian stocks and bonds as investors sold off riskier emerging market assets. Foreign currency borrowing by local businesses and consumers, along with slower growth and a wider budget deficit than elsewhere in eastern Europe, make the country a target, economists said.”

This is the bail-out Hungary will need, a battery of measures to help those with CHF mortgages pay-down their debt, or transfer them over to (subsidised) HUF ones. Hungary, given the fiscal straightjacket she is now in, and the very large costs of population ageing that are now about to hit simply is not able to generate the resources to make this transition alone, and that is why the IMF will have to help.


Cara said...

thank you for your helpful information. I am wondering, given all the puts and takes going on with the hungarian economy, the IMF and ECB bailout, do you expect the forint rally that we saw today to be sustained? it doesn't appear Hungary can afford to squander the cash raised on buying forint everyday to stabilize it the way brazil is doing. what is your thought on the likely impact to the forint / eur or forint/chf over the coming weeks. thanks

Edward Hugh said...

Hi Cara,

"what is your thought on the likely impact to the forint / eur or forint/chf over the coming weeks. thanks"

This is very difficult to say. My feeling is that attention over the next few weeks is likely to shift towards other East European economies - Bulgaria, Romania, the Baltics etc. We may see an attack on the pegs. So euro/forint may stay stable. But rmember euro/dollar is falling fast as is euro/CHF, the latter is due to carry unwind, and again we don't know how far this has to go yet.

So all in all, short term very complicated. Later, as Simor is indication monetary policy in Hungary will adapt, and we should expect to see a weaker forint against the euro in the mid term as interest rates come down and Hungary looks to get export growth. But this will be a controlled decline, rather than a rout. What no one wants is "massive" volatility.

If the CHF stays up, then the forint-CHF could settle at a much lower level, but that is a big if.

Basically, I am a macro economist, and not a currency analyst, so you need to take all of this with a pinch of salt.