Wednesday, October 22, 2008

Panic Gets A Grip On The Hungarian Authorities As Base Rate Is Hoisted And Large Spending Cuts Planned

Wow, this is BIG news:

The National Bank of Hungary (NBH) has on Wednesday raised its benchmark rate by 300 basis points to 11.50% i a bid to shield the forint from speculative attacks. According to a statement released by the central bank, Hungary's two-week deposit rate is 11.50% as of 11:00 CET 22 October.


Let me be absolutely calm, cool and clear at this point: THIS IS NOT THE WAY.

In addition Economy Minister Gordon Bajnai is also promising not to be shy when it comes to spending cuts.

The government has postponed tax cuts aimed at boosting growth from a 14-year low to focus on reducing reliance on external financing as investors shun riskier assets. It plans to narrow the budget gap to 3.4 percent of gross domestic product this year and 2.9 percent in 2009 from last year's 5 percent. The earlier goals were 3.8 percent for this year and 3.2 percent for next year.



According to Prime Minister Ferenc Gyurcsany Hungary's government, which submitted a revised 2009 budget draft to parliament last week, is ready to rework the details again if economic conditions warrant it:

``If we need to act, we will act immediately, like we have in the past 10 days,'' he said in an interview on state-run Magyar Radio late yesterday. ``If there's a consensus among analysts and evaluators that the pressure on Hungary is bigger then we previously expected, then we'll have to work through one or two nights again and redo the budget one more time.''


The government have pledged to reduce the budget deficit faster than previously planned to reduce Hungary's reliance on external financing. My feeling is that they are getting absolutely the wrong advice here. Alone, of course, they have no alterative, since the markets are obsessed with this point and will crucify them if they don't make at least a symbolic effort to reduce the fiiscal deficit, but this is why they need EU support on the fiscal side. Hungary is an EU member, isn't it????? Or do Europe's leaders in Brussels want to see one (and then two, and three, and four.......) "Argentinas" inside the Union's frontiers?

Also, the deeper the recession in 2009, the less tax revenue there will be, so we could get into a vicious circle here. And an 11.5% base rate at exactly the time the supply of foreign credit dries up means you can say bye bye to internal consumption for the foreseeable future. What the hell is the ECB up to at this point? Didn't we all use to say when we were young, "no return to the 1930s", yet this seems to be precisely the kind of policy mix Hungary is facing at this point.


Bajnai apparently said in an interview with CNBC television that the forint and stocks are under attack from ``speculators". This may or not be the case, but it is not the principal problem. The main problems are associated with the weak underlying fundamentals which have long characterised the Hungarian economy, and the fact that people have been drwan into taking out foreign exchange currency loans when the economic fundamentals (and excessive internal inflation) mean that the currency is almost bound to be weak, and trend steadily downwards until a strong, export oriented and competitive economy is built. This will need some years, and in the meantime Hungary needs to survive.

Hungary does not need another bout of significant spending cuts, on the contrary it needs a strong injection of FISCAL support from its EU partners, to try to underpin domestic demand while the Fx loan dependency unwinds. At the same time it needs substantial support from the IMF to allow the currency to move downwards in an orderly, and not a disruptive fashion. There are lots more things needed in the mid term like labour market, pensions and health system reform, but the patient is on life support, and needs to be kept alive, to live to fight another day.

Simply sending Hungary off into a long and deep deflationary recession is not the answer, and the sooner people come out of denial and try to address some of the longer term problems (including the demographic one) the better for all concerned.

At the moment I am knee deep in work from other areas - most of Eastern and Southern Europe it will be remembered is dropping into recession at this very point (not to mention Germany) - but I will try and find time for a longer and much more reflective post on Hungary at the weekend.
Posted by Edward Hugh at 11:16 AM

1 comments:

Mark Pittaway said...

I completely agree with you, but unfortunately I don't think that (a) the governments of the EU states are either awake to Hungary's needs, nor prepared to give the support required, or (b) that the economic and business establishment - let alone the government - understands that there is an alternative given the almost total hegemony of neo-classical economics and neo-liberal policy prescriptions.

2:58 PM

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Hungary At A Glance

Welcome to Hungary Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data which we hope will help the first time reader better assess and get to grips with the argument being presented here. Here you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.