As Retail Sales Wend Their Weary Way Downhill The NBH Cuts Interest Rates By Half A Percentage Point

Hungarian retail sales continued their long running decline in September, and fell by 0.3% month on month, according to the latest calendar and seasonal adjusted data from the Central Statistics Office. On a calendar adjusted basis there was a fall of 1.6% when compared with September 2007.

Retail sales were down in 2007 by 3.0% in annual terms, following increases of 4.4% in 2006 and 5.6% in 2005. In January-September 2008 the drop is 2.0% when compared with the same period in 2007. Which means that Hungarian retail sales actually peaked on a constant prices basis in August 2006, and since that time we have been falling, with the present level now below that registered on average during 2005. I don't give too many possibilities that we will get back above the 2005 level anytime this decade, and I wouldn't even be too sure about the next one, what with declining and ageing population and everything.


Combined sales of cars, car parts and fuel were down 2.1% year on year in September following against an 8.0% drop in August.

Interest Rates Trimmed 0.5%

In a surprise move which shocked most analysts (and possibly the IMF) Hungary's central bank cut its benchmark interest rate today by 50 basis points (to 11.00%). The Central Bank Monetary Council also reduced the reserve ratio from 5% to 2% to take effect from the December 2008 reserve maintenance period.

“Today's rate cut is not only surprising, but also somewhat reckless given the significant pressure seen recently on the Hungarian forint (HUF). Note that the NBH hiked its key policy rate on October 22 by 300bp in a move to stabilise the forint."
Lars Christensen, Danske Bank

Basically Hungary's economy is currently slowing quite dramatically, with inflation also falling sharply on the back of the slowdown. It seems the NBH monetary council was split on today's decision, which was possibly a knee-jerk reaction to the slowing growth. Put cutting rates (and basically by so little) so soon after raising them so sharply (and following so closely on a major bailout package) gives the impression of having little in the way of policy coherence.

“Market reaction to the rate decision today has been limited. Implied rates were already below the policy rate, and the move should in that sense not affect forward rates. However, looking ahead, we fear that the rate cut will not only be damaging to the NBH's credibility, but will also significantly increase the risk of a weaker forint. Today's rate cut in Hungary should further increase the chances of a rate cut in the other countries of the region."

This the decision would seem to reflect serious concerns within the MPC about the growth outlook (no coincidentally the growth forecast for 2009 has been revised from a positive 2.6% to a negative range between -0.2 and -1.7%) together with excessive optimisim that the IMF package will provide a sufficient anchor for investor expectations to avoid a sharp selloff in the forint. This way of seeing things may well come to seem exceedingly premature as both the ruble and the hyrvnia are in the throes of major downward corrections, while we may be just about to see a wave of devaluations across the EU10 East European states.


Inflation Heading Towards Deflation?


Hungary's annual inflation rate fell for a third consecutive month in October, and was down to 5.1 percent from 5.7 percent in September, according to the most recent data from the Budapest-based statistics office. Consumer prices rose 0.2 percent on the month.



Falling oil and food prices are slowing inflation, which has to date exceeded the central bank's 3 percent target since August 2006.

Construction Down And Wages Up In September

Output in Hungary's construction industry fell again in September - down 1.4% over the August level - although on a seasonal and working day adjusted basis it was up slightly (by 0.3%) over September 2007, according to data out this week from the Central Statistics Office (KSH).



Construction industry new orders on the other hand were down 9.0% over September 2007 following a 9.2% annual drop in August. New orders for buildings were down 20.4% while civil engineering orders were up slightly (3.6%). If we look at the seasonal and working day adjusted monthly index chart (which is the best general measure of output at this point - see below) we can see that output levels are now well below those of 2006, and there is little prospect of any substantial recovery in the foreseeable future.




Real Wages Continue To Rise In September

Real wages in both the public and private sectors continued to move up in Hungary in September, despite the evidently very difficult macroeconomic and financial situation of the country. Hungarian gross wages were up by 8.4% year on year in September, up sharply from a downward adjusted 7.1% in August. Real wage growth came out at an annual 1.6% in September (given that inflation fell to 5.7% and net wages were up 7.4%). The latest figure compares with near-zero levels in recent months. More importantly perhaps, the closely watched ex-bonus wage growth in the private sector was up by an annual 9.0% (from 7.6% in August) while in the public sector it came to 6.4% (from 6.2% in August). This means that real ex-bonus wage growth in the private sector was 3.3% (see chart below).



At the same time the number of people employed in companies with at least 5 employees fell by 4,000 people in September to 2.741 million, down by about 5,000 over September 2007. The biggest fall in private sector employment only came in October, so the current statistics do not yet show this impact. While the number of those employed in the public sector rose a little in September (a normal seasonal phenomenon) in annual terms there were 2.3% fewer people (725,000 employed) working in the public sector.

Hungary Creates a $3 Billion Bank Support Package

Hungarian banks will receive a rescue package of HUF 600 billion (USD 3 bn) from the USD 25.1 bn (EUR 20 bn) credit line provided to the country by the International Monetary Fund (IMF), the European Union and the World Bank, central bank (NBH) Governor András Simor told a press conference on Thursday.


The money is to give support to the Hungarian banking sector during the transition from Forex to Forint denominated loans for Hungarian households, and can only be seen (as explained in this post) as a preliminary step towards a lower CHF-Forint exchange rate to help the now bleagured export sector, and a looser internal monetary monetary policy to offer support to domestic demand, as the Hungarian economy enters one of its deepest rcessions in recent history.

What is not clear at this point is the precise accounting procedure which will be applied in order to determine the impact of such bank support on Hungarian government debt. This "grey area" should not really surprise us at this point, since none of the governments who have announced such rescue packages have (to my knowledge) spelt this out in detail at this point.

The support is based on a yet to be finalised agreement with commercial banks which will follow in broad outline the structure Hungarian Prime Minister Ferenc Gyurcsány announced two weeks ago (as covered in this post), namely that:

1) At the request of the debtor the banks will allow the duration of the loan to be extended (with fixed monthly instalments) so that the depreciation of the forint “does not place an unbearable burden on the debtors".

2) FX debtors who deem that exchange rate fluctuations carry excessive risks for them will be allowed to convert their foreign currency-based loan to a forint loan. In this case the banks “will accept this request and make the switch without extra charges".

3) If a debtor finds him- or herself in a position where he or she cannot pay the monthly instalments, e.g. due to becoming unemployed, the banks will be amenable to transitionally reducing the instalments or even suspending them entirely at the request of the debtor.

András Simor indicated that Hungary will not be offering this support to banks who are owned by parent banks in countires which have their own government bailout plans available (which is pretty much what I suggested might happen in my earlier post). So effectively, Hungary will receive fiscal support from Belgian, Italian and Austrian taxpayers, via a fairly convoluted mechanism which will presumeably leave things pretty opaque for those who are actually footing the bill. Following the wording (and hence the letter) of the October 12 Paris meeting, Simor stated that the biggest private Hungarian banks would be able to tap the funds, that is those who are deemed to be of "systemic" importance.

The banking sector package contains provisions for added capital and funds a guarantee fund for interbank lending. Funding will be divided between two separate funds - the Capital Base Enhancement Fund and the Refinancing Guarantee Fund - as follows.

Half of the HUF 600 bn package will be used for equity increases and the other half to provide a liquidity boost. The Capital Base Enhancement Fund will work to bring the eligible banks' capital adequacy ratio (CAR) up to 14%. In exchange for its aid on this front, the state will receive priority bank shares (non-voting, dividend preference shares). The aid will be available to banks with HUF 200 bn warranty capital.

The Guarantee Fund on the other hand will be tailored to wholesale funding requirements and guarantee the refinancing of the eligible bank obligations. The HUF 300 billion fund endowment will initially be invested in euro denominated government bonds of Euro area countries and managed by the NBH. Open for new transactions until end-2009, the fund$ will work to guarantee the rollover of loans and wholesale debt securities with an initial maturity of more than 3 months and up to 5 years, for which a fee will be charged and what are deemed to be appropriate securities will be required.

The big problem as I see it with the kind of package that is being introduced (apart that is from the considerable degree of uncertainty about how much Hungarian sovereign debt will increase in the process) is the fact that this structure does not necessarily get money straight through to the people who actually need it - Hungarian companies and households in the form of new lending. My impression is that - as for example seems to be the case in Italy - Hungary's internal credit system is seizing up, and money isn't moving to the parts where it is really needed to keep the machine oiled and running

The other important detail is the way in which banks based in other EU countries are being asked to get their home governments to step in and fork out. In this sense Austria's recent move to help its banks with state funds is instructive, since it seems to be aimed less at shoring up troubled lenders domestically and more at boosting credit and growth in emerging Europe, where its banks dominate and it could lose heavily from a downturn.

What used to be a lucrative grip on the financial markets of central and Eastern Europe - which contributed 42 percent of Austrian bank profits in 2007 - has now been transformed into a strong risk. The situation has even made it relatively more expensive for the Austrian government to borrow - since the spread over 10 year German bund has been sriven up - and has also driven up costs to insure against the seemingly unlikely even of an Austrian sovereign default.

Austrian banks are owed $290 billion by borrowers across the CEE, from Albania to Russia. Its exposure is much higher than that of Italy, Germany and France, and almost on par with what Spain has lent to Latin America, according to the Bank for International Settlements.

Relative to Austria's size, the exposure - roughly equal to its entire gross domestic product - is daunting.

Put another way, should the recent central European hiccup turn into a crisis of Asian or Latin American proportions, with currencies devaluing and debtors defaulting en masse, Austria would be in trouble, and more so than any other western country.

This underlying reality has evidently shaped how the Austrian government is using its 100 billion euro ($129 billion) banking package. The finance ministry last week agreed to boost the capital of Erste Group Bank by 2.7 billion euros, even though the bank, emerging Europe's third-biggest lender, is well-capitalized and funded.

The state money came cheaper and with fewer strings attached than similar deals in Germany or Belgium. There are few rules on how to use the capital - just enough to allow the government to present the measure as boosting domestic credit.

In reality, most of the capital is going to underpin lending in countries including Romania, where Erste owns the biggest bank, or Hungary, where it is number 6.

"That this is about providing credit to Austrian companies is just a pretense," said Matthias Siller, who manages emerging market funds at Baring Asset Management. "This move is a clear commitment to eastern Europe......But this has nothing to do with charity. Those (Austrian) banks are system-relevant banks in central and Eastern Europe, and if they had to withdraw capital from there, this would set off a landslide," he said.

A number of emerging countries in Central and Eastern Europe share the problem of having a gaping hole in their current accounts - one which they currently fill to a considerable extent through the funding that Austrian, Italian, French, Belgian and Swedish parent banks provide. Fears that they were about to choke off this lending simply because the parents themselves had trouble refinancing played a big role when investors dumped Hungarian assets in droves last month.

By tapping their home governments, the banks effectively lean on taxpayers in their home countries for refinancing countries with large current account imbalances - countries which apart from Hungary also include Romania, Bulgaria and the Baltics.

"If there is no EU-wide plan then it will be left to Sweden (in the Baltics) and Austria (on the Balkans) to take care of this," said Lars Christensen, an analyst at Danske Bank. "Obviously you can't have the Austrian government bailing out central and Eastern Europe," he added. "The problem in this situation is a lack of coordination between European Union governments about a stabilization plan for Eastern Europe."

Well, don't feel especially discriminated against in the CEE I would say, since there is no plan for Southern Europe either, and the problems in Italy, Greece and Spain are every bit as large. Indeed I would say that those responsible for policymaking across the CEE would do well to look at what happened to the Spanish economy after the external funding for the Spanish banks was effectively cut off in September 2007.

Hungarian Exports and Manufacturing Contract, As Global Activity Plummets

Hungarian manufacturing continued to contract in October following a shocking performance in September, while exports drop sharply in the midst of a looming global manufacturing recession. All of which indicates that the real economy impacts of the recent financial turbulence is now about to make its presence felt. I think we are in for a real shocker in Hungary.

October PMI Down


Hungary's manufacturing industry contracted sharply in October, according to the latest PMI reading, which fell 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst reading registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM).

Sharp Industrial Output Contraction In September

Hungarian industrial production dropped the most in more than 16 years in September as the global financial crisis hit the economy and slowing growth in western Europe curbed demand for exports. Production was down 5.3 percent from a year earlier on a working day adjusted basis, following a 1.2 percent drop in August. This was the rapidest annual decline since August 1992, according to the national statistics office (based on preliminary data).




Output was down a seasonally and working day adjusted Output 2.4 percent month on month.



Output also fell for a fourth month for the first time since 1992 as the euro region, which buys 57 percent of Hungarian exports, looks set to enter its first recession since the launch of the single currency and crimped demand for Hungarian assembled products like Audi cars and Nokia phones. The economy of the 15 countries contracted in the second quarter for the first time since the common currency's creation, and it is a pretty sure bet it continued to contract in the third one.

“Preliminary September industrial production data was yet another stark reminder that Hungary is feeling the pain from the global slowdown. Although output “only" fell by 0.7% y-o-y according to unadjusted data (versus the huge, 5.9% drop seen in August), working day adjusted figures showed a much darker picture: on a workday-adjusted basis, output fell by a whopping 5.3% versus the 1.2% decrease observed during the last summer month. The month-on-month figure was just as dreadful, exhibiting a precipitous, 2.4% fall (contrasting the 0.8% pick-up seen during the preceding month)."
György Barta, CIB Bank, Budapest

“Headline GDP growth in Q4 could be well below zero even including the beneficial impact of farming. In light of the most recent data, the -1.0% GDP forecast of the 2009 budget draft seems at the very optimistic end of the possibilities as the joint effects of the fiscal and monetary shocks aggravate the growing problems of the real economy."
Gábor Ambrus, 4Cast, London

Hungary's export-driven economy is expected to contract by 1 percent next year as a result of the global economic decline, according to the latest government estimates, although as Gabor Ambrus notes, even this number now looks pretty optimistic. If things continue like this, a contraction of GDP in the 3 to 5% range would not surprise me. The crisis, which recently forced the country to line up 20 billion euros ($26.1 billion) in emergency loans, have now long since dashed hopes for a recovery from 2007's 1.1 percent growth rate, already the slowest growth in 14 years.

August Exports Drop Year On Year


The national statistics office confirmed during the week (Wednesday) that Hungary posted a trade deficit in August - running at a revised EUR 76.1 million (down from the prelim EUR 103.7 million). The January-August balance was a EUR 24.8 million surplus (as compared with a prelimary EUR 2 million surplus), and this compares positively with the deficit of EUR 457.2 m clocked up in the same period of 2007.


Exports in August 2008 totalled EUR 5,366.3 m (vs. prelim EUR 5,378.3 m), down 0.9% year on year, compared to a growth of 8.2% in July. The export volume growth of 4.2% in July turned into a decline of 6.8%, a far cry from the year to date average of a 7.7% increase. Negative export growth had not been seen in Hungary for five years.

Imports stood at EUR 5,442.4 million, revised up by nearly EUR 40 m from the preliminary estimate. The 12 month running total was also revised from the preliminary -1.9% to -2.6%. Imports were up in July at 12.4% year on year as record oil prices boosted the total. In volume terms Hungarian imports plunged 8.5% year on year in August as compared with a 8.3% increase in July.



The JP Morgan Global Manufacturing Index Plummets Too


The October manufacturing contraction in Hungary really forms part of a much larger global picture, since the current dramatic events in Hungary have, above all, a global backdrop, one which the current dependce of the Hungarian economy on exports only serves to highlight.

Manufacturing output fell in October in one country after another, and indeed the latest JP Morgan Global PMI report really does makes for quite depressing reading.

The world manufacturing sector suffered its sharpest contraction in survey history during October, as the ongoing retrenchment of global demand and further deepening of the credit market crisis negatively impacted on the trends in output, new orders and employment. The JPMorgan Global Manufacturing PMI posted 41.0, its lowest reading since data were first compiled in January 1998 and a level below the no-change mark of 50.0 for the fifth month in a row.

Output, total new orders and new export orders all contracted at the fastest rates in the survey history in October. With the exception of India, which again bucked the global trend, all of the national manufacturing surveys posted declines in output and new orders. The impact of the downshift in global market conditions also had a far-reaching effect on international trade volumes. Although new export orders fell at a slower rate than total new business, all of the national manufacturing sectors covered by the survey (including India) saw a reduction in new export orders.

"October manufacturing PMI data reinforce the stark retrenchment that the sector is currently facing, with production, total new business and new export orders all falling at record rates. The latest Output Index reading is consistent with a fall in global IP of almost 8%. The only positive from the surveys was a decline in input prices for the first time since August 2003."
David Hensley, Director of Global Economics Coordination at JPMorgan

Economies across the Eurozone are being affected. In Italy manufacturing activity contracted at the fastest rate in at least 11 years in October according to the latest Markit/ADACI PMI survey out yesterday (Monday). The Markit Purchasing Managers Index fell to 39.7, its lowest since the series began in 1997, down from 44.4 in September. The Italian manufacturing PMI has now not been above the 50 mark separating growth from contraction since February and the latest data showed activity falling at an accelerating pace as demand shrank while jobs were shed at the fastest rate in the history of the survey.



Other recent indicators from Italy have also been far from encouraging, with October business confidence hit its lowest point since September 1993, when the economy seized up after Italy was rocketed out of the European Exchange Rate Mechanism a year earlier.



Germany's manufacturing sector contracted in October at the fastest pace in seven years as incoming orders and output experienced their sharpest declines in more than 12 years. The headline index in the Markit Purchasing Managers Index for what is Europe's biggest economy fell in October to 42.9 from 47.4 the previous month, well below the 50 mark that separates growth from contraction.

The French manufacturing purchasing managers index was revised down to a series low 40.6 in October, down from both the 'flash' estimate of 40.8 and September's 43.0 figure, Markit Economics said in a press release issued on Monday.

Disaggregating the figures, the output component fell to an all-time low of 37.8 from September's 41.7 level, while new orders slipped all the way to a series low of 34.9 for the month, down 2.6 points from September's 37.5 level. Purchase quantities and new export orders also saw some new record lows in October, falling to 33.7 and 38.5 respectively.




Spain's manufacturing sector continued to shrink at a record pace in October - possibly the fastest among all those included in the JPMorgan index - with both output and new orders contracting and employers shedding jobs at a near record pace, according to the latest Markit Economics Purchasing Managers Index published yesterday (Monday). The Markit PMI for Spain dropped to 34.6 in October, the lowest reading registered by any eurozone economy since the series began in February 1998 and down from the already rapid 38.3 point contraction in September. As we can see, according to this indicator Spanish manufacturing has now been weakening steadily since the start of 2006.




Central and Eastern Europe

Apart from the Hungarian decline, output also contracted elsewhere in the CEE. In Poland the ABN Amro Purchasing Managers Index fell for the sixth month running to 43.7 (down from September's 44.9) a record low and well below the neutral reading of 50, according to Markit Economics yesterday. In the Czech Republic, manufacturing output contracted for the seventh month in a row, and the index hit an all-time low of 41.2, just above the revised euro zone figure of 41.1. As the Eurozone itself contracts, these economies which are heavily dependent for exports to the zone will be buffeted, especially now that forex loans for their domestic housing markets have all but dried up.


US Manufacturing

The US manufacturing PMI dropped back to 38.9 in October from 43.5 in September, indicating a significantly faster rate of decline in manufacturing when comparing October to September. It appears that US manufacturing is experiencing significant demand destruction as a result of recent events. October's reading is the lowest level for the US PMI since September 1982 when it registered 38.8 percent. On the other hand inflationary pressures are evaporating rapidly, and the Prices Index fell to 37, the lowest level since December 2001 when it registered 33.2 percent. Export orders also contracted for the first time in 70 months.


The BRICs

China's PMI dropped to lows not previously seen in October, confirming that the economy of the so-called factory of the world is now decelerating along with everyone else. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.

According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis.

"The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."

The government-backed China Federation of Logistics purchasing managers' index - published on 1 November - also showed a strong contraction, falling to 44.6 in October, the lowest level since the data began in 2005, from 51.2 in September



Russian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting.





Business conditions in the Brazilian manufacturing worsened in October for the first time since June 2006. The headline seasonally adjusted Banco Real Purchasing Managers’ Index (PMI) posted 45.7, down from 50.4 in September, pointing to a sharp contraction -the fastest in the survey history in fact. The PMI was driven down by accelerated declines in output and new orders, as well as falls in employment and stocks of purchases.

Even in India the seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index dropped steeply in October, falling to a record low of 52.2, down from a reading of 57.3 in September suggesting another sharp deceleration in growth, even if Indian industry managed to keep expanding. The biggest fall was in the new orders sub-index, which dropped to 54.4 in October from 62.6 in September. Perhaps the saving grace in the Indian survey is that most firms said demand remained strong in domestic markets, while it had been international orders which had waned. This can also be seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing that Indian year on year export growth slowed to 10.4% in September. Thus the Indian expansion is still hanging on in there, by its fingernails, but it is hanging on in.

Hungarian Business and Consumer Sentiment Fall Sharply In October

Well, you don't need to be especially adept at reading tealeaves to know which way things are about to move now on the Hungarian economy front. But just in case any of you did have some last, lingering doubts, the latest edition of the GKI sentiment index should have wiped them smartly away. In fact the GKI economic sentiment index declined in October to a record low as the financial crisis made businesses and consumers "dramatically more pessimistic'' (according to the institute) about Hungary's growth outlook.

The overall index fell to minus 25, the lowest since measuring began in 1996, from minus 17.9 in September. Business confidence declined to minus 14.8 from minus 9.3, also a record.

``Businesses of every kind and consumers became dramatically more pessimistic about the outlook of the Hungarian economy as the international and domestic financial environment deteriorated by the day...... The industrial confidence index fell ``significantly'' on the predictions for orders, specifically for exports, while the estimate for industrial production ``visibly deteriorated. Expectations for employment also fell significantly.

Consumer confidence also dropped, falling to a six-month low of minus 54.0, from minus 42.5 the previous month. Consumer sentiment has in fact been plumming the bottoms since the middle of 2006, when Prime Minister Ferenc Gyurcsany had to raise taxes and cut state subsidies under the impact of a financial crisis which forced him to narrow what was at the time the largest budget deficit in the EU. Since that time the Hungarian economy has effectively been limping forward.

Sentiment In Europe Also Turns Down


European economic confidence saw its biggest ever fall during October as the global bank crisis generated the bleakest business outlook since the early 1990s, according to the findings of this months European Commission economic sentiment survey. The survey results give us just one more dramatic glimpse ino the devastating impact the financial turmoil is having on the real economy. Pessimism across Europe has risen dramatically on all fronts - from manufacturers' expectations about exports to consumers' fears about unemployment.

These gloomy results now make it almost a certainty that the European Central Bank will cut its main interest rate by at least half a percentage point to 3.25 per cent when it meets later this week. The European Union executive's "economic sentiment" indicator for the 27-country bloc fell by 7.4 points in October to 77.5 points. The latest index reading was the lowest since 1993 and marked the largest month-on-month decline ever recorded. Readings were down right across the individual EU economies.

And as the external environment deteriorates, sentiment inside Hungary not unnaturally falls right behind it.

Manufacturing Contracts In October

The most obvious area where the deteriorating export potential is to be found is in industry, and as was to be expected Hungary's manufacturing industry contracted sharply in October, according to the latest manufacturing purchasing manager index (PMI) reading, which dropped 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst which was registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM), the publisher of the index, has reported on Monday. On these indexes any reading below 50 indicates contraction.

More Budget Details

The Finance Ministry has now made available the latest version of next year's Hungarian budget - which is based on an anticipated 1.0% GDP contraction in 2009. The forecast assumes that wages in the private sector will not grow by more than 1.6% on average during the year, while there is to be no increase in the public sector. The combined result is a 2.6% average decline in real wages. Wage-related austerity measures and an expected 0.6% decrease in employment are projected to lead to a 3.7% contraction in household consumption.

Exports are expected to grow by 3.9% and imports by 2.4% (in both cases revised down from an earlier 4.1%). Based on the above, the government expects the public sector deficit (ESA-95) to come to 2.6% of GDP instead of 2.9%.


Swiss Franc Mortgages Hit Record High In September: The Rise Before The Fall?


Forex borrowing by Hungarian households hit a historic high in September, the month before the crisis, and before the termination or restriction of this practice by a number of significant banks, so this was in all probability one last fond farewell by Hungarians to the practice of local FX borrowing. The monthly statistics of the National Bank of Hungary (NBH) published on Friday also represented, as Portfolio Hungary comments - the calm before the storm in the area of FX loan costs. The average APRC (annual percentage rate charged) on forint loans to households was up, but very slightly slightly overall, while the average APRC on Swiss franc loans remained broadly unchanged compared with August. Next month we will see the result of the substantial (3%) rate hike by the central bank in the middle of the month enter the data.





The seasonally adjusted volume of new loans to companies and households continued to rise in September with both forint and Swiss franc housing loans rising slightly. Also worthy of note was that while the monthly average interest cost of CHF-based household consumer loans remained stationary in September, the value of new loans has risen moderately



Total loans of households rose HUF 296 bn to reach HUF 6,8880 bn in September. But it is important to note that HUF 175 bn of this was the result of the weakening in the forint, and only HUF 121 bn was the result of new transactions, with these being almost exclusively in FX loans. The forint fell by 2% versus the euro, 3.7% against the CHF and 9% against the JPY in September.

As a result of the revaluation effects produced by the forint depreciation the ratio of FX loans to total loans rose hit a record high of 62.3% in September.

Hungarian Producer Prices Maintain their Inflationary Dynamic

Despite the very rapid slowdown in the Hungarian economy, producer prices continue to head stubbornly upwards Industrial domestic prices were up by 0.3% in September over August and were 12.8% higher than in September 2007. Export producer (as measured in HUF) increased by 1.9% on August and decreased by 1.3% compared to September 2007. Combined domestic and export producer prices were up 1.2% on the month and 4.7% year on year.





In September 2008 the highest monthly price increase was in the manufacture of leather and leather products (1.3%), due to a monthly price hike of 3.1% in the manufacture of footwear. There was a 1.2% monthly price rise in the manufacture of chemicals, chemical products and man-made fibres, which were affected by a further price rise of basic chemicals. The manufacture of refined petroleum products prices were up by 0.9% on a monthly basis.

Price decreases took place in the food industry, the textile industry, in the manufacture of machinery and equipment (0.4%), in wood and wood products (0.3%) and fabricated metal products (0.2%).

In other sectors price increases ranged between 0.1% and 0.8%. The prices of electricity, gas and wate supply, which have a considerable influence on domestic sales prices, rose by 0.3% in September, the same rate as in August, largely due to price increases in the production and distribution of electricity (by 0.7%).

Compared to September 2007, the highest domestic sales price increases in manufacturing industry was in the manufacture of refined petroleum products (31.9%). The price of manufacturing fabricated metal products rose by 12.5%, while prices of manufacturing chemicals, chemical products and man made fibres were up by 10.4%.

Prices were down in the manufacture of textiles and textile products (2.5%) and in the manufacture of wood and wood products (0.8%). The prices of electricity, gas and water supply were up by 19.2% year on year.