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Friday, February 13, 2009

Hungary's Second Recession In Two Years Worsens

Hungary's gross domestic product fell by 2.1% year on year in the fourth quarter of 2008 following a 0.7% increase in Q3, according to the first estimate by the Central Statistics Office (KSH). Quarter on quarter GDP fell by 1.0% GDP, even more sharply than the 0.5% (revised) contraction in the third quarter. The Hungarian economy has now registered quarterly contractions four times in the past eight quarters. And the worst is yet to come. According to most economists' estimates, GDP could contract by anything between 3% and 5% in 2009.

“The breakdown is not available yet but farming was no doubt a major booster (around 2.5pp according to our estimates) and without this massive effect, GDP would have collapsed by 4.5% y/y - and that's a a big figure."
Gábor Ambrus, 4Cast, London

“Note that in H2 2008, the economy received a significant boost from the agriculture sector, which makes the underlying picture even worse and bodes ill for 2009." “We now think that the Hungarian economy is likely to shrink by 4-5% in 2009, especially given the central bank's reluctance to cut interest rates and let the forint weaken more sizeably."
Bartosz Pawlowski, Toronto Dominion Bank, London

“The bad news is that recession is set to further deepen in the course of 2009. Especially the first half of the year will cater with nasty figures (GDP decline in the neighbourhood of 5% yoy). The Hungarian government is not in the position to implement any anti-cyclical fiscal policies, just on the contrary: necessary fiscal measures (i.e. expenditure cuts, VAT hike) aiming to further reduce the budget deific to below 3% of GDP only add to the miseries of the current recession times locally."
Zoltán Török, Raiffeisen, Budapest

“Consumption is negatively affected by increasing debt burden of households due to Forint depreciation, increasing unemployment and slightly declining real wages. However, we expect that net export will contribute positively to the GDP this year despite falling exports. In 2009 we expect that GDP would contract by 3.2% but downside risks are mounting..."
Gergely Suppan, Takarékbank, Budapest

Industrial Output Behind The Contraction

We don't have too many details on the GDP breakdown at this point, but a few things are very evident. In the first place the sorry state of Hungary's industrial output.Hungarian industrial production fell the most in December since at least 1991 as a recession in western Europe cut export demand. Production dropped 23.3 percent from a year earlier, the seventh consecutive monthly decline, after falling 9.9 percent in November. Output fell 14.6 percent in the month.

And the output for the coming quarter doesn't look any better, since Hungary's manufacturing purchasing managers index (PMI) fell once again to a all-time low of 38.6 in January, down from 40.8 in December, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) today. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hasd been above the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year.

The January figure is the lowest recorded since September 1995 and is a further sharp drop from January. The last time the January index was below 50 was in 2005 (48.5) and then in 1997 (49.1), but these contraction were much softer.
“In view of the current situation we can confidently say that the five month negative record of 1998 will be broken. We are facing the gravest crisis of the manufacturing industry in almost 15 years," the HALPIM said.

Export Fall Drives Industrial Contraction

Hungary posted a trade deficit of 76.3 million euros in December 2008, compared with a surplus of 109.3 million euros in November and a deficit of 128.9 million euros in Dec 2007. December exports totalled 4,370.5 million, down a massive 17.3% year on year, compared with an already large decline of 10.2% in November. The last time Hungarian exports contracted at this sort of rate was in December 2001 (-14.7%), but that was more of a one-off in an otherwise growing trend. Exports for the whole year were up by 5.5% year on year. Imports were running at to 4,446.8 m illion euros in December, 17.9% down on December 2007, (as compared with a 10.3% year on year drop in November). Imports were up by 5.2% in 2009.

Retail Sales Continue To Fall

But it isn't only external demand which is driving Hungary's economy downwards. Internal demand has been falling for some time now, and retail sales were down again in November, falling by 0.4% month on month (compared with a -0.1% drop in October). On a calendar adjusted basis, there was a 2.0% year on year fall (as compared with a 1.4% decline in October).

The decline in retail sales is ongoing and continuous, and in fact sales have been dropping since the middle of 2006, that is for nearly three years now.

Unemployment On the Rise

Unemployment is also on the way up, and the rate rose to 8.0% in the last quarter of 2008. The number of unemployed rose to 337,100 while the number of employed dropped tp 3.88i million in the fourth quarter (compares with a three month moving average of 3.908 million in the September-November period and 3.909 million in Q4 2007. The number of unemployed was up by 7,500 from the previous 3-m period and by 9,300 from Oct-Dec 2007.

According to data provided by Eurostat, the harmonised jobless rate was 8% in the euro area, 7.4% in the EU-27 and 8.5% in Hungary in November.

Hundary's employment rate (ie % of relevant population employed) for 15-64 year olds was 56.7% in the last three months of 2008, against 57.1% in the preceding three months and down 0.4ppt from the same period in 2007. KSH also said in their last report that 48.6% of all unemployed have been seeking jobs for a year or more and that the average duration of joblessness was 18.5 months.

The demographics of all this is that Hungary's working age population is now in long term decline.

While the employment trend is also down.

As is the total population.

As Disinflation Continues Deflation May Now Be Very Near

The net effect of all this contraction in demand is a tendency towards price deflation, and as might have been expected Hungary's consumer prices rose 0.6% month on month in January and 3.1% year on year. Core inflation fell to an annual 3.4% in January from 3.8% in December.

In January compared to December food prices increased by 2.2%., with seasonal food items (potatoes, fresh vegetables, fruits) up 13.1%, cheese and fruit and vegetable juice up 3.7, as well and edible oil 2.9%. Food prices excluding seasonal food items were up month on month by 0.8%. Administered prices like postal services (+6.8%), local transport (+5.6%), refuse disposal (+5.2%) were all up sharply. Consumer durable goods, on the other had (+0.5%) and energy like electricity, gas and other fuels (+0.4%) were up much more moderately. Prices decreased for clothing and footwear (minus 5.0%), and other goods ( minus 0.7%). Within other goods the price decrease for motor fuels was 3.9%. What this means is that since October the core CPI index has hardly moved, and are on the verge of going negative.

Producer Prices

Hungary's industrial producer prices dropped by 0.9% month on month in December 2008, coming down from +0.1% in November. Year on year the producer price index fell to 5.8% from 7.1% in November. In 2008 as a whole, industrial producer prices went up 5.3%.

Domestic price inflation was 8.3% year on year in December (vs. +10.8% in November) and in monthly terms prices fell by 1.6%, against a 1.3% increase in the previous month. Export prices fell in December to 3.9% year on year (from 4.4% in November). In monthly terms they fell 0.3% as compared with a rise of 1.1% in November. So while we are far from outright price deflation in producer prices at this point, at definite disinflation is certainly to be observed.

The forint traded at 296.3 per euro at 10:43 a.m., from 298.17 following the consumer inflation news. The forint weakened to a record of 304.5 against the euro on Feb. 4 on deepening concern over the size of the country’s recession.

As Gábor Ambrus suggests (see below), this near zero price movement is quite remarkable given the fact that the forint has in fact devalued against the euro by nearly 25% since last August (see chart above). This gives us some indication of the impact of falling demand on the level of output and hence on prices.

“The good news is that the prices of durables were down by 0.1% y/y, despite the significant weakening of the forint, The key question here is that this is because the negative output gap limits the FX pass through or whether the collapse of demand means that the old stocks still last and until they last prices are kept on short leash. We will need a bit more data to see this but no doubt, sooner or alter the FX will kick in here, the only issue is how much the weak growth will limit the transmission."
Gábor Ambrus, 4Cast, London

GKI Confidence Index

Hungary’s economic sentiment index plunged to a record in January as businesses struggled with falling orders and consumers braced against job losses because of the global economic crisis, according to the GKI institute. The overall index fell to minus 39.8, the lowest since the survey began in 1996, down from minus 36.7 in December. Concern about future job losses dragged the consumer confidence index to a record of minus 66.1 from minus 60.8 in December.

OTP's Woes

Also Bloomberg report today that the European Bank for Reconstruction and Development is in talks with Hungary's OTP bank. The bank may also seek funds from Hungary’s emergency loan package from the International Monetary Fund, the European Union and the World Bank, according to Chairman and Chief Executive Officer Sandor Csanyi. OTP is one of the six European banks with heavy lending exposure in the East.

OTP net income in the fourth quarter of 2008 dropped to 1.7 billion forint from 51.6 billion forint a year earlier. The bank plans “substantial” job cuts as loan growth stagnates this year. There will be about 500 job cuts in Hungary and at least 100 in Russia, with reductions in other markets as well. Among OTP's key markets OTP’s key markets, Hungary and Ukraine, have recently been forced to seek international aid to avert defaults, while Russia and Bulgaria have had their debt ratings reduced. OTP has units in Ukraine, Bulgaria, Croatia, Russia, Slovakia, Romania and Serbia.

The bank’s earnings “show the first signs of real asset quality deterioration, namely in Ukraine, where they tripled,” Peter Vidlicka, an analyst at Prague-based research firm Wood & Co, said in a note to investors. “Similar deterioration is still likely to come to other markets.”

This news follows the recent announcement of an arrangement between the Swiss National Bank and the Hungarian central bank of a euro-Swiss franc swap agreement to provide Swiss franc funding to banks in Hungary.

"The Swiss National Bank (SNB) and Magyar Nemzeti Bank (MNB) are today announcing the establishment of a temporary euro-franc swap arrangement......This facility, like the ones existing between the SNB, the European Central Bank and Narodowy Bank Polski, will allow the MNB to provide Swiss franc funding to banks in its jurisdiction in the form of foreign exchange swaps," according to the statement from the Swiss National Bank.

What this means in effect is that the guarantee package available to banks, boosted to a new total of HUF 1,500 billion, will now be available to banks in a slightly modified format. The original IMF loan included HUF 600 billion available for bank bailouts, 50% of which was earmarked for capital injections leaving the other 50% available for state guarantees for commercial banks. The government have thus boosted this original HUF 300 billion (1 billion euros) guarantee fund to HUF 1,500 billion (5 billion euros), but since most of this extra funding would have been backed by Hungary (with only the small original part by the IMF), the credit rating would have been primarily determined by the Hungarian sovereign rating, thus making the credit more expensive. Thus Hungarian commercial banks will be able to issue bonds directly backed by the IMF (with OTP at the top of the list of hopeful recipients here).

Erste Bank, for example, received a government guarantee from the Austrian governmnent for 90 bp. The state guarantee for a Hungarian commercial bank would cost something in the region of 150-200 bp. But if the Hungarian loan conditions are just slightly less favourable than the Austrian ones (Erste has obtained the guarantees on an extremely favourable bass), a more realistic estimate might be approximately 300-400 bp for OTP Bank. Thus a HUF 400 billion guarantee at 350 bp would cost HUF 14 billion a year, meaning the bank would spend about 7% of its profit on the deal.

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