tag:blogger.com,1999:blog-365961112024-03-05T06:06:24.204+01:00Hungary Economy WatchUnknownnoreply@blogger.comBlogger292125tag:blogger.com,1999:blog-36596111.post-42058727350690039572013-02-15T19:32:00.003+01:002013-02-18T20:12:36.208+01:00Hungary's Matolcsy Joins Japan's Abe In Practicing The Ancient Art Of Verbal InterventionIt's amazing what you can achieve these days just by promising to do something. It's also fascinating to watch <a href="http://www.bloomberg.com/news/2013-02-14/g-20-head-russia-pushes-for-currency-manipulation-stance.html">just what a storm you can stir up</a>.<br />
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Last July Mario Draghi surprised markets when he <a href="http://fistfulofeuros.net/afoe/taking-a-man-at-his-word/">vowed to do anything - whatever it would take - to save the Euro</a>. He didn't go into details, he didn't really need to. He simply informed his audience that whatever he did it would be enough. What I suppose no one - not even Mr Draghi himself - imagined at the time was that doing precisely nothing<span style="font-size: large;"><b> </b><span style="font-size: small;">would</span><b> </b></span>turn out to be sufficient. Yet since that time that is just what has happened, he has done nothing, nothing whatsoever - no bonds have been purchased and no country has even asked for aid. So to date this verbal style intervention has been exactly what he said it would be, enough.<br />
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Then in November Shinzö Abe, at that point a candidate who looked highly likely to become Japan's prime minister, spoke out over the problem the high yen was causing the country's exporters, and the desirability of his country's central bank conducting substantially more bond purchases to fight deflation and drive down the yen. The result was not hard to predict - <a href="http://www.bloomberg.com/news/2012-11-18/yen-bears-see-vindication-in-new-boj-under-abe-watch-currencies.html">the Japanese currency came tumbling down</a>.<br />
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While the Japanese prime minister may since have backtracked somewhat,<a href="http://online.wsj.com/article/SB10001424127887324660404578196892204462394.html"> he was quite clear back in December</a> what his objectives were:<br />
<blockquote class="tr_bq">
Mr. Abe on Sunday called on Japan's central bank to resist what he described as moves by the U.S. and Europe to cheapen their currencies and noted that a yen level of around ¥90 to the dollar—it was at ¥84.38 in early Asian trading Monday, down from ¥84.26 late Friday—would support the profit of Japanese exporters. </blockquote>
<blockquote class="tr_bq">
"Central banks around the world are printing money, supporting their economies and increasing exports. America is the prime example," said Mr. Abe, referring to the Federal Reserve's policy of flooding the market with dollars by purchasing massive amounts of Treasury bonds and other assets.<br />
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"If it goes on like this, the yen will inevitably strengthen. It's vital to resist this," said Mr. Abe, who will become prime minister on Wednesday.
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Now, surprising as it may sound, the latest player to join this intriguing new game is not the ECB's Mario Draghi<span style="font-size: large;">. <span style="font-size: small;">Far from being eager for a bit more ver</span><span style="font-size: large;"><span style="font-size: small;">bal fun</span>,</span></span><a href="http://www.reuters.com/article/2013/02/15/g20-draghi-idUSL5N0BF30920130215"> he will have none of this</a> even as <a href="http://www.reuters.com/article/2013/02/14/us-europe-economy-idUSBRE91D0CX20130214">Euro Area economies wilt</a><span style="font-size: small;">.</span> No, the latest player in this rather exclusive game is Hungary's economy minister, György Matolcsy. Since the end of last year he has now spoken out <a href="http://www.portfolio.hu/en/fx/whenever_matolcsy_speaks_hungarys_forint_weakens.25415.html">no less than five times</a> on major policy issues, each of them related directly or indirectly to the value of his country's currency, and each and every time he has provoked a sudden and sharp forint weakening. Topics covered have ranged from issues involving central bank independence, through unconventional monetary policy measures to the latest (January 10) declaration that it was a policy mistake to try and keep inflation low by maintaining a strong forint.<br />
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One curious footnote to the phenomenon is that in the wake of the furore being produced inside the country by the sudden shifts in value (not everyone is convinced a weaker forint would be a good thing) the Economy Ministry felt forced to issue a statement <a href="http://www.cnbc.com/id/100383429">blaming a research report by non other than Nouriel Roubini</a> for the last in the line of abrupt market movements. According to the Hungary Economy Ministry statement, the forint began to depreciate after Roubini said in a newsletter that failure to secure a deal with the International Monetary Fund was bad news for the currency. Consequently RGE advised investors to short the currency. Naughty Nouriel!<br />
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According to the Minsitry version "On Thursday speculators seem to have taken Roubini's advice and attacked the forint."
"It has become clear that the weakening of the forint since the middle of the week was not triggered by an article of the Minister for National Economy," instead, the ministry suggested that it was speculators who were using this as "an excuse to mask their attack." Naturally, <a href="http://online.wsj.com/article/SB10001424127887324595704578241850468806648.html">as RGE analysts stress</a>, it is much easier to sell the wicked speculator version to a voting community with only low level macroeconomic analysis skills.<br />
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<b>Two Countries, One Problem</b><br />
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But my choice of Japan and Hungary for this comparison is far from being an incidental one. Both countries, arguably, suffer from one and the same problem - structurally deficient internal demand due to an ageing and declining workforce. Logically this phenomenon, which we are now witnessing in an ever growing number of developed countries, produces a continually stronger dependence on exports for achieving headline GDP growth, a dependence which creates the surprising situation that even countries with a significant current account surplus can find positive economic growth hard to come by. As it happens, both Japan and Hungary now run current account surpluses. Japan's has been a constant over many years (although it is now notably weakening) while Hungary's is more tenuous, and of more recent origin.<br />
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Yet despite these surpluses in both cases growth is very weak, and during the second half of last year both economies remained mired in recession. Japan's economy surprised once more on the downside in Q4 2012, contracting by a worse than expected 0.1% over the last three months of the year. Hungary's performance was a real shocker, with output falling 0.9% on the quarter and by 2.8% year on year, sending the economy back to a level it first achieved at the start of 2005.<br />
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The sad truth is that long term trend growth in both countries is very low- Japan's 10 year average is now under 1%, while the Hungarian equivalent is only slightly higher. Perhaps the Japan case is not so surprising. After all most economists and analysts now recognise that ageing and declining populations will inevitably slow growth, although many, <a href="http://krugman.blogs.nytimes.com/2013/02/05/the-japan-story/">like Paul Krugman here</a>, think that this is not so dire as long as GDP per employed worker continues to perform well. Many, on the other hand, may be surprised by the situation in Hungary, especially since it is still, in theory a catch up, converging economy. Indeed one can be forgiven for being surprised since the country's leaders from both main parties have consistently argued that trend growth for the country should be something like 4%. This kind of assumption is made<a href="http://www.businessweek.com/ap/financialnews/D9LMJOI80.htm"> in the original Széll Kálmán plan</a> which informs the policy of the present government and lay behind <a href="http://hungaryeconomywatch.blogspot.com.es/2009/12/hungarys-economic-correction-still.html">the 2009 statement of the then prime minister Gorgon Bajnai</a> that "Hungary’s potential economic growth should be 2 percentage points over the corresponding EU figure in order to ensure convergence".<br />
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Similar thinking informed<a href="http://hungaryeconomywatch.blogspot.com.es/2009/05/is-hungary-set-to-become-new-iceland.html"> the 2009 model produced by Zsuzsa Mosolygó and Lajos Deli, of the Hungarian Government Debt Management Agency</a>, which attempted to show that Hungarian sovereign debt was on a sustainable path. As they argued then:<br />
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"Market analysts tend to assume in their debt models a 2% economic growth for the Hungarian economy. The National Bank of Hungary estimates currently a 2% potential GDP growth rate, however, it does not mean necessarily the long-term economic growth. A few years ago the estimates were higher and it seems to be possible that adequate reforms to encourage employment would result in a 3-4% or even higher potential GDP growth rate".</blockquote>
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This around 4% potential growth rate has been a regular theme over the years, with the only other constant being its non achievement, which, as I have been arguing all along is hardly surprising due to the country's dire demographics. If we compare with the case of Japan, the actual fall in population is much more severe in Hungary.<br />
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and the decline in the labour force (population 15 to 64) is now unrelenting.<br />
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Nor is it any real consolation to find out,<a href="http://krugman.blogs.nytimes.com/2013/02/05/the-japan-story/"> as Paul Krugman puts it</a>, that the lower trend growth rate is actually "not bad" since "you can argue that demographically adjusted, the whole tale of Japanese... [or Hungarian, EH)....stagnation is a myth" since what matters are the debt to GDP dynamics being produced by the much higher elderly dependency ratios. These are what will tell us whether a country is on a stable or sustainable path or not. Saying that Japan (or Hungary's) "performance isn’t that bad given the shortage of Japanese" (or Hungarians) seems to magnificently fail to get the point.
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On the other hand, to state that "while there is much shaking of heads about Japanese debt, the ill-effects if any of that debt are by no means obvious," is surely to make a historic error of judgement of monumental proportions. (For a fuller discussion of the theoretical issues raised by Japan's debt problem, see "<a href="http://japanjapan.blogspot.com.es/2013/02/japans-looming-singularity.html">The Looming Singularity</a>").<br />
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<span style="font-size: large;"><b>The Same Only Different</b></span><br />
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Having made this comparison, there are of course many ways in which the two countries differ, and some of them are very important In the first place Japan has been struggling with a very high yen parity, which has seen the country's goods trade balance steadily drift into the red.<br />
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Hungary on the other hand has no such problem, since the trade balance is well in surplus. <br />
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Differences also emerge when we drill down into the respective current account surpluses, since while Japan's is largely boosted by an income flow from a large stock of overseas assets (see second chart below - Japan has a positive NIIP of around 50% of GDP, click on the image for better viewing), in the Hungarian case we find the inverse - the large negative international investment position (around 100% of GDP) leads to a negative income flow which mitigates the impact of the significant trade surplus.<br />
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Surely there are lessons from the Hungarian case for the future outlook on the southern periphery of the Euro Area. Improving goods trade balances are steadily pushing current account balances in countries like Portugal, Spain and Greece back into the black. But far from being like Japan and having a large stock of external net savings these countries are more like Hungary with a large negative net external investment position (again hovering near 100% of GDP in all cases) and consequently a large external debt. What this means is that they are totally unprepared to receive the full impact of the kind of population ageing we have seen in Japan, an impact which is surely now under a decade away.<br />
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The Hungarian lesson is that exports can do well, very well, and the current account can correct, but the economy can still languish permanently on the verge of recession unable to generate sufficient growth to break out into a sustainable growth dynamic.<br />
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And there's another aspect to the Hungarian situation that needs to be taken note of, and that is the fact that one of the reasons for this very high negative net external investment position is the fact that government debt was reduced to some extent during the early years of this century by a SELL-OFF OF STATE ASSETS. Now this kind of sell off often highly desirable, but in a country with an external debt problem there is one important condition - the purchasers need to be domestic savers. If there are insufficient domestic savers, as was the case with a country like Hungary with a large current account deficit, then the external debt simply shifts from being public to private, which looks good in an accounting sense if what you are concerned about is the size of public debt, but since the debt still needs to be serviced the macroeconomic implications are often not that significant - an external debt is still an external debt (even if it only shows up on the net external investment position, rather than under the external debt account) and it still has to be serviced. Indeed part of Hungary's monthly exports still effectively go to pay the interest charges (or dividends).<br />
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So Troika representatives be warned, in Portugal and Greece you can only get so much juice out of a single lemon, and while privatization looks good on the sovereign debt balance, if what you are after are solutions to external debt burdens simple asset sales may not be as productive as they seem. <br />
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A second major difference is that Hungary hasn't got a deflation problem. In fact it has an inflation one, which is hard to understand in an economy which has seen domestic demand deflating for so long. Certainly you couldn't exactly say the economy was "overheating".<br />
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The second major difference is that for all the talk of unorthodox policies, monetary policy is conducted well away from the so called "zero-bound". In fact the central bank monetary policy rate is currently running at 5.5% - and that is after six quarter point rate cuts over the last six months. Prior to that the reference rate was 7%. Hardly stimulative policy, but this is just the point, with an external debt of around 60% of GDP which needs to be financed interest rates have to be maintained high in order to sell the debt, and keep external investors inside the country. Just this week<a href="http://www.portfolio.hu/en/economy/analyst_view_hungary_puts_issuance_nail_in_the_imf_coffin.25581.html"> Hungary issued 3.25 billion 5 and 10 year US dollar denominated bonds</a> paying 345 basis points and 335 basis points over the respective US Treasuries.<br />
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And this is during a period of global "risk on", under conditions of "risk off" the country would surely need to be negotiating with the IMF again.<br />
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So to go back to where we started, with the various attempts to talk down JPY and HUF, the difference is clear enough, isn't it. Japan can do this since far from having external debt it has a very large positive external balance, which means the yen value of its assets goes up. In Hungary we have the exact opposite situation, whereby any fall in the value of the forint forces up the HUF value of the external debt, and with it the size of government debt as a proportion of GDP. So while both countries may wish to try and increase the scale of their export operations to try and squeeze out some more growth, only one can do it (and even then only with the implicit blessing of G7 central bankers if they don't want a verbal currency war to become a sanctions based trade one).<br />
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<span style="font-size: large;"><b>Who Is Turning Into Whom?</b></span><br />
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<span style="font-size: large;"><span style="font-size: small;">(or what the hell does convergence now mean?)</span><b> </b></span><br />
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What I have tried to do here is two things. In the first place draw attention to the flaw in the reasoning of those who argue in the Japan case that the sovereign debt problem is benign since the BoJ can always monetise it and swallow part of the losses if need be. The BoJ can do this for just as long as the country maintains a significant positive external stock of assets. But as these are drawn down as the elderly population need their savings, Japan's current account will steadily deteriorate (as it already shows signs of doing) until the country reaches the point that it will look more like Hungary than, say, Germany, and end game will draw near.<br />
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On the other hand I have emphasized how Hungary's deteriorating demographic profile makes it look increasingly look like Japan, without the large external asset base, and without the deflation. I have been arguing on my Hungary blog since 2006 that this is where we were going and that something serious and substantial needed to be done to address the demographic issue. Unfortunately there has not been one serious study either from the IMF, or from the EU, or from the World Bank, or from the OECD which has tried to situation Hungary's ills in the context of its demographic trajectory. Hence nothing, absolutely nothing has been done to address the issue. Hope may spring eternal, but opportunities don't - they are played out in finite time. This week I have already drawn the conclusion <a href="http://japanjapan.blogspot.com.es/2013/02/japans-looming-singularity.html">that it is probably now too late for Japan to avoid becoming another Hungary</a>. It is hard not to escape the conclusion that it may now also be too late for Hungary to avoid becoming another Japan. Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-87611352115725112042012-01-12T18:20:00.000+01:002012-01-13T10:54:04.886+01:00Playing Chicken And Rooster With HungaryTension surrounding the application of a series of so-called "unorthodox policies" by Hungary's Fidesz government has certainly been rising in recent days. While Washington has been reasonably quiet as <a href="http://online.wsj.com/article/SB10001424052970204124204577153172638298982.html?mod=googlenews_wsj">govenment emissary Tamas Fellegi meets with top IMF officials</a>, Brussels has seen a veritable avalance of official statements and policy initiatives. Despite constant rumours that an agreement with the IMF is near, I find it pretty implausible that any deal can be reached without some kind of EU assent. At the present time this assent is unlikely to be forthcoming, and indeed the "ante" has been pushed up and up. The latest example here is the fact that Brussels has given the Hungarian administration till next Tuesday to do something about altering the country's new constitution or face the prospect of legal action, and possible suspension from the EU under article 7 of the EU Treaty. Budapest on the other hand has been full of conciliating words, but the key point is we have yet to see anything meaningful in terms of action.<br />
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Brussels now has issues pending with Budapest on a number of fronts. In the first place Hungary has been<a href="http://online.wsj.com/article/SB10001424052970204124204577153172638298982.html?mod=googlenews_wsj"> tried and found wanting in relation to its compliance with the conditions of the EU excess deficit procedure</a> to which it has been submitted for some time now. This issue is important in its own right, since it was with the balooning of the fiscal deficit in 2006 that all the recent political problems really began. The current deadlock with Budapest on the deficit front has added importance in the present context since the EU is in the process of formulating a new treaty whereby states using the Euro will be compelled to bring their debt and deficits into line with EU regulations or face sanctions. <br />
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All of this will sound very hollow if Hungary, which is not in the Euro but is bound by the excess deficit agreements already in the Treaty, cannot be brought to heel. The issue is a complex one in the Hungarian case, where many of the underlying issues are interconnected (like the decision to change the constitution and the appropriation of assets worth about 9.75% of GDP from the private pension fund, since without the constitutional change those having their assets effectively expropriated would have had recourse to law on the issue). What the EU are concerned about is the credibility of their policy, and in this case the key question is the <strong>sustainability</strong> of the Hungarian debt and deficit, since one-off measures (like money from the sale of private pension fund assets) do not reduce the underlying structural deficit the country has. As the EU statement says:<br />
<blockquote class="tr_bq">
"Hungary has not made sufficient progress towards a timely and sustainable correction of its excessive deficit." The EU executive proposes to "move to the next stage of the Excessive Deficit Procedure (EDP) and recommends that the Council of Ministers decides that no effective action has been taken to bring the deficit below 3% of GDP in a sustainable manner." </blockquote>
This is a bit of beaurocrat-speak, but what it effectively means is that the European disciplinary procedure is being put to work on the country, and that one of the consequences may be the application of a sanction involving the withholding of EU structural funds (<a href="http://www.reuters.com/article/2012/01/11/hungary-funds-idUSB5E7N500920120111">estimated to be equivalent to 1.7% of GDP</a>):<br />
<blockquote class="tr_bq">
"Subject to this Council decision (under Article 126(8) of the EU Treaty), the Commission will then propose to the Council new recommendations addressed to Hungary (under Article 126(7) of the Treaty) with a view to bringing to an end its excessive government deficit," </blockquote>
Prime Minister Orban <a href="http://www.businessweek.com/news/2012-01-12/hungary-economy-shows-strength-as-cabinet-seeks-loan-orban-says.html">is very proud of the fact that the deficit came in at under 3% of GDP in 2011</a> for the first time since the country joined the EU in 2004. In fact the country had a budget surplus, estimated to be between 2% and 3% of GDP, but this surplus is entirely due to juggling with revenues that come from appropriating the private pension funds. As the EU Commission put it in their autumn forecast. <br />
<span style="font-family: inherit;"></span><br />
<blockquote class="tr_bq">
<span style="font-family: inherit;">"Following a deficit of 4.2% of GDP in 2010, the general government balance is expected to turn to surplus thanks to one-off revenues linked to the elimination of the obligatory private pension scheme. The official estimate for this year's surplus has been revised up from 2% of GDP (contained in the April 2011 Convergence Programme update (CP)) to 3.9% of GDP in the autumn notification. The larger surplus is mainly due to: (i) higher one-off revenue stemming from the elimination of the obligatory private pension scheme (now amounting to 9¾% of GDP, i.e. ½% of GDP higher than previously assumed); (ii) an intention not to assume the debt of the public transport companies (1.4% of GDP) and not to buy out selected PPP projects (0.7% of GDP), contrary to earlier plans; and (iii) additional measures of 0.4% of GDP adopted in September 2011".</span></blockquote>
The EU Commission calculate that the underlying deficit in 2011 (that is the deficit stripping out the one-off cash injections) was around 6% of GDP, and while the budget promise for 2012 is under 3% of GDP there are lots of factors (like lower GDP growth, higher interest costs, and higher expenditure from automatic stabilsers) that could easily mean the real number continues to be over 3%.<br />
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So, enough is enough with "unorthodox fiscal policies" is what the country is now being told.<br />
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But the fiscal deficit is only one, small, part of the problem as far as the EU is concerned. Of much greater concern are the recent changes in the constitution and the independence of the countries institutions like the central bank. The <a href="http://www.washingtonpost.com/business/markets/eu-says-hungary-has-taken-no-effective-action-to-contain-deficit-threatens-measures/2012/01/11/gIQAfceQqP_story.html">EU is now studying whether parts of the constitution violate the fundamental EU Treaty</a>, and <a href="http://www.nytimes.com/2012/01/12/world/europe/european-commission-threatens-to-sue-hungary-over-new-constitution.html">Hungary has been given until Tuesday to present changes to the constitution</a> which would comply with EU membership requirements. If the Commission decide the unchanged constitution does violate the Treaty, legal action against the country will surely follow, and it is not to be entirely ruled out that the country could be temporarily suspended from the EU under the terms of Article 7 of the Treaty (<a href="http://europa.eu/legislation_summaries/human_rights/fundamental_rights_within_european_union/l33500_en.htm">details of which can be found here</a>). As Commission spokeswoman Pia Ahrenkilde Hansen told the press: <br />
<blockquote>
“A legally stable environment, based on the rule of law, including respect for media freedom, democratic principles and fundamental rights, is also the best guarantee for citizens’ trust and confidence of partners and investors,” Ahrenkilde Hansen told journalists. “This is particularly vital in times of economic crisis.”</blockquote>
So the question now posed is that someone here is going to have to back down, and to do so significantly. The question really is "is Orban ready and willing to do so". Friends and acquaintances of mine in Hungary had been warning me for some time that this kind of confrontation would (almost inevitably) come. Orban had gone one bridge too far, and it would be hard for him to turn back. Over the last few days a close acquaintance, who has been becoming increasingly concerned about the situation, has sent me a number of e-mails on the topic. Below I reproduce a selection of extracts, just to give a feel for how some (perceptive and sensitive) people inside the country see the situation.<br />
<blockquote class="tr_bq">
As far as finding a way out is concerned, I am very, very sceptical. Given the super-majority in parliament and the trenchwarfare between left and right, except for a full blown revolution or the landing of US paratroopers (both, eveidently, extremely unlikely), the only way to topple Orban is to have a revolt within Parliamentary group of FIDESZ. This is also very unlikely, as Orban is a very charismatic and ruthless leader with an uncanny ability to get through to people and to preserve his leadership. <br />
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Moreover, all FIDESZ MPs are personally selected by Orban, and only God knows what kind of "documents" are existing in Orban's hand with which he could blackmail them. There ought to be a good deal given the widespread corruption in the Hungarian political system. It seems that nobody either could or would be ready to challange him. Even, I could safely say - reading the right wing press and speaking with supporters of Orban - that a decade of gradual shift towards a radical and anti-capitalist and anti EU ("Empire") position has created a mindset which may even accept a break with EU in order to save "freedom", "independence" and "national goals" and reduce "foreign capitalist exploitation". <br />
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Thus, I don"t really see the internal force, which could stand up to the government. Those lonely voices, who criticised Orban on grounds of economics, have been successfully isolated and there was never any attempt to build up a formal institutionalised form for expressing different policy options within the broad right wing camp. We could even find that any measures on behalf of EU against Hungary only reinforce Orban's stand-alone policy and rally behind him the ultra-nationalist camp, which could be easily as large as 30% of the population. <br />
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Given that he controls state administration and the armed forces, and taking into account the complete reaoganisation of these branches of the state together with the wholesale nomination new staff, he may have enough resources to sustain a populist autocratic order for a long period of time, like in Belorussia. Here comes to play also the aging population and the flight of young professionals into other EU states: older people typically are not those one who are revolting, and those who would revolt may increasingly decide to try and escape in time before the new "iron-curtain" falls down.<br />
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Actually, to be precise: maybe a break with the EU is not an option at this point, but once the EU suspends Hungary, that option maybe more easy to sell. We are faced with a charismatic leader who may actually have an agenda, and not be only "surfing" on the current reality trying to get the best for himself. <br />
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Launching WWII was huge misinterpreation of their own capacity on the part of Germany, especially when coupled with Barbarossa, and was not supported by much of the population and may be even the army and the conservativies had their misgivings, but still, Hitler prevailed, and.... I dont want to say that Orban is comparable with that truly evil person, but we are facing with a similar charismatic leader with a strong will and with deeply internalised goals. .. <br />
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And maybe there is not a masterplan a la Mein Kampf or Hossbach notes. But the changes, the events, the steps he is taking, sometimes irrationally, sometimes rationally, are taking him towards this final irrational step. He may stop at the last moment, but it may happen that fear of loosing power pushes him over the brink and he may choose the completly irrational step. I cannot say how the future will happen. But I can say that his speeches, acts, messages belong to a distinct political family of radical right wing views and these inevitably lead to a break with the current EU. And his personality traits also suggest a certain kind of personality, one who is able to carry out this radical step, if the circumstences arise, and he feels forced to do so. Lets just hope that this scenario will not be the real one. ..</blockquote>
I think we need to be clear at this point, nothing here is inevitable, but the usual kind of "bandaid" kick-the-can-a-little-bit-further-down-the-road solution is not going to be easily available. I think it is going to be very hard for Orban to back down significantly, and especially so in the case of having the constitution rewritten significantly. In many ways this is why I used <a href="http://hungaryeconomywatch.blogspot.com/2012/01/from-here-to-eternity-hungarian-style.html">the cryptic headline and final paragraph in my last Hungary post</a>.<br />
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What I was getting at there is the thought that this is now Orban’s great opportunity to go down in the history books, possibly even as the man who opened up a chain of events which finally destroyed the Euro. This is <strong>his</strong> challenge, and <strong>his</strong> possibility to live eternally ( I doubt there is any other one). He is currently just three steps from heaven, so it is comparatively easy for him to get to his intended destination. But its also easy for him to get things wrong (from his point of view). I mean, he could do the "right thing", be a gentleman and back off to make a deal with the EU under which he had to retire from politics. I can just see José Barroso now, alighting from the plane and waving the critical piece of paper to the delighted press photographers. That way, of course, five years from now no one would even remember Orban's name. <br />
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So the question of whether a deal is still possible is the billion dollar issue in all this. We have a chicken and rooster situation: who will blink first. Hungary may blink since the country's leaders may not wish to find themselves outside the EU and forced into default. Or alternately, some of Orban’s advisers may already accept this scenario as an inevitability, and welcome default as the only way of getting to grips with the forex debt problem. They may even already be thinking in terms of a post Euro scenario, and assuming that the Euro cannot hold together. On the other hand the IMF (under EU pressure) are unlikely to accept the forex default and debt restructuring that Hungary probably needs to achieve sustainability in the longer term while they are still in the EU.<br />
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The constitution law is probably going to be the real sticking point, since if the government needed this to avoid letting the people who had their pension savings appropriated take recourse to the law, then unwinding it would probably mean the public finance issue would quickly get bigger, and quite possibly right out of control.<br />
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On the other hand while the EU may dig in for a time, they may ultimately fear contagion more than they do an unruly Hungarian government. Europe's leaders have basically been motivated by fear of something or other throughout the whole Euro debt crisis, they have never really been out there in front of the curve. No pain today please seems to have been the rule. So with the second Greek bailout visibly wobbling, and much of the rest of Eastern Europe vulnerable to retrenchment by West European banks, fearing the inevitable contagion they may well finally go for a "peace in our time" deal. <br />
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Naturally, in this post I have dwelt on the political dynamics (and dangers) of the current situation (and indeed the post contains not one single chart), but we should never forget there is a real economic backdrop to what is happening in Hungary, one in which IMF programmes in Eastern and Southern Europe are not working out as planned, possibly due to a faulty diagnosis of the problem (<a href="http://hungaryeconomywatch.blogspot.com/2012/01/from-here-to-eternity-hungarian-style.html">see my earlier post for explanation</a>). In addition, it is hard to say at this point whether what is happening in Hungary is unique (due to its 20th century history) or whether it is a harbinger of what is to come along the EU periphery as populations steadily get disillusioned with policy packages which simply don't work. To answer this question we will need to see into the future, but to see into the future we will have to get there first. <br />
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<strong>Postscript Friday Morning</strong><br />
<br />
In the above post I argued that the IMF was very unlikely to open negotiations with Hungary before the Hungarian administration responded satisfactorily to the EU requests for compliance. Last night <a href="http://www.imf.org/external/np/sec/pr/2012/pr1207.htm">the IMF issued a press statement</a> where Christine Lagarde made plain that this is indeed the stance they are taking. <br />
<blockquote>
“I met today with a Hungarian delegation led by Minister Tamas Fellegi. We had a useful exchange about the latest economic developments in Hungary and about how best the IMF can assist the country in addressing the current economic situation. “I indicated that, before the Fund can determine when and whether to start negotiations for a Stand-By Arrangement, it will need to see tangible steps that show the authorities’ strong commitment to engage on all the policy issues that are relevant to macroeconomic stability. Support of the European authorities and institutions would also be critical for successful discussions of a new program.”</blockquote>
Thus Orban's "divide and rule" strategy isn't going to work. On the other hand, reading between the lines<a href="http://www.reuters.com/article/2012/01/12/hungary-orban-idUSL6E8CC47Z20120112"> in his latest speech</a>, I don't think Orban is getting ready to eat humble pie, rather he is getting ready to play "now you see me, now you don't" with Europe's leaders. <br />
<blockquote>
"Our general approach is that we are open and flexible, we are ready to negotiate all the points, but what we need is not political opinion but arguments. And when the arguments on behalf of the European Union are convincing, then it's better to accept and follow that line. There is no reason not to do that. We are absolutely open and flexible and waiting for the argument. But yesterday's comments from the EU did not contain any argument, just opinion, saying that they don't like it, it's against the general legislation of the EU. But we would like to get more specific points on the points (where) they would like to see modifications or corrections. And we are ready to consider it."</blockquote>
As far as I can see, he is simply stonewalling. He is saying a lot and saying nothing, which may well be his best strategy, effectively copying Merkel and Sarkozy on other issues. Continuing in this way he will force the EU's bluff, either they have to act and try to see things through to the end, or they have to back down. They show no sign at present of having any inclination to back down, so we are now facing a very high risk situation. Back in the summer of 2010 <a href="http://esbalogh.typepad.com/hungarianspectrum/2010/07/economy-schmeconomy-the-world-according-to-viktor-orbán-by-györgy-lázár.html">György Lázár wrote the following very perceptive lines</a>: <br />
<blockquote>
"Orbán’s unusual high-wire act might work, but he must avoid Hungary’s debt downgrade to “junk”. This is easier said than done, because the debt is currently under review and the other shoe can drop at any moment. A sovereign debt downgrade, with a run on the forint or on the banks will probably finish his government".</blockquote>
Of course, that's just it, Hungary's debt has now been downgraded to junk, and Orban's government is now facing a "life or sudden death" situation.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-62465074432540404442012-01-07T18:20:00.000+01:002012-01-08T16:43:37.100+01:00From Here To Eternity, Hungarian StyleHungary's unofficial ambassador to the IMF,Tamás Fellegi, <a href="http://www.portfolio.hu/en/economy/terrible_atmosphere_awaits_hungarys_imf_negotiator_in_washington_sources.23578.html">is reportedly facing a "terrible atmosphere"</a> after his arrival in Washington on an exploratory mission whose objective is to open up communication about a new financial lifeline for the country. Frankly, given the recent record of relations between the two institions involved it isn't hard to understand why. Leaving aside the long list of recent grievances, it was Hungary who decided to walk away from the IMF in the first place, suggesting it could manage quite well on its own, thank you very much, so the Washington based lender is now hardly likely to welcome the country back as some sort of long lost prodigal son. <br />
<br />
To make matters worse, the country has now opened up a second front by generating a serious dispute with the EU Commission, and other European institutions like the ECB, so it is only to be expected that the Fund will not reach any sort of agreement with the Hungarian government, until after the path has been cleared at the Brussel's level. Indeed such is the degree of dishumour of Europe's leaders with the present government, that it is still not clear whether the price for any form of aid might not be Orban's own head, and the installation of a more technocratic caretaker government. There are, after all, recent precedents for such a development in Greece and Hungary, and indeed the former Hungarian prime minister Ferenc Gyurcsány was effectively <a href="http://hungaryeconomywatch.blogspot.com/2009/03/hungarian-prime-minister-gyurcsany.html">forced out by Brussels in March 2009</a>. <br />
<br />
Not unnaturally Viktor Orban has been visibly trying to back away from the rapidly deteriorating confrontation, and only last Friday <a href="http://online.wsj.com/article/SB10001424052970203513604577144170679870702.html?mod=googlenews_wsj">said his administration believes striking a deal with the European Union and the International Monetary Fund on a financial safety net for the indebted country is "an urgent task"</a>. Just to rub it in, he went on to declare his total support for the idea of central-bank independence. Government spokesman Andras Giro-Szasz went even further, saying the country was ready to "adjust any law that's against European Union regulations." <br />
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<strong>Yes, Sorry No... OK, Yes Is What I Really Meant To Say</strong><br />
<br />
Meanwhile both the EU and the IMF are digging their heals in, and taking a hard line. European Commission President <a href="http://www.reuters.com/article/2011/12/20/uk-hungary-eu-idUSTRE7BJ0J520111220">Jose Manuel Barroso has written to the Hungarian prime minister</a>, calling on him to withdraw recent offending legislation since they likely failed to comply with community law and could well prove to be incompatible with the EU Treaty itself. According to a report which appeared on the website Origo.hu, Barroso asked Orban to withdraw the legislation on the central bank as well as a 'stability law' proposed earlier this month which would tie the pace of debt reduction to the rate of economic growth. "I would forcefully advise you to withdraw two pieces of cardinal law now in front of parliament," he is reported as writing in late December. Taking a leaf out of Angela Merkel and Nicolas Sarzozy's book perhaps, Orban seems to have ignored Barroso's plea, since<a href="http://www.irishtimes.com/newspaper/world/2011/1231/1224309673196.html"> the bill went into law on 30 December</a>. <br />
<br />
In fact, in what might now turn out to be a classic example of "famous last words" a defiant Viktor(ious) Orban stated after the passage of the bank bill: “It is a European fashion that the central bank must be in a sacred state of independence...Nobody can interfere with Hungarian legislative work, there is no one in the world who might tell the elected deputies of the Hungarian people which act to pass and which not to.” <br />
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Only 6 days and a downgrade or two later, the mood is rather different, and <a href="http://online.wsj.com/article/SB10001424052970203513604577142142688126890.html?mod=googlenews_wsj">Tamas Fellegi told reporters</a> before boarding the plane to Washington that Hungary is open to talks about the central-bank law, indeed there is nothing the country isn't open to talking about if need be to secure a loan. <br />
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Nonetheless both the IMF and the EU will surely continue to play hardball, after all they now have the upper hand. Hence <a href="http://www.bbj.hu/economy/draft-imf-report-says-hungary-needs-bigger-reserves-stability-package---paper_62204">a report which appeared on another Hungarian website</a> (Figyelo) this weekend, which cites a "precautionary" programme that was being prepared for Hungary. The document the website reproduced also suggested the IMF board (<a href="http://www.reuters.com/article/2012/01/06/hungary-imf-reaction-idUSB3E7NG01120120106">which will meet on 18 January to discuss Hungary</a>) was of the opinion that the country could receive a Stand-By Agreement - which carries more conditions than a precautionary agreement.<br />
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According to the document summary, the IMF will require Hungary to re-establish the independence of the National Bank of Hungary, strengthen the Fiscal Council, exercise a stricter fiscal policy, reduce and then withdraw crisis taxes, end ad hoc economic policy measures, fully implement agreed reforms, restructure the social welfare system, restructure public transport companies, and introduce a personal bankruptcy law. , <br />
<br />
The report describes Hungary’s political climate as "complicated", and suggests the chance of Hungary losing its EU Cohesion Fund support because of an excessive deficit procedure that has dragged on for eight years a "real danger". Should this eventuality materialise Hungary would loose funding equivalent to 2% of GDP. <br />
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<br />
<strong>Short Term Crisis, But Long Term Deep-Seated Issues That Won't Simply Go Away</strong><br />
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Yet whatever the political obstacles, it is very likely that some sort of deal will be patched together. The consequences on both sides of the fence are too large to play with for too long (although remember accidents in history do happen, indeed following one school of thought they are the very motive force of history).<br />
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<a href="http://www.reuters.com/article/2012/01/06/idUSWLA104220120106">Last weeks downgrade from Fitch</a> (to BB+ aka "junk") will have concentrated everyone's minds, since it was one further warning of what would quickly happen if agreement were not reached - the currency would fall through the floor, the debt would become rapidly unsustainable and the country would default, and even continuing membership of the EU would be put in doubt. As in then Greek case, it is doubtful at this point that anyone is ready to walk through this particular door, even if they repeatedly keep getting shown it.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirr9wKrvtKT6BMTIdc43wEmrQ34SiJ-EiLJpN6WG4AlvZ_4Dvn9tdAh-Bimvlj6-Jt9rYUPfetHiy32ervD3R26WetiV8O_0bEEM3RMgfRwCyIxrzAHReFdfE3swGyN4RVcoaa/s1600/Ten+year+bond+yield.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="187" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEirr9wKrvtKT6BMTIdc43wEmrQ34SiJ-EiLJpN6WG4AlvZ_4Dvn9tdAh-Bimvlj6-Jt9rYUPfetHiy32ervD3R26WetiV8O_0bEEM3RMgfRwCyIxrzAHReFdfE3swGyN4RVcoaa/s320/Ten+year+bond+yield.png" width="320" /></a></div>
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Naturally the financial markets have responded badly to all the brinksmanship and uncertainty, with the forint repeatedly hitting record lows against the euro (the latest was of 324 to the Euro on Thursday), while the yield on 10 yr government bonds has spiked sharply (see chart above from Portfolio Hungary). Following the Fitch decision Hungary’s 5-yr CDS spread leaped by 38 basis points to 754 bps, dragging Poland's (up 16 bps to 307 bps) and those of the Czech Republic (up 15 bps to 194 bps). Naturally, as in the Greek case, it is the risk of regional contagion which is the biggest headache facing policymakers.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEQ_Nzrdxaoks3Y8OOwPQO-qN_VMtKDU6q1NUyNZ5DIaQUPfi8FxPwj_5nVWxDm57N_gpjSznKjnDP5yQT8jNMXxTrqu1r-rT9gA1V8YF-Fh-I5lCcRx7DbBITeK0isl4_7GDh/s1600/Hungary+CDS.JPG" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="196" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEQ_Nzrdxaoks3Y8OOwPQO-qN_VMtKDU6q1NUyNZ5DIaQUPfi8FxPwj_5nVWxDm57N_gpjSznKjnDP5yQT8jNMXxTrqu1r-rT9gA1V8YF-Fh-I5lCcRx7DbBITeK0isl4_7GDh/s320/Hungary+CDS.JPG" width="320" /></a></div>
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<strong>Chronicle Of A Problem Foreseen But Not Dealt With</strong><br />
<br />
The danger to the Hungarian CDS has been obvious for some time, since six months ago markets were badly underpricing Hungarian risk. As I said in July:<br />
<br />
<blockquote class="tr_bq">
"And if we move over to Hungary, then we find that as of last Friday CDS stood at around 285, well below the highs of over 400 seen as recently as last November in the wake of the Irish crisis. Arguably the Hungarian case is the most glaring example (of risk underpricing), since it is the East European country with the highest debt to GDP levels (around 80%, of GDP, of which 45% is forex denominated) it has very high gross foreign debt (around 135% of GDP), and it is a country where institutional quality is a constant cause for concern. In many ways Hungary is the Italy of the East. Apart from the presence of a strong trade surplus there is not that much to commend in Hungary's recent economic performance, yet its CDS has fallen into line with a regional pattern, and there is little in the way of what is happening in Spain and Italy to be seen in the spread, let alone what is going on in Slovenia and Slovakia".</blockquote>
Obviously market sentiment has changed, and the question now is whether markets are overreacting. In the short term they may be, since although the danger of falling into a default spiral is real, there is the also a genuine possibility (but not certainty) of a deal being reached. But in the longer run they are not, since what Hungary is not suffering from is a short term liquidity crisis (or even a balance of payments one, the current account is in surplus), but a long run solvency and social sustainability one. <br />
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But to get to see what the end of this story may be, we need to go back to the beginning, and the origins of the present Hungarian crisis in the market correction of 2006. Those who could see that the global imbalances which were developing would eventually unwind couldn't fail to see the warning signs that year, as Iceland, Turkey and Hungary all wobbled under the force of those early seizmic tremors. That was when I got interested in Hungary, and took the decision<a href="http://hungaryeconomywatch.blogspot.com/2006/11/first-impressions.html"> to set up a dedicated blog for the country</a>.<br />
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Hungary seemed interesting for a number of reasons. It was a harbinger for many of the things which were to come, the rapid expansion of a fiscal deficit following the ending of a credit driven consumer boom (think Spain or the UK today), the ageing and declining population phenomenon in Eastern Europe, and it became the test pad for the application of "confidence building" measures, austerity programmes and structural reform to the economy of a country which had serverely lost competitiveness. <br />
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Nearly six years later, and with the Hungarian economy on the brink of a possible default, perhaps it is now a good time to take stock of whether this approach has worked.<br />
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<strong>The 2006 Fiscal Deficit</strong><br />
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The key to getting inside the Hungarian problem is to ask yourself the simple question why the country had such a whopping fiscal deficit (over 9% of GDP) in 2006. For the popular press the answer was easy, it was the result of a spednthrift government trying to buy votes. In fact the then Prime Minister Ferenc Gyurcsany made it easy for them, <a href="http://news.bbc.co.uk/2/hi/europe/5359546.stm">he inadvertently admitted what they had been up to</a>:<br />
<blockquote>
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Some came who did not bother whether they would have a place in the country's government, because they understood that this bloody country is about something else. They can understood that it could be worth being a politician here at the beginning of the 21st Century because we can create a different world......Instead, <strong>we lied morning, noon and night</strong>. I do not want to carry on with this. </div>
</blockquote>
While this answer may well satisfy journalists and political sociologists, it cannot be entirely satisfactory for economists, who realise there are underlying processes (beyond flawed and corrupt individuals) behind these phenomena and want to get tot he heart of them. Could it be, for example, that the 2006 deficit was the culmination rather than the start of something. Certainly there had already been large deficits from 2002 onwards.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo67rPWtDtXWj4A_xbkvg24XxnoRO3HcG9NiiuWCov4zsXHjESPQodx7bMCak8Sq0npZ7mnTmrr6Xr8liEhO0__qmmoDBSZPU_qfMWlZ_yrLj2_crY785jZVHx-PkODnHl7DjJ/s1600/Hungary+Annual+Fiscal+Deficit.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="183" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjo67rPWtDtXWj4A_xbkvg24XxnoRO3HcG9NiiuWCov4zsXHjESPQodx7bMCak8Sq0npZ7mnTmrr6Xr8liEhO0__qmmoDBSZPU_qfMWlZ_yrLj2_crY785jZVHx-PkODnHl7DjJ/s320/Hungary+Annual+Fiscal+Deficit.png" width="320" /></a></div>
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I've looked at a number of examples now of where fiscal "extravagance" suddenly breaks out in a country - Portugal in the late 1990s, Spain more recently - and a common pattern I note is that government deficts often surge at the end of a consumption boom as politicians try to keep economic growth humming and living standards rising, even while revenue falls. To some extent this does seem to have been Hungary's case. As can be seen in the chart below, the country did have a very large consumption driven boom between 1999 and 2002.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXmoobLkuNjAtU9Hfr8wDRpHPXmxR5MinsxCbzovpTquVlemcHmIOr5KUqaLBYx4xCgHqFkc_cwXXAHtzmLaNpNeECaljIrwt6LQyuFagva2WbNIWo7-jhPJnnK22Egc_Ar-D4/s1600/Hungary+Constant+Price+Household+Consumption.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="194" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXmoobLkuNjAtU9Hfr8wDRpHPXmxR5MinsxCbzovpTquVlemcHmIOr5KUqaLBYx4xCgHqFkc_cwXXAHtzmLaNpNeECaljIrwt6LQyuFagva2WbNIWo7-jhPJnnK22Egc_Ar-D4/s320/Hungary+Constant+Price+Household+Consumption.png" width="320" /></a></div>
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After 2002 the thing evidently eased off, meaning government revenue slowed, and hence the start of the deficit problems. Why the consumption boom ended is not clear, but it does form part of a pattern. Although conventional economic theory doesn't seem able to account for the phenomenon, many countries seem do seem to pass through some sort of transition wherby they move from been consumer driven to export driven economies. Germany is a good case in point, since as we can see Germany had a substantial consumer boom in the 1990s before converting itself into the export champion we have now grown to know and love.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg46_2tM2HHH39-sQ2bgFohAOCNNDvMavBtzuXQnc_OH-ncM7PhQ-9JFktQspxBztQ8-4ZsXZRXWtL4ejVhQ4nJ3VT1cbpG_d6C_jFWfkAV3KhfUM2-NN0KloysIGMU5NgDJAQh/s1600/German+Constant+Price+Household+Consumption.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="193" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg46_2tM2HHH39-sQ2bgFohAOCNNDvMavBtzuXQnc_OH-ncM7PhQ-9JFktQspxBztQ8-4ZsXZRXWtL4ejVhQ4nJ3VT1cbpG_d6C_jFWfkAV3KhfUM2-NN0KloysIGMU5NgDJAQh/s320/German+Constant+Price+Household+Consumption.png" width="320" /></a></div>
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<br />
<strong>Competitiveness Loss Which Precedes Fiscal Lunacy</strong><br />
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<br />
The big difference between the German and Hungarian economies though, is in the extent to which they lost competitiveness during the boom years, and in the extent to which the government tried to use deficit spending to sweep the problem under the carpet. The chart below shows a comparison of movement in <strong>unit</strong> labour costs between the two countries over the relevant period. Now it is important to realise that unit labour costs are not about "catch up" improvements in living standards, they simply tell you how productive your workers are for each hour worked (or the cost in labout terms of each euro of GDP), and as we can see, while Germany held costs almost constant, Hungary let them rip. Which simply means that once you can no longer rely on consumer borrowing or spending for headline growth in GDP, you can't fall back on exports, because your economy isn't competitive enough, which is the issue all along the EU periphery, although Europe's leaders are mainly in denial on the issue, simply following the fiscal paper chase without digging any deeper to try to get at what might be at the root of the problem.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPHARYknJ7vvbasHAx43MGnAz_c5hS6EqlyDan5o7kZrQfZRWytwBe4He4r_Vr9WY8QXB5x_pI0Aw9iujK4EFyhisys8whiHmYx-2a_YCHMJNu94yjmkaihIUgde2azRPGd2Hb/s1600/Germany+%2526+Hungary+Unit+Labour+Costs.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="168" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPHARYknJ7vvbasHAx43MGnAz_c5hS6EqlyDan5o7kZrQfZRWytwBe4He4r_Vr9WY8QXB5x_pI0Aw9iujK4EFyhisys8whiHmYx-2a_YCHMJNu94yjmkaihIUgde2azRPGd2Hb/s320/Germany+%2526+Hungary+Unit+Labour+Costs.png" width="320" /></a></div>
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Now the interesting point is that Hungarian exports have in fact risen substantially over the years.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3zOERVD3DwUpntt5GR_KHBZYSsFQiQywN0elgLw07FxexscguY7WPlYvHKZzJAVGAxJdIkbz-SoCJnxP0UDT35SJIccv6zsi8Cfttg9w0T8Pt7kCLcHmYZV0OGcznpbNT5ddf/s1600/Hungary+Constant+Price+Exports.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="193" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3zOERVD3DwUpntt5GR_KHBZYSsFQiQywN0elgLw07FxexscguY7WPlYvHKZzJAVGAxJdIkbz-SoCJnxP0UDT35SJIccv6zsi8Cfttg9w0T8Pt7kCLcHmYZV0OGcznpbNT5ddf/s320/Hungary+Constant+Price+Exports.png" width="320" /></a></div>
<br />
But impressive as all this looks, it has not been enough to get the kind of GDP growth that Hungary evidently needs (among other things to pay its debts and its contingent liabilities to its elderly population). <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgT4OxB3arzsCxS8tc4YYZygd4omMfNpLeRjaCAdE7lx8Y1ktJuXj3G-9-um2uO1SA1P8ITmOmClYAwIXDTQjD7NuAQz2VQgbqGecwKOK0KmLupMpZQF2hHduvwerAnswm-9vx/s1600/Hungary+Constant+Price+GDP.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" height="188" rea="true" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjgT4OxB3arzsCxS8tc4YYZygd4omMfNpLeRjaCAdE7lx8Y1ktJuXj3G-9-um2uO1SA1P8ITmOmClYAwIXDTQjD7NuAQz2VQgbqGecwKOK0KmLupMpZQF2hHduvwerAnswm-9vx/s320/Hungary+Constant+Price+GDP.png" width="320" /></a></div>
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In fact, despite the massive increase in exports since the end of the global financial crisis, Hungarian GDP has only recovered slowly. Hungary’s economy fell by 7% in 2009, grew 1% in 2010, and is heading back into recesssion at the end of 2011. Even leaving out the crisis year of 2009 Hungary has only managed average growth of under 1% since the austerity measures began in 2006. Something, somewhere evidently isn't working as it should. In addition to the ongoing programme of structural reforms what Hungary needs is a short sharp shock in the form of forint depreciation, to recover a large chunk of competitiveness and boost investment into the export sector. In this sense "competitiveness" means having an export sector which is large enough (as in Germany) to drive GDP growth forward. At present value added in Hungarian manufacturing is only just over 20% of GDP as compared with over 40% in the German case (the gross export values are misleading, since Hungarian industry is highly intergrated with German industry, and a lot of the activity is processing components which are imported and then re-exported). <br />
<br />
But this kind of forint depreciation (which to some extent we are seeing now under the impact of the crisis) is impossible to achieve without debt restructuring (or outright default) since so much Hungarian debt is denominated in other currencies (largely Swiss Franc - roughly 85% of Hungarian domestic mortgages are denonominated in CHF). Gross external debt is around 140% of GDP and rising as the forint falls, while government debt stood at 83% of GDP at the end of September, and around 45% of this is forex denominated.<br />
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<br />
<strong>No Devaluation High Interest Rate Trap?</strong><br />
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<br />
So far from wishing for the forint to fall, the central bank is busily raising interest rates to try to sustain its value. Base rates have now been increased twice since October, and now stand at 7%, even though the country is heading towards recession and most central banks are near the zero bound.<br />
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Naturally, raising interest rates only helps choke off declining domestic demand even further. <br />
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Incidentally, the sharp drop in Hungarian retail sales that can be seen in July 2009 is the product of a 5% rise in VAT, a rise from which Hungarian sales have never really recovered. So much for the received folk wisdom that consumption tax hikes are "comparatively harmless", since the real situation is "it depends".<br />
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Naturally, this export dependence is not simply anecdotal. Hungary, like many of its Central and Eastern European peers, has a massive demographic problem. Population is already falling, and any sudden default would only precipitate the added issue of a sharp surge in the numbers of qualified young people packing their bags and leaving.<br />
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And the potential labour force is both ageing and shrinking.<br />
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So the problem isn't going to go away, and is only set to get worse with time.<br />
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<strong>The Harbinger Of Things To Come On The Periphery?</strong><br />
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Thus Hungary is in a similar situation to many countries on Europe's periphery (in or out of the Euro), without real devaluation the economy will never get enough growth traction, and restructuring of the debt at some stage or another is more or less inevitable.<br />
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But there is another factor which gives what is happening now in Hungary special significance, and that is the problem of "reform weariness". <br />
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Basically, if the solutions which are being promoted by the IMF and the EU Commission are based on a faulty or incomplete analysis of the situation, then the measures being promoted eventually won't work as they should, and this will lead to disappointment. The political dynamics of what then happens is what should be concerning those who are able to think about such things. Could Hungary be the first example of a country that has lost hope and gone down the road of believing in demagogic politicians? Will there be more Hungaries? Could this be what the future in countries like Greece, Latvia, Portugal and Italy will look like. And if it is, how the hell do you hold the EU, let alone the Euro together? This is the burden of responsibility that now falls on the shoulders of those with responsibility for taking the decisions.<br />
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It was, after all, in Hungary that the new orthodoxy of relying on “non-Keynesian” effects related to expectations and credibility was formally announced and put to work. <br />
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In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged. IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008 </blockquote>
Naturally this approach was subsequently transferred from emerging market countries (like Hungary) to more developed economies along Europe's southern fringe. Private consumption, unfortunately, has notably failed to rise. Perhaps there will be more than a little historic irony involved in Hungary being the country where the whole experiment eventually went badly wrong, although I doubt the Hungarians themselves will se it that way. <br />
Back at school I remember learning about the example set by the British army sargeant at Vimy Ridge who lead his troops out of the trenches and into the withering fire of the German machine guns with the phrase "Come on You Bastards, Do You Want To Live For Ever!" This was the classic example, it seems, of charismatic leadership. Only years later did I twig the double entendre of the expression (which could also have been, "Come on You Bastards, Don't You Want To Live For Ever!"<br />
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So this weekend, as he tosses the coin to decide whether to accept the EU conditions or not, Viktor (she loves me, she loves me not, she loves me....) Orban may do well to pass an idle moment perusing over the immortal lines left for our greater edification by the late, great and one and only Eddie Cochrane.<br />
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Now there are three steps to heaven <br />
Just listen and you will plainly see <br />
And as life travels on <br />
And things do go wrong <br />
Just follow Steps 1, 2 and 3Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-21799218797771733902011-08-22T18:32:00.000+02:002011-08-22T18:33:24.570+02:00Eastern European Growth - Coming Rapidly Off The Boil?The latest round of EU GDP data, brought to light a reality which many who have been closely following the economies of Eastern Europe already suspected: that the heavily export dependent economies in the region would almost inevitably be dragged down by the rapid slowdown in Europe's principal economic motor, the German economy (<a href="http://www.economonitor.com/edwardhugh/2011/08/04/could-there-really-be-a-recession-risk-in-germany/">see this post</a> for background).<a name='more'></a>
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<br />The Czech Republic, Hungary, Slovakia, Bulgaria and Romania all reported slower GDP growth in the second quarter, due in large measure to the disappointing performance of their German neighbour, central Europe’s most important trading partner.
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<br />As <a href="http://www.economonitor.com/edwardhugh/2011/07/27/a-hungarian-waltz-on-the-wild-side/">anticipated on this earlier blog</a>, the Hungarian results were especially weak. Analysts had widely predicted interannual growth of just under 2.5%, but in the end the result came in at 1.5%. Even worse, the economy completely failed to grow in the second three months in the year, since quarter on quarter growth was effectively zero. Thus the increase in industrial activity which accompanied the increased demand for exports was only sufficient to compensate for the drop in internal demand, and this at a time of near record export levels in many European countries. This is doubly worrying since the government, while continuing to reduce the deficit, has appropriated something like 9% of GDP from a one off pension move, paying down debt and, in addition, adding some support to this years spending programme. This factor will not be there to assist growth in the years to come.
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<br />This post will examine the growth performance in a number of the region's economies, and attempt to extract some useful conclusions for what we can expect to see in the region in the future.
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<br /><strong>The Czech Republic Shows Its Weaknesses</strong>
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<br />Mirroring what just happened in Germany, second quarter GDP growth in the Czech republic slowed from what had been the fastest pace in almost three years achieved in the first three months of the year, to a mere 0.2%, the slowest rate of increase in two years.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-2Xp2nIx13VLOVZgG9AgXQOrc8B8hLDCDBbTy0M-ddLaJbTVVb08J8r0gcul_3iEjlZQVuJSxQ5PdQB3b-fQXMju26SLX3l28GJ5CXHQIFl8oO9m9UZL3gdC69-RaPZuKNBSs/s1600/gdp+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-2Xp2nIx13VLOVZgG9AgXQOrc8B8hLDCDBbTy0M-ddLaJbTVVb08J8r0gcul_3iEjlZQVuJSxQ5PdQB3b-fQXMju26SLX3l28GJ5CXHQIFl8oO9m9UZL3gdC69-RaPZuKNBSs/s400/gdp+two.png" /></a>
<br />While the economy grew 2.4 per cent from a year earlier, compared to 2.8 per cent in the first three months of the year.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNStF0ey25JWWsBpV6NrZfv4C2bM0W7AxcGuj1I4DB28RgGTs0cRQVYMeCxr96FNhahnVGvHWXUCc0r51tUdj7dSP63YXASYWg2UkFbdn-UVjVQczkYJ3zuSGgXExaDg8naqbZ/s1600/gdp.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNStF0ey25JWWsBpV6NrZfv4C2bM0W7AxcGuj1I4DB28RgGTs0cRQVYMeCxr96FNhahnVGvHWXUCc0r51tUdj7dSP63YXASYWg2UkFbdn-UVjVQczkYJ3zuSGgXExaDg8naqbZ/s400/gdp.png" /></a>
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<br />Like many economies in the region, the Czech one is now strongly dependent on foreign demand for its products. Exports have surged back up and beyond pre-crisis highs, while industrial output has grown strongly.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYfAI6NGmbKMLdXIoHT9l1Vl1JUPWmMqolSCHgDcOjVvUsOxC1w-UVPDaNkH7rka9DiYKvKolHYMXD4tK4NIldKF1Cxq6q9kijOs4YZ_zeph918FlCdig6wjuXdE2UDKzEnzgq/s1600/Czech+exports.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYfAI6NGmbKMLdXIoHT9l1Vl1JUPWmMqolSCHgDcOjVvUsOxC1w-UVPDaNkH7rka9DiYKvKolHYMXD4tK4NIldKF1Cxq6q9kijOs4YZ_zeph918FlCdig6wjuXdE2UDKzEnzgq/s400/Czech+exports.png" /></a>
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRw4ZLe7qGB566z9eCAymHq-bO96d_6bWLfleRE-e8J0OviQtrf-uiZhrR2Ju7mOj2mWjyNvx3Tlr0Ffn1dQGoKYs_cIupzcCrA_9EqRkyjdWL7PH66Kh3QBRpNA3FEXJ7vBlf/s1600/Czech+IP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRw4ZLe7qGB566z9eCAymHq-bO96d_6bWLfleRE-e8J0OviQtrf-uiZhrR2Ju7mOj2mWjyNvx3Tlr0Ffn1dQGoKYs_cIupzcCrA_9EqRkyjdWL7PH66Kh3QBRpNA3FEXJ7vBlf/s400/Czech+IP.png" /></a>
<br />What makes the Czech case interesting is that neither the private nor the public sector is heavily indebted - public sector debt was only 41.3% of GDP in 2010, and the country's external debt was only 46.7% of GDP. Nor is the country facing an "investor strike", the central bank policy rate is currently 0.75% , and far from this deterring people from holding the currency, the Koruna has gained nearly 2.4% against the euro so far this year, as compared with a decline of around 10 per cent in the Polish zloty. Indeed some are even talking of the Koruna <a href="http://blogs.ft.com/beyond-brics/2011/08/18/the-czech-koruna-a-new-star-in-the-foreign-exchange-sky/#axzz1VgLKIOQ7">as a potential safe haven alternative to the Swiss Franc</a>.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0NHs7dnrgcQLaC3_9KlHjbkC5g7ENaQf5yTD8A_W7Yun2EdG05kAlNUgBz52LILcWg97OAbrgoyOkHxDJ_pI8qpmubXAW6nR3R2WIFhdGIOQgoOxZuzmRUj1G_LfrIRA76vWA/s1600/cZech+Interest+rates.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0NHs7dnrgcQLaC3_9KlHjbkC5g7ENaQf5yTD8A_W7Yun2EdG05kAlNUgBz52LILcWg97OAbrgoyOkHxDJ_pI8qpmubXAW6nR3R2WIFhdGIOQgoOxZuzmRUj1G_LfrIRA76vWA/s400/cZech+Interest+rates.png" /></a>
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<br />The government deficit has been over the EU 3% limit (it stood at 5% of GDP in 2010) and recent government austerity measures to reduce this level have undoubtedly played some part in the slowdown, but this on its own is not enough to fully explain the velocity of the reduction. As I argue <a href="http://www.economonitor.com/edwardhugh/2011/08/04/could-there-really-be-a-recession-risk-in-germany/">in my most recent post on Germany</a>, export driven economies are inherently volatile, and what has happened in the Czech Republic is an almost classic example. But why is the country export dependent? Well, there are probably as many answers offered to this question as there are economists, but my own personal view is that demography is the key. After decades of very low fertility, the country's population is ageing rapidly, and by 2020 the median age will be nearly 45, making the Czech Republic the second oldest nation in the region, after Slovenia.
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<br />Many will see no significance in this fact, but from where I am sitting the association is not simply coincidental (see <a href="http://mpra.ub.uni-muenchen.de/17655/1/MPRA_paper_17655.pdf">this working paper from Claus Vistesen</a>).
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwRqjIdTqTwuHoAvSnmkJUe208QgcS81jS7rCpZcdi_J-43j_hlukIP3uxF4BBN-E1RQhOYsto48NRLxxVmB-KT4YudTddw8lhCg0XLdJtI4OqLgPor-ToDEzpIhXDji1i9xNW/s1600/Cxech+median+age.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwRqjIdTqTwuHoAvSnmkJUe208QgcS81jS7rCpZcdi_J-43j_hlukIP3uxF4BBN-E1RQhOYsto48NRLxxVmB-KT4YudTddw8lhCg0XLdJtI4OqLgPor-ToDEzpIhXDji1i9xNW/s400/Cxech+median+age.png" /></a>
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<br />A number of "<strong>stylised facts</strong>" can be extracted from the Czech example. <strong>In the first place,</strong> if we look back at the q-o-q GDP chart (the orange/red one), what is most noteworthy is how the rate of quaterly growth since the crisis has fallen to about half its prior level. This, in an economy without major debt problems and with a fairly competitive economy must give us some idea of <strong>what the "new normal" looks like</strong>. GDP growth is much lower, and likely to remain lower (on average) as far ahead as the eye can see.
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<br />In the second place, <strong>construction output is down</strong> (and falling). This also seems to form part of the brave new world we now live in, at least as far as most of Europe, the US and Japan are concerned. A house is once more becoming something you live in.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgL56rz6stM4JJS1y4abQMvghAeOwsBe4WfW8-I-nihOQRzqPeYhYfFwtVz_veHYVro-BR5gHpiXP1h29VzSS1tSY6sSfU3TfzNWQUzIEyN7qQvWoJr1ZJ4ICSB20msbcxqWL2T/s1600/Czech+construction.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgL56rz6stM4JJS1y4abQMvghAeOwsBe4WfW8-I-nihOQRzqPeYhYfFwtVz_veHYVro-BR5gHpiXP1h29VzSS1tSY6sSfU3TfzNWQUzIEyN7qQvWoJr1ZJ4ICSB20msbcxqWL2T/s400/Czech+construction.png" /></a> And thirdly, as I say, <strong>domestic demand is falling steadily</strong>, as reflected in retail sales (naturally in the more heavily indebted economies this situation is worse). This weakness in domestic demand is unlikely to be temporary, and those waiting for a turnaround would do better going and waiting for Godot.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDw_lp6TGa6fwH1d6fqQwzs9qgemCDEGJTwgt1r-xHi5JRKleODDJmtXxDGY_d6qTOvg3HLnziXYl_dzUj_Cs6UfXecZD5vxZMuWtrKjqObjEexxDHHeihpHDipI6IqIiVe7gh/s1600/Czech+Retail+Sales.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDw_lp6TGa6fwH1d6fqQwzs9qgemCDEGJTwgt1r-xHi5JRKleODDJmtXxDGY_d6qTOvg3HLnziXYl_dzUj_Cs6UfXecZD5vxZMuWtrKjqObjEexxDHHeihpHDipI6IqIiVe7gh/s400/Czech+Retail+Sales.png" /></a>
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<br />This persistent weakness in domestic consumption is all the more striking in the Czech case, given that real GDP is now almost back at pre-crisis levels.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjszSik2oP71sYmjGpokm07_aFNQKT2n-4pR6t4GRqJRP6Y565mpHWot-ZDivebnwoo2T6p17GKXFHoDiJ6JPWkNseW15wORAvql3YlpGkJNnUtcArLGDnbBChyMuXnA32yjFXP/s1600/Czech+constant+price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjszSik2oP71sYmjGpokm07_aFNQKT2n-4pR6t4GRqJRP6Y565mpHWot-ZDivebnwoo2T6p17GKXFHoDiJ6JPWkNseW15wORAvql3YlpGkJNnUtcArLGDnbBChyMuXnA32yjFXP/s400/Czech+constant+price+GDP.png" /></a>
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<br />The Czech example is illustrative, since it is one of the best case scenarios, and unfortunately, when we look at the regional neigbours, we find that in general things only get worse.
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<br /><strong>Romanian Growth Holiday</strong>
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<br />Romania has struggled far longer than any other CEE economy to emerge from recession, only grew (q-o-q) by 0.1%, following a 0.7% quarterly rate of increase in the first quarter.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyOTVkLocrLNV6-DAHlZ2H_pqT_NHkpshC2YmjsdPNqtqnG4cQ3mykAmnMahKX7E8lIWhRQ8c1h0l4HPRlR66mGjnoy7YI5-xe8_0zXilFh0-NBHCjHyFGoKA90dLUbeBpBDw5/s1600/Romania+GDP+q-o-q.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyOTVkLocrLNV6-DAHlZ2H_pqT_NHkpshC2YmjsdPNqtqnG4cQ3mykAmnMahKX7E8lIWhRQ8c1h0l4HPRlR66mGjnoy7YI5-xe8_0zXilFh0-NBHCjHyFGoKA90dLUbeBpBDw5/s400/Romania+GDP+q-o-q.png" /></a>
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<br />Even though there is some discrepancy between the data published by the national statistics office and by Eurostat, it is clear that Romanian GDP is barely up from one year ago.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4ePXeUxQ01HHP4X9z7C7ZosRURIHxAMyY7qYAz-JsxNC4yKmsLkmPtaIBzpFbI7EBMTpuBn_wvZLViDzXzUmbnLF4DtRmmWd7_3iDEIHoQVDsNr1rdKs8boOlxY_OKPXtF0Jm/s1600/romania+GDP+y-o-y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg4ePXeUxQ01HHP4X9z7C7ZosRURIHxAMyY7qYAz-JsxNC4yKmsLkmPtaIBzpFbI7EBMTpuBn_wvZLViDzXzUmbnLF4DtRmmWd7_3iDEIHoQVDsNr1rdKs8boOlxY_OKPXtF0Jm/s400/romania+GDP+y-o-y.png" /></a>
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<br />And indeed is still something like 8.5% below its pre-crisis peak.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHSAEFtJmE8Q6cZ-daJLeCBVmlRBm3PD9exmMpTeey7pkzvuUyti8xt__f1Z2fktnohyphenhyphenyOKfiXkqDeXVPi4WqfHZinY-65D87TS_xDqm911hjOUvUPvmrANR7d32cZoJ3dHsTy/s1600/Romania+Constant+Price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHSAEFtJmE8Q6cZ-daJLeCBVmlRBm3PD9exmMpTeey7pkzvuUyti8xt__f1Z2fktnohyphenhyphenyOKfiXkqDeXVPi4WqfHZinY-65D87TS_xDqm911hjOUvUPvmrANR7d32cZoJ3dHsTy/s400/Romania+Constant+Price+GDP.png" /></a>
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<br />This despite the fact that exports have been booming, and are now above the pre-crisis level.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtZFfkdjVJjct7BrkiR0SV5PFJsoEPMQBOK1zbHHcj3PGdYlrbcYncGBKbrpZ8P_hMSVRIwRLepZiSpZZA9vFkebViVusC3XqhuYZTIy85KNSmXRBCapCCB0_sIx6IX4glbGYl/s1600/Romania+Exports.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtZFfkdjVJjct7BrkiR0SV5PFJsoEPMQBOK1zbHHcj3PGdYlrbcYncGBKbrpZ8P_hMSVRIwRLepZiSpZZA9vFkebViVusC3XqhuYZTIy85KNSmXRBCapCCB0_sIx6IX4glbGYl/s400/Romania+Exports.png" /></a>
<br />As per the regional pattern, domestic demand has not recovered and retail sales are falling.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRplPoYdGlXcT_49WvB3is5b_J9vTRF6zRI20eGoefXOxYzsRT7EwJmZswHyAciavIFODNgVu4V41Qmso2kwU2tB_P3glcGXT7MpUeuQlOhpDK2KqmuhMoX732i2ScNqB76zbq/s1600/retail+sales+index.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRplPoYdGlXcT_49WvB3is5b_J9vTRF6zRI20eGoefXOxYzsRT7EwJmZswHyAciavIFODNgVu4V41Qmso2kwU2tB_P3glcGXT7MpUeuQlOhpDK2KqmuhMoX732i2ScNqB76zbq/s400/retail+sales+index.png" /></a>
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqquCh5Za64TjEp26j1vuhhpSsX17FrQHej0VLyBxyBNGYxROVQF51YlLVqpVIXdH7TE9IE3jZBWIq1H-W1_FTB79h9ZVIRjilZkIuY5RzS4df-1idHmjRs1_T9oBGM3FhuwhC/s1600/Romania+Constant+Price+Household+Consumption.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqquCh5Za64TjEp26j1vuhhpSsX17FrQHej0VLyBxyBNGYxROVQF51YlLVqpVIXdH7TE9IE3jZBWIq1H-W1_FTB79h9ZVIRjilZkIuY5RzS4df-1idHmjRs1_T9oBGM3FhuwhC/s400/Romania+Constant+Price+Household+Consumption.png" /></a> </p>
<br />
<br />
<br />Construction is well down, and is unlikely to return to pre-crisis levels. </p>
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQ1hPMBayX_vkNTLqsftaWqnXtK2swFiHAIkHsoHN1V_Odgta2jymZB6Ulo4ZPIXfMuvAC6f5Vd2t0FQxECmRO3dI2DGVPxMwXqQTuy25YLTWe0COtFOjTfKdHrmMw2sXT4pGa/s1600/construction+index.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQ1hPMBayX_vkNTLqsftaWqnXtK2swFiHAIkHsoHN1V_Odgta2jymZB6Ulo4ZPIXfMuvAC6f5Vd2t0FQxECmRO3dI2DGVPxMwXqQTuy25YLTWe0COtFOjTfKdHrmMw2sXT4pGa/s400/construction+index.png" /></a> </p>
<br />
<br />
<br />But Romania and the other countries we are about to look at suffer from an additional problem - the have significant external debt levels, and despite the activation of <a href="http://www.ebrdblog.com/wordpress/2011/04/the-vienna-initiative-moves-into-a-new-phase-out-of-crisis-coordination-towards-crisis-prevention/">the so called Vienna initiative </a>they continue to suffer from very tight credit conditions.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheGiq9IIDb5HwpmZnz9Rz-J3JDGrRFquCioIv5Y2MnyNfJ1OMV_V3NGbvTTzKhTlY5XOWTQXmTlIABPvXnzRwTlvDFLzHLbC69MrvwhpYG11piTCbcQ_53J-0ka3sKQyOsasP5/s1600/Romania+Total+Non+Government+Credit.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheGiq9IIDb5HwpmZnz9Rz-J3JDGrRFquCioIv5Y2MnyNfJ1OMV_V3NGbvTTzKhTlY5XOWTQXmTlIABPvXnzRwTlvDFLzHLbC69MrvwhpYG11piTCbcQ_53J-0ka3sKQyOsasP5/s400/Romania+Total+Non+Government+Credit.png" /></a>
<br />
<br />Total Romanian government debt is not high (only just over 35% of GDP), but the country does suffer from deficit problems (6.5% of GDP in 2010), while external debt is over 70% of GDP (a lot of this in forex loans to the private sector). The country continues to run a significant current account deficit (4.2% of GDP in 2010):
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKlohbvs0TP93N8JTyNrc29V9Nf8OggfLZlMhRUax-EMVpfD-zL0O0L5tJRfnHiBRNXcL-2D9AkInhQXa1cuWiP73JfMHlDquMh0ocLTXER8vtEbHWk9FjPlRrdqW_Wu1LAuA2/s1600/Romania+Current+Account+Deficit.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKlohbvs0TP93N8JTyNrc29V9Nf8OggfLZlMhRUax-EMVpfD-zL0O0L5tJRfnHiBRNXcL-2D9AkInhQXa1cuWiP73JfMHlDquMh0ocLTXER8vtEbHWk9FjPlRrdqW_Wu1LAuA2/s400/Romania+Current+Account+Deficit.png" /></a>
<br />
<br />and inflation has been far higher than is desireable, given that the country cannot easily devalue to restore competitiveness given the external debt exposure.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEji6bp5EVRYQZO3FAnbHSChsrlhmY7Tppk0BEo5FWVomlvNfSryonQEYiPZ4btJ8IgiIPHzNYtmcrXo-sIcQ3iTTb5YPfiweVfMqmXx8YbACAqDV8sRbUvVhBEhn80z81ZMlyc1/s1600/CPI+YoY.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEji6bp5EVRYQZO3FAnbHSChsrlhmY7Tppk0BEo5FWVomlvNfSryonQEYiPZ4btJ8IgiIPHzNYtmcrXo-sIcQ3iTTb5YPfiweVfMqmXx8YbACAqDV8sRbUvVhBEhn80z81ZMlyc1/s400/CPI+YoY.png" /></a>
<br />
<br />True, the inflation rate was exacerbated by a 5% VAT rise in July 2010 and the annual rate has now fallen back from 8% in June to 4.9% in July, but I really would question the wisdom of the widespread recourse to VAT rises made by the IMF, since while they do offer a fairly quick short term fix to deficit issues, they only compound growth and external competitiveness problems, in particular in cases where devaluation is not a quick'n easy option.
<br />
<br /><strong>Bulgaria's Limp-along Economy</strong>
<br />
<br />The Bulgarian case is not dissimilar to the Romanian one, even though the economy did return to growth in the second quarter of last year. Growth screeched to a virtual halt in the most recent quarter (0.1% q-o-q):
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKA5MrBw0OuVKWxDEtkkv_Pfs7dvZ-xYjdNzq4GwFwLzE7Ccph_j7VacVY8s249yIWV5iqD_hlDV-nb1tMTwWXpabvXJUyouW8nw1SaJ2aFB7cKLzeyj-DmQ1BRKgkB1qn_mXE/s1600/bulgaria+GDP+q-o-q.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKA5MrBw0OuVKWxDEtkkv_Pfs7dvZ-xYjdNzq4GwFwLzE7Ccph_j7VacVY8s249yIWV5iqD_hlDV-nb1tMTwWXpabvXJUyouW8nw1SaJ2aFB7cKLzeyj-DmQ1BRKgkB1qn_mXE/s400/bulgaria+GDP+q-o-q.png" /></a>
<br />
<br />while interannual growth slowed to 1.9% from 3.4% in the first quarter. </p>
<br />
<br />
<br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVzcV-HcRNkQnuTadDRiaDSgPN4Uf_sMYGwTQ7A-_9hrM0xYUVqfpeIWLOoCUUuSuiLVDQuhI59XErtLFnOdIT8lltienZj7nky8R73WYG9VoGnrANv1hTYYfgAQClhoPFGnr_/s1600/bulgaria+GDP+y-o-y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgVzcV-HcRNkQnuTadDRiaDSgPN4Uf_sMYGwTQ7A-_9hrM0xYUVqfpeIWLOoCUUuSuiLVDQuhI59XErtLFnOdIT8lltienZj7nky8R73WYG9VoGnrANv1hTYYfgAQClhoPFGnr_/s400/bulgaria+GDP+y-o-y.png" /></a>
<br />
<br />Bulgarian GDP has recovered rather more than it has in Romania, but at the end of June it was still more than 7% down from the pre crisis peak level.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFFbxO__TSF27dbReCMGyUA-14wzHynHJpyMIXrV9uQm0p9fJhFhWH9j8Idr-jtsxYL-Qa2h5dcRlH3KJ3WZjuxNE9eFrErmqQdFI7OuBclh7wPj8_gZ7HxflT1TM_DIE576PI/s1600/Bulgaria+Constant+Price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFFbxO__TSF27dbReCMGyUA-14wzHynHJpyMIXrV9uQm0p9fJhFhWH9j8Idr-jtsxYL-Qa2h5dcRlH3KJ3WZjuxNE9eFrErmqQdFI7OuBclh7wPj8_gZ7HxflT1TM_DIE576PI/s400/Bulgaria+Constant+Price+GDP.png" /></a>
<br />
<br />The explanation for the weak recovery is the same as elsewhere, with domestic consumption stagnant, and retail sales in tendential decline.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRLDfXct4WMNElneNb_CAPXKG0minqzEV3hjRYY1rDzhTynyuxHn1b9R7LfFExpMqEFXZmICyLb6RB-6FiJ9OtLRPLi7xAI4E9uNsFszqaWU0N3BfXT1yBboo0rv_gFeGHwpIc/s1600/Bulgaria+Constant+Price+Household+Consumption.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRLDfXct4WMNElneNb_CAPXKG0minqzEV3hjRYY1rDzhTynyuxHn1b9R7LfFExpMqEFXZmICyLb6RB-6FiJ9OtLRPLi7xAI4E9uNsFszqaWU0N3BfXT1yBboo0rv_gFeGHwpIc/s400/Bulgaria+Constant+Price+Household+Consumption.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDskUBy0-98_YcJmF-lYBnyKL10XrZWexbrXqWmvQBNu1vJsrfgqiNuI9ZzLBE2g16pjZ5XpkXAm4l46BPpxvqkZKjcYDmwQaezesJlvxBA4eMPww0gKPOdBUxIx0zMJkWuvRe/s1600/bulgaria+retail+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDskUBy0-98_YcJmF-lYBnyKL10XrZWexbrXqWmvQBNu1vJsrfgqiNuI9ZzLBE2g16pjZ5XpkXAm4l46BPpxvqkZKjcYDmwQaezesJlvxBA4eMPww0gKPOdBUxIx0zMJkWuvRe/s400/bulgaria+retail+two.png" /></a>
<br />
<br />Construction has also slumped significantly.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHEMDXauWRFZKcaXgt45P8wuntzsnpEjQxdBCjwiP3vgYEkCZuyQRy7CAGMbU1zFa-dlYUqecZ0bIZPcCVEAfwDcmlt9HwyfvRgxGiCL2Ji0vR2Pnj5HRbIrFaP36z2meHXizA/s1600/bulgaria+construction.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHEMDXauWRFZKcaXgt45P8wuntzsnpEjQxdBCjwiP3vgYEkCZuyQRy7CAGMbU1zFa-dlYUqecZ0bIZPcCVEAfwDcmlt9HwyfvRgxGiCL2Ji0vR2Pnj5HRbIrFaP36z2meHXizA/s400/bulgaria+construction.png" /></a>
<br />
<br />In addition to the credit crunch which is to be found elsewhere, Bulgaria faces the added difficulty that many banks are Greek owned, and are themselves facing a liquidity stretch at home.
<br />
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_7mN5JcEed0mIefo31GZkOMDMDde4kt5pEhoal2ZZTTjfQ0Zv7ghcgvMiM3jigzg19z5xeQ5n45750CaggE0rrJqhyphenhyphenG0iDiLsdbzhJQwcIQhb8N_pFF6iTQS0rWpDeQUD653Q/s1600/Bulgaria+Total+Loans.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_7mN5JcEed0mIefo31GZkOMDMDde4kt5pEhoal2ZZTTjfQ0Zv7ghcgvMiM3jigzg19z5xeQ5n45750CaggE0rrJqhyphenhyphenG0iDiLsdbzhJQwcIQhb8N_pFF6iTQS0rWpDeQUD653Q/s400/Bulgaria+Total+Loans.png" /></a>
<br />
<br />Yet despite the Euro peg the country continues to run a sizeable inflation rate, and competitiveness - as measured by the REER - continues to deteriorate. Thus an export sector which in value added terms is already too small for the job it has to do is facing headwinds which don't exactly encourage expansion.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjIDTA0yWMzjuLP2YiXpCjtxLYQfaZuV7oewt3pjnUCZeTzfHE3tdPUH-wvNpZ8hDCJE9VFvR7GCzyUhKuTioYg7TDqG3POPgStnSJCA-G66EVBYQvIl6njuffeoBAVqs94nho/s1600/bulgaria+CPI.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjIDTA0yWMzjuLP2YiXpCjtxLYQfaZuV7oewt3pjnUCZeTzfHE3tdPUH-wvNpZ8hDCJE9VFvR7GCzyUhKuTioYg7TDqG3POPgStnSJCA-G66EVBYQvIl6njuffeoBAVqs94nho/s400/bulgaria+CPI.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioAbzaZkHMcf395ZQnTzMt2BYvcTnBVqznqDILOpvZCHX3D7k5hAs30lZ35zYVCrDbdBpO4SclDB2K0HgEDLgOflwhrM-fsXVkP0AhSmCuQ0l0F9aEu1Wy8R6EGrr89o9pNV1y/s1600/Bulgaria+REER+monthly.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioAbzaZkHMcf395ZQnTzMt2BYvcTnBVqznqDILOpvZCHX3D7k5hAs30lZ35zYVCrDbdBpO4SclDB2K0HgEDLgOflwhrM-fsXVkP0AhSmCuQ0l0F9aEu1Wy8R6EGrr89o9pNV1y/s400/Bulgaria+REER+monthly.png" /></a>
<br />
<br />
<br /><strong>Hungary Had No Boom, But The "Bust" Continues</strong></p>
<br />
<br />Hungary's GDP growth basically stalled in the second quarter (0.0% q-o-q), taking the year-on-year rate down from 2.4% to 1.5% in the first quarter. This is well below consensus expectations (2.5%) and also worse than the central bank forecast of around 2.2%. The pull from net trade evidentally weakened substantially, and in an economy that only has one cylinder to fire on (exports) this makes itself noticed quickly.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgC5hfE1gAq1GRj2rnbpjYE0q8UnBBDyQynmpQpzlWWvYWwEZ1hd34z13gXRhn3V2PlKzw1e-7lBFvzj3U56JjszOumYXc4SXaFISa-9sOoV73As-yu6Iy1u1HZgD7RGrJpd1dA/s1600/Hungary+GDP+q-o-q.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgC5hfE1gAq1GRj2rnbpjYE0q8UnBBDyQynmpQpzlWWvYWwEZ1hd34z13gXRhn3V2PlKzw1e-7lBFvzj3U56JjszOumYXc4SXaFISa-9sOoV73As-yu6Iy1u1HZgD7RGrJpd1dA/s400/Hungary+GDP+q-o-q.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgv4nV6ojHBwLMr4UU_3BADFbkeazTC0dhyBWDWcRWtKfiUl0Yb85WVCgZxsDyaW5Y5Kbx7zXVUYQqLmb8CgPl6Ige49VogtHpJrl9ausBreC239FAL2S4awXLILqEVwqVWD0j2/s1600/Hungary+GDP+Y-o-Y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgv4nV6ojHBwLMr4UU_3BADFbkeazTC0dhyBWDWcRWtKfiUl0Yb85WVCgZxsDyaW5Y5Kbx7zXVUYQqLmb8CgPl6Ige49VogtHpJrl9ausBreC239FAL2S4awXLILqEVwqVWD0j2/s400/Hungary+GDP+Y-o-Y.png" /></a>
<br />
<br />
<br />Hungarian exports have risen well since early 2009, but in recent months growth in both these and industrial output has tapered off.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgT_Jldd6xhQw27sSSTonIJ8fEm09WHqnJhqxdJw6QCu9IcOOV58eTWkKzar-xDib-4ut_pHwbvmWCSCL6MmgiuU1QQevpzfTl6IVrJ_Q_55PB1PoZdWH4uoa9aCjPh2SQLG6NS/s1600/hungary+exports+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgT_Jldd6xhQw27sSSTonIJ8fEm09WHqnJhqxdJw6QCu9IcOOV58eTWkKzar-xDib-4ut_pHwbvmWCSCL6MmgiuU1QQevpzfTl6IVrJ_Q_55PB1PoZdWH4uoa9aCjPh2SQLG6NS/s400/hungary+exports+two.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCiaYY7elmkF2A5qn7-41XiHFVwglfz21ueJMEyP7CLyayoNG6RluZ52QCfQlFwxCGtPuK3iirgjPhfUwWQWe4WZhpXsBLl61i3FirVdtSCh0uqBSEwzwmhQR6KLjDBpn7z1WR/s1600/hungary+IP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCiaYY7elmkF2A5qn7-41XiHFVwglfz21ueJMEyP7CLyayoNG6RluZ52QCfQlFwxCGtPuK3iirgjPhfUwWQWe4WZhpXsBLl61i3FirVdtSCh0uqBSEwzwmhQR6KLjDBpn7z1WR/s400/hungary+IP.png" /></a>
<br />
<br />Hungarian GDP is still over 8% down from the pre-crisis peak.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJoazxnz_ZtGkNHxyrnKe6fgVgbtSTfK7WeVVFe3QzYIw3Pbs6VCmWCWx1SLeAql6cYERxO9YJ9zFUxSaAC23Q_mlW-7p0xfw25WGfiDFdCUCNgjqvmtND1v-M3F3-yQFuRQaR/s1600/Hungary+Constant+Price+GDP.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJoazxnz_ZtGkNHxyrnKe6fgVgbtSTfK7WeVVFe3QzYIw3Pbs6VCmWCWx1SLeAql6cYERxO9YJ9zFUxSaAC23Q_mlW-7p0xfw25WGfiDFdCUCNgjqvmtND1v-M3F3-yQFuRQaR/s400/Hungary+Constant+Price+GDP.png" /></a>
<br />
<br />Household consumption has not recovered at all, and retail sales continue to fall.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFokOsqzwV6_m0iYDxbXNYTYhyLaQqsqkX0dWuKpqhsBJ9gVt_O0heCZYiECRP1tDkSF1bcOFId8rvBfUxEv9xFA0nO5nsX7MirUdSrmtoSgZ8eCNMneXmei-9R-1Nm00F7AZ3/s1600/Hungary+Constant+Price+Household+Consumption.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhFokOsqzwV6_m0iYDxbXNYTYhyLaQqsqkX0dWuKpqhsBJ9gVt_O0heCZYiECRP1tDkSF1bcOFId8rvBfUxEv9xFA0nO5nsX7MirUdSrmtoSgZ8eCNMneXmei-9R-1Nm00F7AZ3/s400/Hungary+Constant+Price+Household+Consumption.png" /></a>
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWNtOESY2cc6piLB1LKwIPaCjHHM0Goy07W5DRoiDqwNGHPiPMF_A_agmVMz1fN6rPzDyv6O7I_klS5AcltDBPLfI7ufYlK9F6OdhtasDIPsRnbDcchSqnCm1VzAxyCOJF7scG/s1600/hungary+retail+two.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWNtOESY2cc6piLB1LKwIPaCjHHM0Goy07W5DRoiDqwNGHPiPMF_A_agmVMz1fN6rPzDyv6O7I_klS5AcltDBPLfI7ufYlK9F6OdhtasDIPsRnbDcchSqnCm1VzAxyCOJF7scG/s400/hungary+retail+two.png" /></a>
<br />
<br />Again, construction activity is trending down.
<br />
<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXo8nJ9JGLRmYw7cqTFEGUojn9_w_kPYDMBRUcz2SukVIBxXMTk3gjmB1DWUEUs35EluRZT1dTtmNZJqh0D_L05KH5WhsjHIZ5KhEOWBiWlxAGJnVg_grDUD6sS3dd1-dfIpis/s1600/hungary+construction+index.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXo8nJ9JGLRmYw7cqTFEGUojn9_w_kPYDMBRUcz2SukVIBxXMTk3gjmB1DWUEUs35EluRZT1dTtmNZJqh0D_L05KH5WhsjHIZ5KhEOWBiWlxAGJnVg_grDUD6sS3dd1-dfIpis/s400/hungary+construction+index.png" /></a>
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<br />The Hungarian current account has recovered considerably, and the country now runs a surplus, unfortunately not a large enough one to underpin stable growth.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhczADe56tO_78CAUU0X79p8UZ4QtSFlFPT04iS-hTQ-bzppAbSq_52oKPlvSJTE1qxXLBUzRmgxwwoR2gBLwGm44zdF2uvSUBUUTYMLCrqNkeOkiwtDib_JWFdyOcdsUm5S-eB/s1600/Hungary+Current+Account+balance+%2528quarterly%2529.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhczADe56tO_78CAUU0X79p8UZ4QtSFlFPT04iS-hTQ-bzppAbSq_52oKPlvSJTE1qxXLBUzRmgxwwoR2gBLwGm44zdF2uvSUBUUTYMLCrqNkeOkiwtDib_JWFdyOcdsUm5S-eB/s400/Hungary+Current+Account+balance+%2528quarterly%2529.png" /></a>
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<br />
<br />The stock of CHF private sector loans is equivalent to approximately 20% of GDP, most of it made up of household loans (18% of GDP). Roughly half of these loans are mortgages, and the other half consists of home equity loans. As shown in the chart below (housing loans only, but representative of the whole), most of these loans were contracted in 2005- 08, when the consensus view was that the forint was in a secular appreciation trend versus EUR as well as CHF and Hungarians felt safe about borrowing at much cheaper foreign interest rates. People were focused on the repayment size, and not the capital value movements, rather like people have recently been focusing on public deficit issues, without thinking too much about debt dynamics (until Italy came barging along, that is).
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYUSu_zuVjKfmX86orlsvYilh9TDcq8XQbZcw29bOWH5QuX0pmFfRvXBzgn3ncx_zrE7AXoJoIeL6KqBtL_XNIK9Unm2_wzpNbA5DXnjJqh-sdiH5PubloUzGomHALuTXXL9Ss/s1600/Hungary+forex+mortgages.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYUSu_zuVjKfmX86orlsvYilh9TDcq8XQbZcw29bOWH5QuX0pmFfRvXBzgn3ncx_zrE7AXoJoIeL6KqBtL_XNIK9Unm2_wzpNbA5DXnjJqh-sdiH5PubloUzGomHALuTXXL9Ss/s400/Hungary+forex+mortgages.png" /></a>
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<br />In 2005, the average rate for a home equity loan in CHF was 4.8%, compared to 6.2% in EUR and 17.6% in local currency.The upward surge in the CHF together with increases in interest rates on CHF loans since these were intitially taken out means that the repayments on these mortgages have risen significantly. Morgan Stanley estimate that the average repayment on a CHF mortgage taken out over 2005-07 is up over 50%.
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<br />Carrying out some simple back-of-the-envelope calculations they also arrived at the conclusion that servicing this debt at an 8% interest rate costs Hungarians around 2% of GDP every year. Absent the adverse FX shock, servicing costs would have been around 1.4% of GDP. The 0.6% difference can be seen as a kind of growth penalty, hamstringing what would already have been pretty weak domestic consumtion. According to Morgan Stanley calculations, the rise in CHF since 2008 has had the equivalent impact on Hungarian FX borrowers of a 6% rate increase.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWORMBQWB7IMTbYa3t5dpSvLJ_KJgVxDST0dQs_n4glJSK_4qMElOntVNQ4esUV5WGOjSZ1C4W2g1q8yzDImN48QYmOGn4H6X8SPJKJNImlUraByDUueAEcJ0RvjPCKa2IjaMx/s1600/Hungary+Total+mortgage+lending+y-o-y.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWORMBQWB7IMTbYa3t5dpSvLJ_KJgVxDST0dQs_n4glJSK_4qMElOntVNQ4esUV5WGOjSZ1C4W2g1q8yzDImN48QYmOGn4H6X8SPJKJNImlUraByDUueAEcJ0RvjPCKa2IjaMx/s400/Hungary+Total+mortgage+lending+y-o-y.png" /></a>
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<br />And it isn't only householders who are suffering from Forex risk. Hungary's gross external debt is around 135% of GDP. The country has the largest public debt in the region (around 80% of GDP), and although one off measures with the pension system mean that this will fall this year, the upward path may then resume unless the country has a growth revolution. Worse, 45% of public debt is not in Forints (and some of it is even in Swiss Francs), meaning that currency depreciation risk exists. All in all, it is very had to see the country being able to find its way onto a sustainable debt path.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNStNOZ-Xjq-6BX1vgfGyFUvciHmFhy0tHqilQbBcW6n8GMop1VwQU7NwndMw_nJBBEin9fGGszX3ZX4hYk0xN4SWYmMKqx4m-XU18OryQ9WrRTG4LgAjQHY5PzzGmLhXVYUH3/s1600/Hungary+Gross+External+Debt.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNStNOZ-Xjq-6BX1vgfGyFUvciHmFhy0tHqilQbBcW6n8GMop1VwQU7NwndMw_nJBBEin9fGGszX3ZX4hYk0xN4SWYmMKqx4m-XU18OryQ9WrRTG4LgAjQHY5PzzGmLhXVYUH3/s400/Hungary+Gross+External+Debt.png" /></a>
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<br /><strong>Drifting Towards Export Dependence Too Slowly For Comfort?</strong>
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWzgD8bQDeMslNHPDbCOm71whvbuYfny3PdLXKWYhv4I_cXzSDtdRJptPC_mGr2ozzZg5de_4d3X4U6c_QCHQKfeVT_XjTf-GJGt2ugaiDUH107sFdJNWrOp-tyvTjrBwwLN21/s1600/Romania+Population.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgWzgD8bQDeMslNHPDbCOm71whvbuYfny3PdLXKWYhv4I_cXzSDtdRJptPC_mGr2ozzZg5de_4d3X4U6c_QCHQKfeVT_XjTf-GJGt2ugaiDUH107sFdJNWrOp-tyvTjrBwwLN21/s400/Romania+Population.png" /></a>
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<br />
<br />The recent enthusiasm we have seen for the East European model has a nasty and worrying precedent, since in the years leading up to the financial crisis those who lauded the merits of the European Union’s newest members were not few in number. They were seen as the high-growth members of the Union who had learnt the costly lessson that big government was to be strenously avoided. Such was the enthusiasm that even the very evident and very substantial current account deficits were considered almost benign. But then, as even, after pride came the fall, as one country after another had financing difficulties and became forced to call in the IMF.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkQBEAfe_RRGiNt9VqR4xKJHRBlQeBcBSHLLt7HuTe2y5w4-1Y1PnHE_t_kKUtAxaQgZT727u-JEju9EBvj33cLUnr09ZP9n7TZgGAU7uiQglydW64lsfGQkwc0ygnEN4Xozdt/s1600/bulgaria+population.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 259px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkQBEAfe_RRGiNt9VqR4xKJHRBlQeBcBSHLLt7HuTe2y5w4-1Y1PnHE_t_kKUtAxaQgZT727u-JEju9EBvj33cLUnr09ZP9n7TZgGAU7uiQglydW64lsfGQkwc0ygnEN4Xozdt/s400/bulgaria+population.png" border="0" /></a>
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<br />
<br />Now countries in the East are cited for their low debt, and capacity to accept sacrifices in avoiding excessive deficits. Two issues stand out as important: the prevalence of unhedged forex debt and the regions unique demographics. Just like in the Euro Area's Southern Periphery the presence of forex borrowing severely limits devaluation as a potential competitiveness restorer, while ageing and declining populations mean that the economies are increasingly export dependent. This means they often have both increased exposure to global slowdowns (or recessions), combined with an external financing dependency when sources of funding may rapidly dry up.
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<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDgabE08Llf9vkLd-DzrSiiW3RoD72P2WTixddnVbARW8zgsvqznxPpWjX_zqeNjtvx6PuAYvsTEq_n-ZdpT75mrhBjc3xy63W95_oz5MbDlzqoYqVrYgLm7AhV6gfB_NqmXSS/s1600/hungary+population.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 219px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDgabE08Llf9vkLd-DzrSiiW3RoD72P2WTixddnVbARW8zgsvqznxPpWjX_zqeNjtvx6PuAYvsTEq_n-ZdpT75mrhBjc3xy63W95_oz5MbDlzqoYqVrYgLm7AhV6gfB_NqmXSS/s400/hungary+population.png" border="0" /></a>
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<br />
<br />Evidently, societies with young, growing populations can hope that the sheer pace of economic growth will eventually burn down their debt, but societies with shrinking populations, and rapidly rising elderly dependency ratios cannot adopt such a complacent attitude. Older societies are normally lower growth societies, and in addition, with the number of people of working age falling and falling, an ever greater burden falls on an ever smaller labour force. All four countries in our sample are pioneeers in this regard, sounding out the frontiers of a world in constant decline, a world which is ever older.
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<br />This post first appeared on my Roubini Global Economonitor Blog "<a href="http://www.economonitor.com/blog/author/ehugh3/">Don't Shoot The Messenger</a>".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-44411706853385816612011-07-27T09:58:00.001+02:002011-07-27T20:24:39.694+02:00A Hungarian Waltz On The Wild SideThe Hungarian government’s much publicised unorthodox plans to cut the country's public debt level has been attracting a lot of attention of late, both from the media and from the rating agencies. Some observers have been quite positively impressed. Fitch Ratings, for example, raised their outlook on Hungary’s sovereign credit rating in early June from negative to stable, citing government plans to reduce what is currently the largest accumulated public debt among the European Union’s eastern members. Others, however, continue to have their doubts. Moody’s, for example, has decided to maintain a negative outlook on the country's due to concerns about the general trend in government policy, and the possibility of slippage with deficit objectives. Either way, these are changes within very defined margins, since at the end of the dat Fitch currently still rates Hungary at BBB- and Moody’s at Baa3, in both cases these ratings amount to the lowest investment grades.<br /><br />Nor are the analysts any more unanimous. Christian Keller, head of emerging Europe research, Barclays Capital, feels the most challenged of the CEE economies have now gotten over the worst, and <a href="http://blogs.ft.com/beyond-brics/2011/07/14/guest-post-cee-lessons-for-greece/#axzz1RmXUhcSG">could now serve as role models for their Southern counterparts</a>. Capital Economic's Neil Shearing <a href="http://blogs.ft.com/beyond-brics/2011/07/25/cee-dont-breathe-easy-yet/#axzz1T8BZ6xap">does not agree</a>, and warns that those who suggest that emerging Europe will avoid contagion from the South could “prove to be being dangerously complacent”.<br /><br />On the other hand Market sentiment seems to be much more with Fitch than Moody's so far, since, <a href="http://easterneuropeeconomy.blogspot.com/2011/07/smoke-on-east-european-horizon.html">as I highlighted in this post</a>, Hungary's CDS are now well below the highs of over 400 seen as recently as last November in the wake of the Irish crisis.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0ET9sKm_F9E2_agSewoZVN62ALhFI33r_9oZWKjUOXr8pR5tfwMPhZW-GhVAIQlN52kwa9yUEtNAyg7ayBdtUYLVH1mmmxexjPfocQOGS3e-FhEXVdTEmpPFr2LcxkDqVVTUs/s1600/Hungary+CDS.JPG"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; HEIGHT: 222px; CURSOR: hand" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0ET9sKm_F9E2_agSewoZVN62ALhFI33r_9oZWKjUOXr8pR5tfwMPhZW-GhVAIQlN52kwa9yUEtNAyg7ayBdtUYLVH1mmmxexjPfocQOGS3e-FhEXVdTEmpPFr2LcxkDqVVTUs/s400/Hungary+CDS.JPG" /></a><br /><br />Arguably though the much maligned Moody's have their finger more on the pulse in this case, since the way Hungarian risk is being treated by both Fitch and the CDS seems to reflect pretty optimistic assumptions. Not only is Hungary is the East European country with the highest gross government debt to GDP levels (around 80%), it also has very high gross foreign debt (around 135% of GDP, of which 45% is forex denominated), and it is a country where institutional quality is a constant cause for concern. The most glaring recent example of this is the decision to unilaterally liquidate the formerly mandatory private pension pillar, and recover the accumulated reserves for the coffers of the state system, a measure which at a stroke took 9% of GDP from the accumulated debt, and a lot of short term pressure from the deficit. Yet since the pension liabilities remain however you account for them, this is simply another kicking the can down the road move, and not a real example of a positive saving.<br /><br />Indeed it is the predominance of this and other similar "one off" measures in the Hungarian debt stability programme which worries not only Moody's, but also the EU Commission and the IMF.<br /><br /><br /><br /><br /><br /><br /><blockquote>"Central and Eastern Europe has remained fairly immune thus far from contagion, as financial stability and solvency among euro area peripheral countries as well as some quasi-core (Italy) countries have lately taken centre stage. One can argue that CEE has benefited from 'benign neglect’ on the part of investors, who focused their attention elsewhere. However, this fragile equilibrium is not necessarily going to hold,"<br />Morgan Stanley Research Note</blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFC5vsbLqwx8u_7uwLuq8N7djyrF89_hN3xEaY2md1q7xCpfKdrdRNCKeT3RSwpiLan6RTz4ixXeiJRna7OcSYvi-c9ysbf638Osepi-LVkChPJooh4LznDlD59k9ce9LSkO95/s1600/Morgam+Stanley+On+Hungary.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 272px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5634092893761612450" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFC5vsbLqwx8u_7uwLuq8N7djyrF89_hN3xEaY2md1q7xCpfKdrdRNCKeT3RSwpiLan6RTz4ixXeiJRna7OcSYvi-c9ysbf638Osepi-LVkChPJooh4LznDlD59k9ce9LSkO95/s400/Morgam+Stanley+On+Hungary.png" /></a><br /><br /><br /><br />To some extent the scale of the debt in relation too its peers makes the country look very much like the Italy of the East - since 2006 the country has suffered from stubbornly low growth, the scale of the challenge involved in bringing about a real reduction in the sovereign debt has been consistently underestimated, and one administration followed by the next has relaxed in the comfort of <a href="http://hungaryeconomywatch.blogspot.com/2009/12/hungarys-economic-correction-still.html">continually rose tinted GDP growth forecasts</a>.<br /><br />But when we come to examine things in the cold clear light of detailed macro economic scrutiny, apart from the presence of a strong trade surplus there is not that much to commend in Hungary's recent economic performance. So even though Hungary's CDS and other risk measures have gradually fallen back in line with the regional pattern, we might well ask ourselves whether this will not be yet another case of a decoupling that wasn't?<br /><br /><b>A Story Of Success Tinged With Failure</b><br /><br />But let's get things off on the right foot: not everything in the Hungarian economy is going badly. In the first place, and above all, exports are booming.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhozXPYMOyb2lgWs-oQYUVSVkI3hhPaMH8tIdBB4nY3UEjze_lOeDIYASqR9h03_NYj3__fluQvw3WQtfGnCTkJvoG1ZMXiR9PUoyiwDww195elfzbyjOeUO0MeaSNoqtyQMdKY/s1600/hungary+exports+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 222px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626667606805749730" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhozXPYMOyb2lgWs-oQYUVSVkI3hhPaMH8tIdBB4nY3UEjze_lOeDIYASqR9h03_NYj3__fluQvw3WQtfGnCTkJvoG1ZMXiR9PUoyiwDww195elfzbyjOeUO0MeaSNoqtyQMdKY/s400/hungary+exports+two.png" /></a><br /><br />And the goods trade balance is impressive:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZnN9ZxHoF0LbNT4nNOXa8chXaenEMicdhZqKWm3N6VgVBCNf45A4dbkfEfR9QRd-c6d3M9lr8lB3UVIXIbBiHK8PyPH6OBUx81fIB5jAaDj3-QjMSabjGVG3pM3cOxxIbVVDy/s1600/Hungary+trade+deficit.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626667857941317778" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZnN9ZxHoF0LbNT4nNOXa8chXaenEMicdhZqKWm3N6VgVBCNf45A4dbkfEfR9QRd-c6d3M9lr8lB3UVIXIbBiHK8PyPH6OBUx81fIB5jAaDj3-QjMSabjGVG3pM3cOxxIbVVDy/s400/Hungary+trade+deficit.png" /></a><br /><br />So obviously the country has been doing something right. The current account position has even turned positive:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr7hcpmLP775Mjt50P3i5h30Hz1wb82DDvGK0ZX_8tN5x0FmJ91JHZkyQWFgpKzwDL5lHHvDZS-RnDTA59jq8xvnGWXwanBr-hjnqLrYf92npZB6ObO9WnonBdJl5MCKeH4mvj/s1600/current+account+balance.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 236px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626668671154660050" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr7hcpmLP775Mjt50P3i5h30Hz1wb82DDvGK0ZX_8tN5x0FmJ91JHZkyQWFgpKzwDL5lHHvDZS-RnDTA59jq8xvnGWXwanBr-hjnqLrYf92npZB6ObO9WnonBdJl5MCKeH4mvj/s400/current+account+balance.png" /></a><br /><br />And the government deficit has improved substantially:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFre0Cg5EnniiJOrD8izxPaADaVPwBEU7pCcB9uoPn5Z8HN9r3A7Xb8GNk9Qn4zEK01I3HQW6Ag5eGL8WkDB_gmDFbOhljN2GsRCuFbQ8JCd2ZS3IiNsB64TQhwi0GMnduRLse/s1600/Hungary+fiscal+deficits.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 224px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626668924360898450" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFre0Cg5EnniiJOrD8izxPaADaVPwBEU7pCcB9uoPn5Z8HN9r3A7Xb8GNk9Qn4zEK01I3HQW6Ag5eGL8WkDB_gmDFbOhljN2GsRCuFbQ8JCd2ZS3IiNsB64TQhwi0GMnduRLse/s400/Hungary+fiscal+deficits.png" /></a><br /><br /><br />Growth has returned to the economy, following a peak to trough fall of over 7% fall during the financial crisis.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvtHaIBtttXMmufSXz9uondeR5mPb-_GJaSrk-DD1AFo3pZscbdBTZHmSbWts8hvP7swPaHw7omr0UTp6U9m8Wb_Qaa1cninUGsNT0iX45GA9sDAKQArE1baz-HFbJOCQD6e6Y/s1600/Hungary+GDP+Y-o-Y.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 233px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626671618723406642" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvtHaIBtttXMmufSXz9uondeR5mPb-_GJaSrk-DD1AFo3pZscbdBTZHmSbWts8hvP7swPaHw7omr0UTp6U9m8Wb_Qaa1cninUGsNT0iX45GA9sDAKQArE1baz-HFbJOCQD6e6Y/s400/Hungary+GDP+Y-o-Y.png" /></a><br /><br />So that was the good news, what we might call the Hungarian success story. But unfortunately the story doesn't end there, there is more.<br /><br />The apparently positive picture highlighted above conceals another, much more problematic and preoccupying one. Despite all that recent growth Hungarian GDP is still substantially below its pre-crisis peak. Indeed it is so far below that it remains at a level which was first attained at the end of 2005. That is to say, Hungarian GDP has effectively stood still for the last six years.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWJlnszReIvWLCMfRGHsJQEPa7KvkH-ZWIzS1QTRWzcI_yBJsUsAmAmO8138icA0b2EM6AMI4-UovFzEgkjF_hlQBMuEf_f5AGD8cu4bG9fJXLdQKUbbO-Fws9efK62l63P_Rm/s1600/Hungary+GDP+constant+price.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626671897120685810" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWJlnszReIvWLCMfRGHsJQEPa7KvkH-ZWIzS1QTRWzcI_yBJsUsAmAmO8138icA0b2EM6AMI4-UovFzEgkjF_hlQBMuEf_f5AGD8cu4bG9fJXLdQKUbbO-Fws9efK62l63P_Rm/s400/Hungary+GDP+constant+price.png" /></a><br /><br />But while GDP has been marking time back there in the middle of the last decade, Hungarian debt certainly hasn't been standing still. Officially recognised government debt reached around 80% of GDP in 2010, and while it may not rise significantly in the short term, this is both well above the 60% level the country needs to gain access to the Euro, and well above public debt levels in most of the country’s regional peers. The critical question is whether the policies being currently pursued will be able to bring that level back down again, or is Hungary, like Italy, in a knife edge situation where if growth and inflation are not sufficiently high, and interest rates begin to climb if risk sentiment turns against the country, the debt will start to climb upwards in a way which will be hard to control?<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyCp4pdJJG6Q2xkMQvrLFCU6fjgTNaOB6rEBlEngG63CswwwJ2-yEtqAzbTsJOUnLrDL0OSylZAlWjUq10MA10CPps_8air52Z5U5Um3D1GPiiT0KIbHTWDDjbxyBJXXKkyKNm/s1600/Hungary+gross+government+debt.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 225px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626672612505103634" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyCp4pdJJG6Q2xkMQvrLFCU6fjgTNaOB6rEBlEngG63CswwwJ2-yEtqAzbTsJOUnLrDL0OSylZAlWjUq10MA10CPps_8air52Z5U5Um3D1GPiiT0KIbHTWDDjbxyBJXXKkyKNm/s400/Hungary+gross+government+debt.png" /></a><br /><br />One of the factors which is sure to make it hard to achieve those ambitious government growth targets of 3% in 2011 and 3.3% in 2012 is the state of domestic demand, which is now in continuous decline on the back of a falling population and a significant credit squeeze produced by a heavy dependence of CHF borrowing. In fact retail sales have now been going down since mid 2006. They continue to fall, and it seems pretty unrealistic to imagine that this trend will now be reversed.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0Av7eVJpoIIXcb7q_5oiBJOwf3FtqKZYudnO-M7ozJbHTc4-YFB2j3FEhVJE3QLEZNpM1XGuTFnEvbtojm3-akaYG3v0jL4lTqRIkpa_pV1vrRKV96-xnYR0hDy_8vCga8MWO/s1600/hungary+retail+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 222px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626673003416709682" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0Av7eVJpoIIXcb7q_5oiBJOwf3FtqKZYudnO-M7ozJbHTc4-YFB2j3FEhVJE3QLEZNpM1XGuTFnEvbtojm3-akaYG3v0jL4lTqRIkpa_pV1vrRKV96-xnYR0hDy_8vCga8MWO/s400/hungary+retail+two.png" /></a><br /><br />Which is why the strong trade surplus is as much a product of a slump in imports as it is of booming exports.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiaPjpqzQ8qgFnGjV5NLdTnzJUZ6n3S6N3xMdKe6Ud5-dDdfRd4fiD7Oc5c0kR5ShVdJ6h_o4QPp03XJ63VFFWDoYSKxDS6kJoA_UUaXeNHZNQ0Qzvlxx24agkWdi5HTiAYssv/s1600/Hungary+imports.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 223px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626673529123896466" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiaPjpqzQ8qgFnGjV5NLdTnzJUZ6n3S6N3xMdKe6Ud5-dDdfRd4fiD7Oc5c0kR5ShVdJ6h_o4QPp03XJ63VFFWDoYSKxDS6kJoA_UUaXeNHZNQ0Qzvlxx24agkWdi5HTiAYssv/s400/Hungary+imports.png" /></a><br /><br />Private sector credit is effectively stagnant. Even the small apparent interannual rise in the value of outsanding mortgages shown in the chart below is a little deceptive, since the increase is almost all accounted for by the rising value of existing Swiss Franc mortgages (pushed up by the value of the CHF) and there is little if anything in the way of net new mortgage lending.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMPhSikLfy4kTuXmZryx91xbGKwRa-MpPjAP-9ZcQ2rzL-GWWKemdzo7eKlrDRyY2uJ_WUjOAEL5PLW-0Am8I-evhe0Iu-jrE3q7Oq57dtt2HhPTWhhfAtAf3XdN6PpeH8dCgH/s1600/Hungary+Total+mortgage+lending+y-o-y.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626674808459907682" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjMPhSikLfy4kTuXmZryx91xbGKwRa-MpPjAP-9ZcQ2rzL-GWWKemdzo7eKlrDRyY2uJ_WUjOAEL5PLW-0Am8I-evhe0Iu-jrE3q7Oq57dtt2HhPTWhhfAtAf3XdN6PpeH8dCgH/s400/Hungary+Total+mortgage+lending+y-o-y.png" /></a><br /><br />Which means the construction industry has entered what is now a rear terminal downsizing state. The industry is now only half the size it was at the start of 2006.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHRCYRgNpkf35aQSoihZY1qPfsZ6GLwSLU5chx9t-IEFOfyIZTRQ5XA7wee7JEppTtVIHXveES4Zm3wkJe4swCoxfrvLRz3bsQTC7x4kcYKZkuLZXXc1ulJiJNWZFLIxxweXRH/s1600/hungary+construction+output+stats+office.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626675586260449778" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHRCYRgNpkf35aQSoihZY1qPfsZ6GLwSLU5chx9t-IEFOfyIZTRQ5XA7wee7JEppTtVIHXveES4Zm3wkJe4swCoxfrvLRz3bsQTC7x4kcYKZkuLZXXc1ulJiJNWZFLIxxweXRH/s400/hungary+construction+output+stats+office.png" /></a><br />So while the Hungarian domestic economy and the country's demography seem to symbolise one steady march towards the past,<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAIlGCBvy7quA5kWsItf7qTakGVY4GtzBgBv0__KrrC2cfFe26YUuk8seQf3U9asBYF4UO6QruwXrTOHTw9Ux2Nk2x_50eX0RbBgrvK1ZrhBdkdHiMeW6Gmm_MFIHAiByhIm5R/s1600/Hungary+Working+Age+Population.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 206px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626675882548470338" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAIlGCBvy7quA5kWsItf7qTakGVY4GtzBgBv0__KrrC2cfFe26YUuk8seQf3U9asBYF4UO6QruwXrTOHTw9Ux2Nk2x_50eX0RbBgrvK1ZrhBdkdHiMeW6Gmm_MFIHAiByhIm5R/s400/Hungary+Working+Age+Population.png" /></a><br /><br />the face of the future can be seen from the level of indebtedness. While GDP, housing starts, car sales etc have all fallen, the one thing which has just kept growing and growing is the size of the country’s gross external debt, which stood at 135% of GDP at the end of the first quarter of 2011.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJWSzluINGyU8hW8d3TB1P759RSe41UDMvalien51Q0JTLSBVYBxpDe-dCaZGb_ZPjum4TthYxhJHDasvLg3QK3Vqrt4q4K_QLys9E85Z7epwEkrXwGbzT0zSXS_SKS65ePBtc/s1600/Hungary+Gross+External+Debt.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 238px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5626676124166750194" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJWSzluINGyU8hW8d3TB1P759RSe41UDMvalien51Q0JTLSBVYBxpDe-dCaZGb_ZPjum4TthYxhJHDasvLg3QK3Vqrt4q4K_QLys9E85Z7epwEkrXwGbzT0zSXS_SKS65ePBtc/s400/Hungary+Gross+External+Debt.png" /></a><br /><br /><br /><strong>As The Global Economy Slows, Hungary Faces Growing Risk And An Uncertain Future</strong><br /><br /><br /><br /><br /><br /><blockquote>The recovery in the Hungarian economy remains weak due to a lack of domestic demand. After falling 14 percent in real terms in the 12 months to mid-2009, domestic demand has remained essentially flat. Still high unemployment, muted wage growth, falling consumer confidence, and stagnant credit are weighing on consumption. Meanwhile, fixed investment continues to decline amid considerable idle capacity, bottlenecks to credit supply, limited final demand, and an uncertain business environment. Recent data underscore concerns about the recovery: retail sales growth remains flat in early 2011 while the rate of decline in fixed investment actually accelerated in Q4 2010. Such weak demand has kept a lid on underlying inflationary pressures, while private real sector wage growth remained at historic lows.<br />IMF, Hungary: First Post-Program Monitoring Discussions, June 2011</blockquote><br />The key points I wish to make in this post are as follows.<br /><br />- There is a substantial contagion danger due to the current mispricing of risk, and the possibility of a sudden correction.<br />- There has been no real recovery in domestic demand, which means the country has to rely on exports, and this becomes difficult during a time of rapid economic slowdown elsewhere.<br />- The large proportion of external debt makes it difficult for the country to volutarily devalue, and indeed since 45% of government debt is non-forint-denominated any slippage in the HUF only pushes debt to GDP upwards.<br />- To avoid slippage the country needs to maintain a comparatively high interest rate policy (currently the central bank benchmark rate is 6%) which makes it hard to apply monetary easing to stimulate demand.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgv4Quf7VRIyXx2ekv9-0mlKoOO7U9lMdlcdoBXbaowURcPDfoBCxhYpU97rJ_Ck5ugI9VjZXZzAcJ-hlcczqc6ZYPGNoszO1blQrgbPJJl3stSJGLd1WJxsmThFf-FZZO3LV2-/s1600/Hungary+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5634074482503541698" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgv4Quf7VRIyXx2ekv9-0mlKoOO7U9lMdlcdoBXbaowURcPDfoBCxhYpU97rJ_Ck5ugI9VjZXZzAcJ-hlcczqc6ZYPGNoszO1blQrgbPJJl3stSJGLd1WJxsmThFf-FZZO3LV2-/s400/Hungary+interest+rates.png" /></a><br /><br />This cocktail - less GDP (in comparison with before the crisis), less people, a smaller workforce accompanied by higher (and potentially growing as political pressures mount) debt - is inherently unstable and quite unsustainable in the longer run, and especially so if financing costs start to rise again and exports wane during any forthcoming Eurozone crisis.<br /><br />One of the most worrying things about the current situation is the air of unreality which seems to surround recent policy initiatives. Indeed the Hungarian convergence programme itself is a rather amazing document, especially when it comes to the growth forecasts. Most worrying of all is the idea that policymakers may actually believe some of the own musings here, even though they verge on the world of fantasy. According to the document authors:<br /><br /><br /><br /><br /><br /><blockquote>The Convergence Programme identifies two scenarios: one is a cautious and conservative path in which the positive effects of the Structural Reform Programme are manifest late and not with full effect. The other is a dynamic path of growth that assumes the successful handling and management of existing bottlenecks. The probability that the actual implementation of the plan resides somewhere between these two paths is 80%. In the dynamic scenario the risk premium will decrease in the long term and due to the incentives of the New Széchenyi Plan investment will grow at a higher level than in the conservative approach. These effects enhance capital accumulation and labour demand at the same time, improving the household’s disposable income and domestic demand. Under these favourable circumstances the Hungarian economy can grow at 4,8-5,5% in the period of 2013-2015.</blockquote><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivVwLtFSlwVMhQkz37MKJ8etIXbf2nPvYC6FA8-LKM5sRx323iQu1dzj-bbURNNnZPHZH6rz6ny6YhVrrXVzcicNTZ-ZOBzA3GEX67PVyRUB21iZasFyZ4ut4ye_tZgLAh-RpA/s1600/Hungary+Government+Forecasts.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 271px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5628133734578740162" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEivVwLtFSlwVMhQkz37MKJ8etIXbf2nPvYC6FA8-LKM5sRx323iQu1dzj-bbURNNnZPHZH6rz6ny6YhVrrXVzcicNTZ-ZOBzA3GEX67PVyRUB21iZasFyZ4ut4ye_tZgLAh-RpA/s400/Hungary+Government+Forecasts.png" /></a><br /><br />So the Hungarian economy could grow between somewhere between 4.5% and 5.5% between 2013 and 2015? With all the known problems the Hungarian economy is facing! On which planet are these authors living? Fortunately neither the EU Commission nor the IMF have been taken in. The EU Commission has really yet to pronounce on the longer term forecasts, but their shorter term growth expectations (at 2.7% in 2011, and 2.6% in 2012) are significantly below those of the Hungarian government, while the IMF outlook at 2.8%, 3% and 3.2% (for 2013/14/15 respectively) is much more in the land of the living, even if it still sounds rather optimistic.<br /><br />Then there is the political risk, which Moody's draw attention to. You provide your voters with hopelessly unrealistic expectations, then somehow or another you try to find a way to comply, which normally implies higher rather than lower budget deficits. This is a possibility to which the IMF is currently extremely alert.<br /><br /><br /><br /><br /><br /><blockquote>The 2010 general government deficit of 4.3 percent of GDP (ESA terms) exceeded its target by ½ percentage point— mainly at the local government level—despite a series of ad hoc corrective measures late in the year. This slippage implied a primary structural weakening of 1¾ percent of GDP in 2010, undoing much of the adjustment achieved during the 2008–10 Stand-By Arrangement (see the forthcoming Ex-Post Evaluation report). Poor budget performance continued into the start of 2011 where the first quarter central government cash deficit has already exceeded the government’s initial annual target, largely because revenues fell short of optimistic expectations.<br />IMF, Hungary: First Post-Program Monitoring Discussions, June 2011</blockquote>In addition to the other worldly feel of government documents, the Swiss Franc exposure represents a big downside and potentially sizeable drag on Hungary's prospects. As Moody's note<a href="http://www.bloomberg.com/news/2011-07-26/hungary-banking-system-outlook-stays-negative-moody-s-says-1-.html"> in their latest report on Hungarian banks</a>:<br /><br /><br /><br /><br /><br /><blockquote>"The large amount of foreign-currency lending to households underpins the rating agency's expectation that asset quality will deteriorate further, as these borrowers' ability to service their debt has weakened significantly following more than 30% depreciation of the forint against the Swiss franc in recent years," Moody's Vice President and Senior Analyst Simone Zampa, the author of the report, noted. </blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDOHdgvjMLYN6Z0reMLO-G-2V5EystM3Pzn1RcTJRwK5UXcuWKp459xISeJ-dS6JQdvqCu5z6zxO1BYUR5j4IqJIArlWboFqW5nMmVwRA0NBo4tFM0wAVQaDR9QYaQsiCjr391/s1600/Hungarian+Forint+vs+Swiss+Franc.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 251px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5634088145537213106" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDOHdgvjMLYN6Z0reMLO-G-2V5EystM3Pzn1RcTJRwK5UXcuWKp459xISeJ-dS6JQdvqCu5z6zxO1BYUR5j4IqJIArlWboFqW5nMmVwRA0NBo4tFM0wAVQaDR9QYaQsiCjr391/s400/Hungarian+Forint+vs+Swiss+Franc.png" /></a><br /><br />Unsurprisingly there are clear signs that the export sector is now feeling some of the pressure. The <a href="http://www.bloomberg.com/news/2011-07-24/hungary-economic-confidence-declines-to-lowest-since-april-2010.html">GKI economic-sentiment index declined for a third consecutive month in July</a>, dropping to its weakest since April 2010, as confidence among both businesses and consumers deteriorated. Even more importantly, sentiment in the industrial sector, whose exports pulled the country out of recession, “deteriorated palpably in July,” according to the report. “The sentiment index in the industrial segment dropped especially significantly, the deteriorating trend has been in place for a quarter now.”<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6Mox6OTwV7UjK8nmZiKp862_1hgu2-2dCGWkwyHvyHWYIIVR__RPA2M9ZR8ZqmmMKPG_D8j-Ad7SUwj1d-e-IprW9AQXf-PddErhhyEaf8zEYWIawqnxK14X4gqo2zDyEfjc-/s1600/GKI+Confidence+Indicator.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 250px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5634088807134426978" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6Mox6OTwV7UjK8nmZiKp862_1hgu2-2dCGWkwyHvyHWYIIVR__RPA2M9ZR8ZqmmMKPG_D8j-Ad7SUwj1d-e-IprW9AQXf-PddErhhyEaf8zEYWIawqnxK14X4gqo2zDyEfjc-/s400/GKI+Confidence+Indicator.png" /></a><br /><br />And the financing all that external debt represents another problem, especially as investors have taken more and more of it at shorter, and shorter maturities. As the IMF notes, financing the debt amortization schedule will be a particular challenge for the country in the coming years.<br /><br /><br /><br /><br /><br /><br /><blockquote>"Evidence is accumulating suggesting that the public debt reduction plan will prove much less than forecast, leaving Hungary more exposed to external vulnerability and failing to safely anchor the sovereign credit rating in investment grade territory..."This raises the question of whether Hungary’s fundamentals have improved enough to motivate a stable high foreign positioning and whether a further escalation in the Greek debt crisis will lead to a sharp sell off of the forint."<br />Raffaella Tenconi, analyst at BofA ML </blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuxuhnceoBmeCWoelcBrOOuBpAuhJ9HDgtwqwBIJPUsQXfuSkSHbJLXJFa5GD0TO5eo8JRR4vMXhcpk7-hNMTgFftKfjccp_-S9loEb1HyNNI2oyogPtff4gky7BLXvBVy490I/s1600/Hungary%252C+Debt+Volume+and+Maturity.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 261px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5634089563620002962" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuxuhnceoBmeCWoelcBrOOuBpAuhJ9HDgtwqwBIJPUsQXfuSkSHbJLXJFa5GD0TO5eo8JRR4vMXhcpk7-hNMTgFftKfjccp_-S9loEb1HyNNI2oyogPtff4gky7BLXvBVy490I/s400/Hungary%252C+Debt+Volume+and+Maturity.png" /></a><br /><br />So problems enough, and, as the IMF emphasise, it is important not to let the calmness of the current environment mislead, and produce complacency.<br /><br /><blockquote>Fiscal slippages in 2010 and 2011 to date highlight the difficulty of translating policy intentions into results, particularly in the context of a still weak economy. In this context, the surplus in this year’s budget (which is entirely due to the one-off revenue effect of the de-facto nationalization of the second pension pillar) and the current benign market environment must not lead to complacency, especially in light of the electoral timetable and a challenging public debt amortization schedule after 2012.<br />IMF, Hungary: First Post-Program Monitoring Discussions, June 2011</blockquote><br /><br />This post first appeared on my Roubini Global Econmonitor Blog "<a href="http://www.economonitor.com/blog/author/ehugh3/">Don't Shoot The Messenger</a>".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-10183977317051240912011-07-10T21:58:00.001+02:002011-07-10T21:58:39.996+02:00Smoke On The East European Horizon?<blockquote>"The market is pricing these sovereigns at much wider levels than where their agency ratings would imply," said Diana Allmendinger, a director at Fitch Solutions.CDS on Italy imply a rating of BBB, five notches below its agency rating of AA-minus. And Spain's implied rating is BB-plus, nine notches below its agency rating of AA-plus.</blockquote><br /><br />With so much emphasis being placed on what has been happening farther to the South, economic realities on Europe's Eastern periphery have largely been escaping the close scrutiny of media and analyst attention. In the wake of the belated recognition of the region's vulnerability which followed the bout of acute stress experienced during the post-Lehman crisis, a new consensus has now emerged (<a href="http://www.economonitor.com/edwardhugh/2011/06/02/bells-in-hell-that-dont-go-ting-a-ling-a-ling/">for an in-depth study of the Latvian example see this piece</a>) that the IMF-guided programmes put in place at the time have essentially set things, if not entirely straight then at least on the right track. In particular, as a result of the extensive fiscal discipline and willingness to sacrifice shown a much brighter future now awaits these countries well to the sidelines of all those horrible Greek debt concerns.<br /><br />Certainly this is the picture you get from looking at the way the ratings agencies have been treating many of the countries in the region. Only last week Fitch upgraded Estonia to A+, citing the country's solid economic growth performance, exceptionally strong public finances, declining external debt ratios and increasing stabilization in the banking sector. But since many reservations have been being expressed in Europe of late about the validity of rating assessments, I thought it might be interesting to seek out an alternative opinion, and take a look at what the financial markets have been saying, <a href="http://www.bloomberg.com/news/2011-06-19/euro-drives-estonia-credit-risk-lower-as-neighbors-dodge-greek-contagion.html">at least as far as the recent evolution of Credit Default Swap prices go</a>. <br /><br />The recently upgraded Estonia, for example, was being valued as recently as just two years agao as having the third-riskiest sovereign debt in the European Union. But the country is now trading in quite another league, and finds itself included among the European "top ten" sovereigns in terms of price. <a href="http://www.bloomberg.com/news/2011-06-19/euro-drives-estonia-credit-risk-lower-as-neighbors-dodge-greek-contagion.html">As reported by Bloomberg on 20 June</a>, Estonian credit-default swaps were trading at 87 basis points, while France was being quoted at 83.7, the Czech Republic at 83, Austria at 68.7 and the U.K. at 66, according to data provided by CMA. By way of comparison Polish CDS stood at 159.6. Effectively, Poland was being considered as almost twice as risky as Estonia. The big question, of course, is whether this kind of realignment in valuations make any kind of economic sense? Is contagion risk being reasonably priced in, and if it isn't, do we face the risk of a sudden (and destabilising) adjustment in the not too distant future?<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5jun5NYXMBsTE5WrcRn5rekzVcZmURPKH9wIolo1pk8mO7Dzceyz4ZdeVA9Xgm5QB2eF00Rrv3N6Br_Q-vg7-A9AqdKZIOX9PJTbB7RMu7GUE8Bs8Aayt2yFrebl5d_cu39TL/s1600/Estonia+CDS.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5jun5NYXMBsTE5WrcRn5rekzVcZmURPKH9wIolo1pk8mO7Dzceyz4ZdeVA9Xgm5QB2eF00Rrv3N6Br_Q-vg7-A9AqdKZIOX9PJTbB7RMu7GUE8Bs8Aayt2yFrebl5d_cu39TL/s400/Estonia+CDS.png" /></a><br /><br />Obviously, it is clear that the Estonian Sovereign was never, even during the worst moments of the financial crisis, and under the most severe of worst case scenarios, the third riskiest that was to be found within the frontiers of the EU (Estonia was the only EU country to have a budget surplus last year - worth 0.1 percent of GDP - while public debt totaled a mere 6.6 percent). On the other hand it is the case that Estonia faced an extremely challenging crisis in 2008/09, and had the Euro peg collapsed in one of the four East European countries who had one at the time then the pressure of private debt could certainly have confronted the country with some very complex and difficult choices. So, if we all stop being emotional about CDS for a moment, and start to consider that they might be a traded instrument which can tell us not who is about to default but rather something about the perceived levels of country risk at a given moment in time then they might offer us some sort of yardstick for following how market sentiment is moving, and even (the case in point for my argument here) whether market pricing of relative risks is in line with economic fundamentals.<br /><br />So, following the argument along a bit, it is far from clear that the current level of Estonian CDS prices risk in in any more satisfactory way than they did at the height of the crisis, since as we will see there are rather curious anomalies in the way in which some of the countries in the region are being priced, while an excessive short term emphasis on fiscal deficits has perhaps mislead observers about real risks in Europe whether these lie to the South (Italy) or to the East.</p><br /><br />It is not my intention here to single out Estonia for special - negative - treatment (that would not be warranted) but the value being placed on the CDS really is incredibly low for a country that just entered a Euro Area whose outlook could, at the very least, be considered as reasonably uncertain. It is being priced as part of core Europe, when in reality it forms part of Europe's periphery. Arguably, were the Euro to break in two, Estonia would incline towards riding with the German lead group, but given the fact that the country now has a totally export dependent economy (this is the part that I feel is least understood) , and a currency which was arguably over valued at the time of Euro entry (and the country now has ongoing above-Eurozone-average inflation) it is not clear how prepared the country would be to handle the challenges of being attached to the new, and ultra-high value, currency which would be created. Of course, some are going to argue that the risk of this happening is slim, but is this risk, small as it may be, currently being priced in? That is the question. I suggest it isn't, and this creates the possibility of a dangerous surprise in the markets in the event of a disorderly Greek default.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYymxqmmZyKBI5K5J5PBSo_23vz1gRte5T-wfZyczMKxbNuGjjnYU_QuH6G6fma2mZjhbM1l24buOTviKT_pcB769LTO60HUh0A23v_LQG8j7kqH2j_yurJolHkyQ0dmUi_9oy/s1600/Estonia+%2526+EA16+inflation+compared.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYymxqmmZyKBI5K5J5PBSo_23vz1gRte5T-wfZyczMKxbNuGjjnYU_QuH6G6fma2mZjhbM1l24buOTviKT_pcB769LTO60HUh0A23v_LQG8j7kqH2j_yurJolHkyQ0dmUi_9oy/s400/Estonia+%2526+EA16+inflation+compared.png" /></a><br /><br />Strangely, as a country which has recently entered the common currency, country risk seems to have followed a path which is rather nearer to that of its Baltic peers that equivalent Euro Area countries.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVsV0aDbBoa7VgAYgqtTwhd43XRH-veqpaqUgtMNPlyPFlyAd_AyeBcdPS3tQb1q7qJZbOkXSo_EIo_5hSaCLTZUnLcPDcvzMQhdpEJeedSFT-wMmvw95YodBaFmhhXXtWSz00/s1600/Latvia+CDS.png"><img border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVsV0aDbBoa7VgAYgqtTwhd43XRH-veqpaqUgtMNPlyPFlyAd_AyeBcdPS3tQb1q7qJZbOkXSo_EIo_5hSaCLTZUnLcPDcvzMQhdpEJeedSFT-wMmvw95YodBaFmhhXXtWSz00/s400/Latvia+CDS.png" /></a><br /><br />This disparity becomes even more striking if we look at the evolution of Baltic CDS with those of the two countries in Eastern Europe who entered the Eurozone before Estonia. The spread on Slovenian and Slovakian CDS has surged in recent months, not because short term risk of sovereign default in either of these two countries has increased notably, but simply because these two countries as members of a Eurozone with known problems, and real contagion dangers, are now seen as being more risky. So why isn't this the case with Estonia?<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLPWf8SkCb-8N4NCUkH81KbrsdrZjXdFc4l6X44aSZvci5GexEoBKhUX9I18OS3Xr0u-al1dMhoUhCcaysnK_ucEbMmzZXkTnjdvVoZFEvrlrRvtariWP1TSN-JE3jH-ieYOzS/s1600/Latvia+and+Lithuania+CDS.png"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 285px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLPWf8SkCb-8N4NCUkH81KbrsdrZjXdFc4l6X44aSZvci5GexEoBKhUX9I18OS3Xr0u-al1dMhoUhCcaysnK_ucEbMmzZXkTnjdvVoZFEvrlrRvtariWP1TSN-JE3jH-ieYOzS/s400/Latvia+and+Lithuania+CDS.png" border="0" alt="" /></a><br /><br />True Slovenian and Slovakian CDS are still comparatively low risk priced (Slovenia at 109 and Slovakia at 102) but it is the direction and velocity of the movement which is striking, and especially in comparison with Euro Area peer Estonia. Why are these two countries considered to be more at risk than Estonia, especially given the size of the latter's recent historic legacy?<br /><br />Moving beyond the Baltics, risk in a number of other East European countries seems quite mispriced, unless we think that only being pegged to the Euro (rather than actually being a member of it) is a less risky mode to live in. Bulgarian CDS (currently around 225) have been steadily moving down all this year, and in sharp contrast to what happened in June last year, have so far not responded to the Greek crisis, despite the fact that Bulgaria's banks are quite dependent on their Greek parents for funding.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis9RavBv1UfhLt5z8BKINcBF8GYupw9Z7rI9zSuJYV2ViFg_8tq02zL4j0bYvRP9U8qMlVcjjhIWZI06qIdA4FfnHae5xGBtZ6GRWx0OAwWqxuLSvZFl1YGEShiN6psOHzwcJQ/s1600/Bulgaria+vs+Romania+CDS.JPG"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 195px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEis9RavBv1UfhLt5z8BKINcBF8GYupw9Z7rI9zSuJYV2ViFg_8tq02zL4j0bYvRP9U8qMlVcjjhIWZI06qIdA4FfnHae5xGBtZ6GRWx0OAwWqxuLSvZFl1YGEShiN6psOHzwcJQ/s400/Bulgaria+vs+Romania+CDS.JPG" border="0" alt="" /></a><br /><br />The picture in Romania is rather similar, with the current price of 250 being well off last years highs of around 415, which means that markets are currently perceiving risk in Spain and Italy as more pronounced than those in Bulgaria and Romania. Certainly I would not want to argue that risk in both the aforementioned countries is high, but I am not at all convinced that contagion risk in the latter two is anything like as low as is being suggested, which is presumably why <a href="http://ftalphaville.ft.com/blog/2011/06/14/593531/old-greek-bank-risk-in-new-europe-again/">Nomura was recently advising clients in a research note</a> to sell South African CDS and buy the wrongly priced Bulgarian and Romanian ones (<a href="http://ftalphaville.ft.com/blog/2011/06/30/609776/that-greek-bank-risk-in-new-europe-continued/">also see here</a>). Looking at the macro economic fundamentals of the respective cases, I can't help feeling that in this case the analysts are right.<br /><br />And if we move over to Hungary, then we find that as of last Friday CDS stood at around 285, well below the highs of over 400 seen as recently as last November in the wake of the Irish crisis.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0ET9sKm_F9E2_agSewoZVN62ALhFI33r_9oZWKjUOXr8pR5tfwMPhZW-GhVAIQlN52kwa9yUEtNAyg7ayBdtUYLVH1mmmxexjPfocQOGS3e-FhEXVdTEmpPFr2LcxkDqVVTUs/s1600/Hungary+CDS.JPG"><img style="margin:0px auto 10px;text-align:center;cursor:pointer;cursor:hand;width: 400px;height: 222px" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0ET9sKm_F9E2_agSewoZVN62ALhFI33r_9oZWKjUOXr8pR5tfwMPhZW-GhVAIQlN52kwa9yUEtNAyg7ayBdtUYLVH1mmmxexjPfocQOGS3e-FhEXVdTEmpPFr2LcxkDqVVTUs/s400/Hungary+CDS.JPG" border="0" alt="" /></a><br /><br />Arguably the Hungarian case is the most glaring one, since it is the East European country with the highest debt to GDP levels (around 80%) it has very high gross foreign debt (around 135% of GDP, of which 45% is forex denominated), and it is a country where institutional quality is a constant cause for concern. In many ways Hungary is the Italy of the East. Apart from the presence of a strong trade surplus there is not that much to commend in Hungary's recent economic performance, yet its CDS has fallen into line with a regional pattern, and there is little in the way of what is happening in Spain and Italy to be seen in the spread, let alone what is going on in Slovenia and Slovakia.<br /><br />Both Hungary and Romania were the object of IMF/EU rescues during the height of the financial crisis, and as a result their financing problems subsided. Both countries have made substantial progress in reducing their fiscal deficits, and have carried out a number of structural reforms. But both countries still have high levels of external indebtedness coupled with economies which are now extraordinarily export dependent for growth. In addition the demographic outlook for many of these countries is absolutely dire, and you will continually have smaller and older workforces trying to pay down increasing quantities of debt.<br /><br />This underlying reality constitutes an unstable combination which make the countries concerned highly vulnerable to both a renewed deterioration in sentiment and an external economic slowdown of the sort we could see following a disorderly Greek default, and yet markets in general seems to be shrugging off the risk as almost non existent. "Smoke on the horizon" the admiral said as he lowered the telescope from his blind eye, "I see no smoke on the horizon".<br /><br />This post first appeared on my Roubini Global Econmonitor Blog "<a href="http://www.economonitor.com/blog/author/ehugh3/">Don't Shoot The Messenger</a>".Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-65398767335099762762010-06-11T15:19:00.001+02:002010-06-11T15:22:16.795+02:00The Price Of PowerHell, it seems, knows no fury like the financial markets being told you are about to become the next Greece. The poor Vice President of the election-winning Fidesz party, Lajos Kosa, had no idea what was in store for him when he calmly announced to a group of astonished journalists that Hungary was in the throes of a sovereign debt crisis not disimilar from the one Greece has been passing through. The value of the forint immediately fell sharply, and a whole army of government spokesmen – lead by incumbent Prime Minister Viktor Orban – had to rush for the microphone to try to clarify that the man didn’t mean what he had just said.<br /><br />There then followed several days of political and financial chaos which saw market valuations rocking across the globe till finally the government issued a series of new measures designed to try and bring the country's fiscal deficit problem back under control. Thus ended a brief and ill-fated experiment in alternative anti-crisis measures - one which in fact lasted for just under a month (the month we lived dangerously, aka suddenly last spring). Hungary's new prime minister Viktor Orban has now sharply changed course, and said his government will cut public wages, overhaul the tax system and ban mortgage lending in foreign currencies in an attempt to reassure nervous investors he can contain the country's budget deficit.<br /><br />After a sweeping victory in April’s elections, which saw the victorious FIDESZ party elected with a two-thirds majority, the incoming government unveiled a program which departed dramatically from that of the previous caretaker Socialist cabinet that had been following the outline of an IMF Programme introduced after the country narrowly avoided economic meltdown in 2008. Initially the party had pledged to cut taxes and create jobs in an attempt to stimulate the growth the country evidently badly needs to tackle its heavy debt burden, although such moves would obviously threaten targets agreed under the country's 20 billion euro European Union/International Monetary Fund bailout.<br /><br />In fact Hungary has - for anyone who looked hard enough - been in an unsustainable fiscal position for some time now (try this article of mine in January, <a href="http://hungaryeconomywatch.blogspot.com/2010/01/hungary-isnt-another-greecenow-is-it.html">Is Hungary Another Greece?</a>). It was obvious that the deficit was going to be higher than the 3.8% objective - indeed I personally clashed publicly with the Finance Minister (<a href="http://hungaryeconomywatch.blogspot.com/2010/02/so-where-is-hungary.html">see his reply to me here</a>) on exactly this issue back in January - and that the provisional figures coming out for growth from the statistics office were just a bit too good to be true. Furthermore, the underlying "cashflow" deficit (as in Spain, see charts below) was in fact higher because of the need to fund the losses of state companies and others (like the hospitals and other public entities where the previous government was simply funding the losses by classifying them as unpaid short term debts). Hungary had been lucky until the election in that the financial markets had been too busy with Greece, Southern Europe and the Eurozone to pay the country too much attention. Now that state of grace is well and truly over.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnYmJTT8JfZCRMWw8B_ONFDmlMLiPqnos473uGx1Zst5hSAH7m-DJFbZ8uFjsItwV7bVMwQYAlbX49KEjoE1ZOERo9z0ObOlWMQV7jgs_aRaXLv4LBElEdN9aRJ3ebka3n6-FDxw/s1600/Spain+Accounts+Four.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 220px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnYmJTT8JfZCRMWw8B_ONFDmlMLiPqnos473uGx1Zst5hSAH7m-DJFbZ8uFjsItwV7bVMwQYAlbX49KEjoE1ZOERo9z0ObOlWMQV7jgs_aRaXLv4LBElEdN9aRJ3ebka3n6-FDxw/s400/Spain+Accounts+Four.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5481452408292969698" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoFmvMVGtJdTyj870PCdt5JG7InsSVkV5c-t8OsEYcS-ML6rDmCULQBXkT3Xd4RcOcVDymolhI8SAuL62Tj9r-PaieOiYXgUbIYsiFF0e9dyS_KsnbDrPyJjEDbftQiY29h83joQ/s1600/spain+accounts+eight+english+version.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 221px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoFmvMVGtJdTyj870PCdt5JG7InsSVkV5c-t8OsEYcS-ML6rDmCULQBXkT3Xd4RcOcVDymolhI8SAuL62Tj9r-PaieOiYXgUbIYsiFF0e9dyS_KsnbDrPyJjEDbftQiY29h83joQ/s400/spain+accounts+eight+english+version.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5481452317272848514" /></a><br /><br /><br />But beyond the immediate, headline-catching, story there lurk a number of issues with implications which stretch well beyond the frontiers of the small central European country. The first of these is the high preponderance of forex loans which have been taken out by Hungarian families (largely in CHF, they constitute over 85% of total mortgages). The presence of these loans has been a massive aggravating factor in Hungary's ability to conduct an effective monetary policy in a context of high inflation and low growth. Swiss franc loans are attractive in Hungary, since they are much cheaper than forint denominated ones, since while interest rates determined by the National Bank of Hungary are still over 5%, at the Swiss National Bank they are effectively near to zero.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvQoNnrAwFcT8Z8ZwTBIw8nwfidkZgeqbVpr2le6DWE9aPmYUzW5MeAbetm7Pnu1YtaIRy6_X3Fuqer1kZgcy7LD2zqL7BLaHIA904-84rrFMYeGybLqC01sOz8jE4pLEMAvzTIw/s1600/forex+mortgages.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 228px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvQoNnrAwFcT8Z8ZwTBIw8nwfidkZgeqbVpr2le6DWE9aPmYUzW5MeAbetm7Pnu1YtaIRy6_X3Fuqer1kZgcy7LD2zqL7BLaHIA904-84rrFMYeGybLqC01sOz8jE4pLEMAvzTIw/s400/forex+mortgages.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5481452851194700162" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikPnLre7ZAIRlFfeuNAbP0O3koG1Ynx4yS2tnvqEAuZnf1zDgYkvqNTRbGIpKohUmWGEc8ga2FTda42Dc51G5xoElcvDQljr_lsD0b-LZG26uhOxe9205iuV4AIvFf6h7H_T6G8Q/s1600/Hungary+interest+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 245px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikPnLre7ZAIRlFfeuNAbP0O3koG1Ynx4yS2tnvqEAuZnf1zDgYkvqNTRbGIpKohUmWGEc8ga2FTda42Dc51G5xoElcvDQljr_lsD0b-LZG26uhOxe9205iuV4AIvFf6h7H_T6G8Q/s400/Hungary+interest+rates.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5481496945938769666" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE4BILUs_9orf-kUh1uzHSHjFZnHqJMCs0h7L7VPUtzTOm43h8pojXSlnv11zChk6lCGB99RU-oARMB5OBiFebnDzz8VDMSWYs0QomTOW-TDP86WQ7RLN1QtWrxEU-eUEW2C-IfA/s1600/hungary+CPI.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 228px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE4BILUs_9orf-kUh1uzHSHjFZnHqJMCs0h7L7VPUtzTOm43h8pojXSlnv11zChk6lCGB99RU-oARMB5OBiFebnDzz8VDMSWYs0QomTOW-TDP86WQ7RLN1QtWrxEU-eUEW2C-IfA/s400/hungary+CPI.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5481498446645756146" /></a><br /><br />The second issue is the failure of the current IMF programme to return the economy to a sustainable growth path. The Hungarian economy contracted by 7% last year, and even while it grew slightly in the first three months of this year, the level of Hungarian PIB is still likely to fall again in 2010. A 5% increase in VAT last July, and increasing reluctance to take out more loans means that domestic consumption is still contracting, while the public sector has been in an ongoing adjustment process since 2006. This leaves the economy – like its Spanish equivalent – completely dependent on exports to obtain growth. Yet while Hungary now has both a trade and current account surplus, the heavy level of international indebtedness means that the burden of interest payments is heavy, and the capacity to generate export lead growth insufficient.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFeTuELkty2ZyyPjb4KvELK2Fly0LINzDwCCNXzFq7I5Swk8Xhrc5RKuhtzqmZsxpNi5_ha7EmvPZPmwihXSB8hVjVyWaNJLAhDjVqllEP-WTJK9tp0iO4udMuCeeqb2s8xwNpTQ/s1600/hungary+retail+two.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 231px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFeTuELkty2ZyyPjb4KvELK2Fly0LINzDwCCNXzFq7I5Swk8Xhrc5RKuhtzqmZsxpNi5_ha7EmvPZPmwihXSB8hVjVyWaNJLAhDjVqllEP-WTJK9tp0iO4udMuCeeqb2s8xwNpTQ/s400/hungary+retail+two.png" border="0" alt="" id="BLOGGER_PHOTO_ID_5481504539696987634" /></a><br /><br /><br /><br />Of course, since Hungary is not a member of the Euro Group the country could devalue its currency, but the high level of external debt makes this very difficult, since the proportion of non performing loans the banking system would have to handle would rise sharply.<br /><br />Finally, we have the political lessons. Having seen the experience of Greece, and now that of Hungary, it must be very clear to all that the traditional ploy of those who win elections against unpopular governments – of blaming their predecessors for the disastrous state of public finances – is now no longer open. The financial markets are indifferent to who is responsible, they simply want to know how the extra debt being made public is going to be paid. So the lions share of their anger inevitably falls on the incoming government.<br /><br />Also, this kind of situation demands a high level of responsibility from opposition parties. This responsibility was not shown by the FIDESZ party. Indeed in 2008 they organised a succesful referendum against the constitutionality of a number of cost saving measures in the health system (<a href="http://hungaryeconomywatch.blogspot.com/2008/03/sundays-referendum-in-hungary.html">see my post on this at the time</a>), only to find that they themselves will have to introduce similar (if not identical) measures. The only casualty here is democracy. Countries facing problems which can lead to national bankruptcy need the maximum political unity and consensus in seeking a way out, and not short term political gests which can only bring more problems in the longer run. If pensions need to be cut, they need to be cut, if the only way to finance them is to issue more debt at a time when markets are tired of buying so much of it. The sooner politicians find the courage to recognise this the better, whether we are talking about Hungary, or other (let them be nameless) countries on Europe's periphery in similar difficulties.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-37804195736072083712010-04-28T23:44:00.000+02:002010-04-28T23:46:28.203+02:00Contagion Turns EastWell, I don't know how many other people have noticed, but <a href="http://ftalphaville.ft.com/thecut/2010/04/27/213711/hungarian-forint-hammered/">the Hungarian forint has been having rather a hard time of it over the past few days</a>. The currency was down by as much 1.3 percent against the euro at one point today, today making the two-day intraday loss 3.6 percent, and <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHdnHoPOfUSk">this according to Bloomberg</a>, was the biggest such fall since March last year. The Polish zloty also has weakend slightly, and fell by 0.1 percent to 3.9333 against the euro today while the Czech koruna gained 0.1 percent to 25.582 against the euro. At the same time the cost of credit default swaps on Hungarian debt rose 23.5 basis points to 240. Now virtually all currencies associated with the euro have been having a hard time of it in recent days, but what matters is the magnitude of the pressure being felt in each case, and Hungary here has been unlucky enough to have entered a period of political uncertainty at just the time when the level of market nervousness is higher than normal. There is another problem too. Over 85% of Hungarian home mortgages are not in forints, they are not even in euros, they are in Swiss francs, and the CHF has risen sharply against the euro since the start of the year. So unfortunately Hungarians don't even benefit from the euros woes.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif0ArMFs00Q_1WZ147sgRC_tcvylktOFrBbXtqHZlfUlqv9iM3f_QW1CtGgMA0zCLIqX2ME-vVgor7YwSqjEwpEpI5pJz7bYru4Eb7lZcE8JB02YRXfDewBXRs30BPNM-fCgzmTA/s1600/CHF+Forint.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 273px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif0ArMFs00Q_1WZ147sgRC_tcvylktOFrBbXtqHZlfUlqv9iM3f_QW1CtGgMA0zCLIqX2ME-vVgor7YwSqjEwpEpI5pJz7bYru4Eb7lZcE8JB02YRXfDewBXRs30BPNM-fCgzmTA/s400/CHF+Forint.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5465303817931637746" /></a><br /><br />Really, and unfortunately, this is the one I had been waiting for, and expecting. And precisely why did has the forint tanked in this way? What is so special about Hungary? After all, aren't many of Europe's economies seeing the cost of financing their government debt rising sharply over recent days. Basically one of the key reasons the forint has taken such a sharp knock is that Viktor Orban, Hungary’s new premier-in-waiting, just said in public what everyone following Hungary has been thinking (and saying) for weeks now: Hungary's fiscal deficit is going to be higher (possibly significantly higher) than the target agreed with the IMF. Other factors have also added to the level of concern about the country. What exactly will the core orientation of the incoming government economic policy be, and how much political interference might there be in the financial and monetary institutional structure? Certainly things haven't been helped by the way Hungary's incoming Prime Minister has publicly criticised the financial markets regulator (PSZÁF) and even gone so far as to give the impression he would like to replace central bank (National Bank of Hungary - NBH) governor Andras Simor (see <a href="http://portfolio.hu/en/cikkek.tdp?k=3&i=19995">Portfolio Hungary account here</a>). In a world like the one we live in right now, what you ask for is what you get, and so get it they did.<a name='more'></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGUNQlKlkO_C0Eu_FmDBxJmqoVRWnJWXiNkM1iPsoPLF4tdCLg24th-x4rstcEGkvxxhjZ95hawqSJNDK27LUfHFPStszSCTer0PFqugiry4pkXkaxd4x15wQ3IozI9EEeVhf5kA/s1600/Forint+Tank.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 273px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGUNQlKlkO_C0Eu_FmDBxJmqoVRWnJWXiNkM1iPsoPLF4tdCLg24th-x4rstcEGkvxxhjZ95hawqSJNDK27LUfHFPStszSCTer0PFqugiry4pkXkaxd4x15wQ3IozI9EEeVhf5kA/s400/Forint+Tank.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5465296702532683682" /></a><br /><br /><blockquote>The Hungarian forint dropped sharply on Tuesday - <a href="http://www.ft.com/cms/s/0/97974e02-51da-11df-a2a2-00144feab49a.html">says the Financial Times</a> - as comments from the country’s premier-in-waiting raised worries over its fiscal position. The forint and Hungarian stocks rose sharply on Monday as news that the Fidesz party had swept to a landslide victory in Hungary’s general election at the weekend reduced political uncertainty and buoyed local markets. Lars Christensen at Danske Bank said the remarks only confirmed his view that the positive reaction on the Hungarian markets to Fidesz’s win was overdone. “Fidesz’s victory will lead to a loosening of fiscal policy, which is rather more negative than positive for Hungary,” he said. By midday in New York, the forint was down 3.7 per cent at Ft203.65 against the dollar and lost 2.3 per cent to Ft269.17 against the euro.</blockquote><br /><br />As I say, this is what I had feared would happen. It has been obvious for some time now that the true extent of the fiscal position in Hungary was not being made public - especially off-balance sheet debt in public corporations, and in Public Private Participation projects. Of course, the incoming government, like its Greek counterpart before it, wants to "come clean" so as not to take what it would consider to be unmerited blame. But that isn't how markets will see it, since they will simply push up the country risk element given that fiscal spending has been - in theory - being brought under control since as far back 2006. That is to say, and this is an issue we will have to face in a number of the countries in the East, the IMF programmes simply are not working as they should, or giving the anticipated and hoped for results. I have written about all of this on numerous occasions <a href="http://hungaryeconomywatch.blogspot.com/">on my Hungary blog</a>, most notably and most recently in my post of January 21 <a href="http://hungaryeconomywatch.blogspot.com/2010/01/hungary-isnt-another-greecenow-is-it.html">Hungary Isn't Another Greece........Now Is It?</a> - which was treated sufficently seriously <a href="http://hungaryeconomywatch.blogspot.com/2010/02/so-where-is-hungary.html">to receive a direct reply from the then Minister of Finance, Peter Oszko</a>. <br /><br />In recent weeks I have refrained from replying to the Minister's reply since I did not want to politicise my discourse in the context of the recent elections. But now they are over, and Hungary faces a complicated mess. The economy is stagnant, and <a href="http://portfolio.hu/en/cikkek.tdp?k=2&i=19997">unemployment is going steadily onwards and upwards</a>. So there is no sign at present that the "cure" has made the patient better. <br /><br /><blockquote>Hungary’s rate of unemployment ticked further up to a record high of 11.8% in the first quarter of 2010 from 11.4% in the previous three-month period, the Central Statistics Office (KSH) reported on Wednesday. The rate of employment has also continued to drop and reached a 12-year low. </blockquote><br /><br />But the worst part of this situation is that contagion is now moving Eastwards, meaning that EU institutions will now increasingly face a battle on two fronts - this won't stop with Hungary, there is Latvia, Bulgaria and Romania to also think about (just to name the first three that come to mind). This is what I was getting at when I wrote my "<a href="http://fistfulofeuros.net/afoe/economics-and-demography/there-is-another-shoe-to-drop-in-the-global-economic-and-financial-crisis-and-the-focus-will-be-on-europes-perifery/">There Is Another Shoe To Drop In The Global Economic and Financial Crisis - And The Focus Will Be On Europe’s Perifery</a>" post back in September of last year. Time has elapsed, and inaction, denial and even incompetence at the highest level means that what was then only a possibility is now increasingly becoming a reality. And this <a href="http://www.businessweek.com/news/2010-04-28/spain-s-rating-cut-to-aa-by-s-p-as-contagion-spreads-update1-.html">on a day when Spain lost it's first full "A" from Poor Standards</a> - one down, two to go. As <a href="http://blogs.reuters.com/felix-salmon/2010/04/28/roubini-on-greece/">Felix Salmon so aptly puts it</a>:<br /><br /><blockquote>I covered emerging market sovereign bonds for many years, but I’ve never seen anything like this: a country trading at levels where the bear case is terrifying, the bull case is very hard to articulate, and everybody is talking about a possible default even when the country has an investment-grade credit rating from two agencies and is only one notch below investment grade at the third. Maybe the only thing which really explains what’s going on is that both yields and ratings are sticky. Which would imply that Greece has a long way to deteriorate from here.</blockquote><br /><br />This is no longer a rout, it is fast becoming a debacle.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-49180772820855593272010-04-28T19:17:00.000+02:002010-04-28T19:20:20.241+02:00The Comeback of a Political SurvivorGuest Post by Mark Pittaway<br /><br /><br />The outright victory of Viktor Orbán’s FIDESZ party in the first round of Hungary’s parliamentary elections on 11 April, and the likeliehood that they will win a two-thirds majority in parliament after the second round on 25 April marks a new stage in the unfolding of Hungary’s entangled political and economic crises – crises that have been in process since the summer of 2006. Most discussion of the election outside Hungary has focussed on the 16.67 percent won by the neo-fascist Jobbik party, with its explicit racist rhetoric towards Hungary’s Roma, its open anti-Semitism and its uniformed paramilitary wing, the Hungarian Guard. Within the country attention has focussed, especially among FIDESZ’s defeated left-liberal opponents, on the probability that FIDESZ will use its new found power and influence to purge the public sector and the media of its opponents, waging an intensified version of the “culture war” it conducted against the liberal left when it was last in power between 1998 and 2002.<br /><br />Viktor Orbán himself ranks among Europe’s most persistent political survivors. In 2002 he was narrowly defeated by a coalition of Socialists and the liberal Alliance of Free Democrats in an election he was widely expected to win that took place in a benign economic climate. This defeat was largely self-inflicted and a product of FIDESZ’s authoritarian and confrontational policies towards its opponents. A further, and larger defeat in 2006 seemed to confirm the outcome of 2002 – that Orbán’s divisive style and widespread suspicion of his authoritarianism and use of right-wing populism would keep FIDESZ out of power for a long period. In the light of this, Orbán’s political survival and return to power are worthy of explanation. In the morrow of his defeat in 2002, Orbán began to transform FIDESZ from a traditional political party into an alliance of disparate movements originally integrating elements on the far right into a broad political coalition. A politics of using the deep-seated left-right polarization within Hungary to integrate the far right into his coalition was combined with a reach for the political centre by seeking to present FIDESZ as a party that stood for an expansion of welfare protection for the population – a kind of social democracy in national colours. Re-launched as FIDESZ-the Hungarian Civic Alliance in 2004, the party promised an expanded welfare state and lower taxes, while it began using the provision in the Hungarian constitution to initiate referenda as a campaigning strategy. Between 2004 and 2006 this strategy failed, yet it has been used to considerable effect since 2006 – though this effect has been less the result of trust in Orbán than a consequence of the political failures of his opponents and the unwinding of Hungary’s post-socialist economic model.<br /><br />After the deep recession that followed the collapse of state socialism during the early 1990s, Hungary produced growth of 4-5% per annum during the latter half of the decade as a consequence of favourable economic circumstances, the apparent stabilization of the country’s external debt as a consequence of receipts from the privatization process, and an influx of FDI, largely of German and Austrian origin, in the expectation of speedy Hungarian membership of the European Union. Growth peaked in 2000 and after this date the circumstances that underpinned it began to unwind. Hungary’s competitiveness vis-a-vis its German and Austrian neighbours declined progressively, exacerbated by the strength of the Forint, while the EU’s decision in 2000 to support a large eastern enlargement, rather than one in which a select number of countries in Central Europe would gain EU membership intensified competition for FDI. While growth averaged 3-4% per annum until 2006, this was only maintained by running larger fiscal deficits and as a consequence of the demand created by increased consumer indebtedness fuelled by the de-regulation of financial markets that occurred in the wake of the consolidation of the banking sector and with EU membership.<br /><br />As predominantly Austrian-owned entrants into the personal lending markets sought to increase market share they used the strong Forint, and high Forint interest rates to offer loans to households denominated in foreign currency, predominantly in Swiss Francs, but also in Euros, and even in Japanese Yen.<br /><br />In 2004 the Socialist-Free Democrat government, believing they faced defeat in subsequent elections, ditched Prime Minister, Péter Medgyessy, and replaced him with Ferenc Gyurcsány. Faced with a large opinion poll deficit and attacks from FIDESZ that called for an expansion of welfare spending, Gyurcsány sought to gain re-election through maintaining large public deficits. As a consequence of pre-election spending both the European Union, and international credit rating agencies became increasingly nervous at Budapest’s poor control over public spending, and its attempts to move some public expenditure – notably on motorway construction projects – off the balance sheet.<br /><br />The patience of financial markets was stretched up to the elections in April 2006, which Gyurcsány won, aided by a cut in the rate of VAT on luxury goods from 25% to 20%, and unfunded promises of tax reduction over the coming parliamentary term. Austerity followed the election as taxes were hiked, spending was cut, while co-payments in health and higher education were introduced. The government became severely unpopular by the beginning of summer, a situation compounded by a series of communication errors that culminated in the leaking to the press of a recording of a speech by Gyurcsány in which he admitted “we lied morning, noon, and night” to win the elections in September, and several months of disturbances on Hungary’s streets.<br /><br />The austerity programme effectively removed demand from the economy, while the strong Forint policy was maintained by the central bank, and foreign currency lending continued apace. The economy stagnated, entering its first recession since 1993 in early 2007. Enormous discontent with austerity measures focussed on the figure of Gyurcsány, who many believed had shamelessly lied to win the election. Street demonstrations radicalized sections of right-wing opinion, which laid the basis for the future rise of Jobbik, and FIDESZ attacked directly the austerity programme with a series of several citizen-initiated referenda, three of which – on two sets of co-payment in health, and one in higher education- made it onto the ballot.<br /><br />When these referenda succeeded in March 2008 by large margins, they weakened Gyurcsány fatally, but also strengthened FIDESZ’s credibility with a Hungarian electorate tired of market-based reform and frustrated at cuts in living standards as a party that offered social democracy in national colours. Thus, even before Hungary was forced to call in the IMF in October 2008 at the height of the global financial crisis the stage was already set for FIDESZ’s return. Events since – the fall of Gyurcsány in March 2009 and his replacement with Gordon Bajnai along with continued IMF-sponsored austerity; the electoral collapse of the Socialist Party; the rise of an explicitly neo-fascist party with mass support, especially in ex-Socialist voting industrial areas; and the victory of FIDESZ stems from the intensification of the impact of factors already visible in 2002.<br /><br />The FIDESZ led list with its 52.73% of the first round list votes has become the first party to win an absolute majority of the popular vote since 1990. Its success reflects the considerable support among large sections of Hungarian society for a government that offers social democracy in national colours, and a desire for a period of respite from continued falls in living standards. This is revealed by opinion poll data and the broad geographical distribution of its support in the first round, where it was able to lead its opponents even in many of the formerly Socialist-voting strongholds in the working-class eastern suburbs of Budapest. Its electoral success was aided by its failure to offer any kind of concrete programme to the electorate, which allowed potential supporters to project their desires onto the party.<br /><br />Yet this strength is now clearly a weakness moving forward. The latest figures suggest that Hungary’s GDP declined by 6.3 percent in 2009, and will continue to decline at a slower pace in 2010 – though the precise extent is uncertain due to the country’s dependence on exports to the Eurozone. Independent experts believe that Hungary will have severe difficulties in keeping its budget deficit below 4% in 2010 without urgent remedial action to raise revenues and cut spending. Furthermore, these figures do not include the deficits and the lending undertaken by local authorities, many of which are on the edge of bankruptcy, as are Hungarian State Railways and the Budapest Public Transportation Company. Consolidating these entities will place further pressure on the budget. There remain question marks over the long-term financial health of the Hungarian financial sector.<br /><br />At the same time, given the high value of the Forint against the Euro, the consequent persistence of the problem of Hungarian competitiveness, and the continuing burden of financing debts in both the public and household sectors, Hungary’s economy seems to be condemned to either stagnation or sluggish growth for the foreseeable future. FIDESZ’s approach to these problems is almost completely unknown. It is difficult, however, to imagine that the measures they will have to undertake to deal with this situation, in all probability underpinned by an IMF loan, will be anything other than extremely painful.<br /><br />Hungarian households are under severe pressure from declining real incomes, unemployment and the fear of unemployment, and the burden of servicing loans denominated in foreign currency. Furthermore, Hungary is now entering its fifth year of austerity and consequently the climate in the country is very tense, as the patience of the population with this situation is thin. Orbán has never been a universally popular leader and his divisive style seems to make him deeply unsuited to leading Hungary through the crisis. Furthermore, he will face considerable opposition both from his left, and from a militant, insurgent neo-fascist right. At the same time in a clientelist political system he will face enormous pressure to reward his supporters, and failure to do will meet with negative consequences. For these reasons, despite the size of his victory, it is difficult to see his position as being very secure. Hungary’s road out of the crisis will be, at the very best, a bumpy one.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-71446612316922589502010-02-14T14:35:00.000+01:002010-02-14T14:37:19.618+01:00Just What Is The Real Level Of Government Debt In Europe?<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi1F6Xv8LrmDMNv1coGECrlqxZlAjH9j51OmlponZVT9-x25ddzIyb3yyCKz7WPaimcuBmxPwhFRQfBtHhD3zXxsfWx4qL9ml9XW1LnUXEw0gYG-k5VH3ABursfiCWVbFdb-Gvf1Q/s1600-h/Botin.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 267px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi1F6Xv8LrmDMNv1coGECrlqxZlAjH9j51OmlponZVT9-x25ddzIyb3yyCKz7WPaimcuBmxPwhFRQfBtHhD3zXxsfWx4qL9ml9XW1LnUXEw0gYG-k5VH3ABursfiCWVbFdb-Gvf1Q/s400/Botin.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5438085487868523106" /></a><br /><br />“If you don’t fully understand an instrument, don’t buy it.”<br /><br />To the above advice from Emilio Botín, Executive Chairman of Spain’s Grupo Santander, I would simply add one small rider: Don’t sell it either, especially if you are a national government trying to structure your country’s debt.<br /><br />In <a href="http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=1">a fascinating article in today's New York Times</a>, journalists Louise Story, Landon Thomas and Nelson Schwartz begin to recount the mirky story of just how the major US investment banks have been able to earn considerable sums of money effectively helping European governments to disguise their growing mountain of public debt.<br /><blockquote>Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. <br /><br />As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels. <br /><br />Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.</blockquote><br /><br />In fact, concerns about what it is exactly Goldman Sachs have been up to in Greece are not new, and the Financial Times have been pusuing this story for some time, in particular in connection with the investment bank's <a href="http://www.ft.com/cms/s/0/53bbbd40-0c42-11df-8b81-00144feabdc0.html">ill fated attempt to persuade the Chinese to buy Greek government debt</a> (and <a href="http://ftalphaville.ft.com/blog/2010/02/09/145201/goldmans-trojan-greek-currency-swap/">here</a>, and <a href="http://www.zerohedge.com/article/ever-increasing-parallels-between-aig-and-greece-and-cds-puppetmaster-behind-it-all">here</a>). Nor is the fact that the Greek government resorted to sophistocated financial instruments to cover its tracks exactly breaking news, since I (among others) have been writing about this topic since the middle of January - <a href="http://greekeconomy.blogspot.com/2010/01/does-anyone-really-know-size-of-greek.html">Does Anyone Really Know The Size Of The Greek 2009 Deficit?</a> - following the arrival in my inbox of a leaked copy of the report the Greek Finance Minister sent to the EU Commission detailing the issues. <br /><br />What is new in today's report from the NYT team is the extent to which they identify the problem as a much more general one, involving more banks and more countries, since "Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere". I very strongly suggest that our NYT stalwarts take a long hard look at what has been going on in Spain, and especially at the Autonomous Community level.<br /><br />So the question naturally arises, just how much in debt are our governments, really? As the NYT team point out, Eurostat has long been grappling with this matter, and as far back as 2002 they found themselves forced to change their accounting rules, in order to try to enforce the disclosure of many off-balance sheet entities that had previously escaped detection by the EU, since up to that point the transactions involved had been classified as asset "sales", often of public buildings and the like. Following advice paid for from the best of investment banks many European governments simply responded to the rule change by reformulating their suspect deals as loans rather than outright sales. As we say in Spain "hecha la ley, hecha la trampa" (or in English, when you close one loophole you open another). According to the NYT authors:<br /><br />"As recently as 2008, Eurostat.... reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”"<br /><br />So just what is all the fuss about. Well, in plain and simple terms it is about an accounting item known as "receivables". Now, <a href="http://en.wikipedia.org/wiki/Accounts_receivable">according to the Wikipedia entry</a>:<br /><br /><blockquote>"Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of a customers for goods and services received by the customers. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms."</blockquote><br /><br />However, as <a href="http://en.wikipedia.org/wiki/Factoring_(finance)">we can learn from another Wikpedia entry</a>, often the use of "accounts receivable" constitutes a form of factoring, and this is where the problems Eurostat are concerned about actually start:<br /><br /><blockquote>Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.</blockquote><br /><br />But how does all this work in practice? Well, the World Wide Web is a wonderful thing, since you have so much information near to hand, at just the twitch of a fingertip. <a href="http://www.john-laing.co.uk/pfi_ppp/948.htm">Here is a useful description of what are known as PPI/PFI schemes</a>, from UK building contractor John Laing:<br /><blockquote>A Public Private Partnership (PPP) is an umbrella term for Government schemes involving the private business sector in public sector projects. <br /><br />The Private Finance Initiative (PFI) is a form of PPP developed by the Government in which the public and private sectors join to design, build or refurbish, finance and operate (DBFO) new or improved facilities and services to the general public. Under the most common form of PFI, a private sector provider like John Laing will, <strong>through a Special Purpose Company (SPC)</strong>, hold a DBFO contract for facilities such as hospitals, schools, and roads according to specifications provided by public sector departments. Over a typical period of 25-30 years, <strong>the private sector provider is paid an agreed monthly (or unitary) fee by the relevant public body</strong> (such as a Local Council or a Health Trust) for the use of the asset(s), which at that time is owned by the PFI provider. This and other income enables the repayment of the senior debt over the concession length. (Senior debt is the major source of funding, typically 90% of the required capital, provided by banks or bond finance). Asset ownership usually returns to the public body at the end of the concession. In this manner, <strong>improvements to public services can be made without upfront public sector funds</strong>; and while under contract, the risks associated with such huge capital commitments are shared between parties, allocated appropriately to those best able to manage each one.</blockquote><br /><br />And for those still in the dark, <a href="http://en.wikipedia.org/wiki/Private_finance_initiative">Wikipedia just one more time comes to the rescue</a>:<br /><br /><blockquote>The private finance initiative (PFI) is a method to provide financial support for "public-private partnerships" (PPPs) between the public and private sectors. Developed initially by the Australian and United Kingdom governments, PFI has now also been adopted (under various guises) in Canada, the Czech Republic, Finland, France, India, Ireland, Israel, Japan, Malaysia, the Netherlands, Norway, Portugal, Singapore, and the United States (amongst others) as part of a wider program for privatization and deregulation driven by corporations, national governments, and international bodies such as the World Trade Organization, International Monetary Fund, and World Bank.<br /><br />PFI contracts are currently off-balance-sheet, meaning that they do not show up as part of the national debt as measured by government statistics such as the Public Sector Borrowing Requirement (PSBR). The technical reason for this is that the government authority taking out the PFI contract pays a single charge (the 'Unitary Charge') for both the initial capital spend and the on-going maintenance and operation costs. This means that the entire contract is classed as revenue spending rather than capital spending. As a result neither the capital spend nor the long-term revenue obligation appears on the government's balance sheet. Were the total PFI liability to be shown on the UK balance sheet it would greatly increase the UK national debt.</blockquote><br /><br />And here are two more examples of what is involved which were brought to light by a quick Google. First of all, the case of Italian health payments. Now according to analysts Patrizio Messina and Alessia Denaro, <a href="http://www.orrick.com/fileupload/753.pdf">in this report I found online from Financial Consultants Orrick</a>:<br /><br /><blockquote>In the last years many structured finance transactions (either securitisation transactions or asset finance transactions) have been structured in relation to the so called healthcare receivables.The reasons are several. On one side, the providers of healthcare goods and services usually are not paid in time by the relevant healthcare authorities and therefore, in order to gain liquidity, usually assign their receivables toward the healthcare authorities. On the other side, due to the recent legislation that provides for very high interest rates on late payments, the debtors as well as banks and other investors have had the same and opposite interest on carrying out different kind of transactions. In this brief article we will analyse, after a quick description of the Italian healthcare system, some of the different structures that have been used in relation to transactions concerning healthcare receivables and, in particular, we will focus on transactions concerning the so called “raw receivables”, which are lately increasing in the Italian market practice, by analysing the legal means through which it is possible to ascertain/recover such receivables.</blockquote><br /><br />This system thus has two advantages (apart from the fact that it effectively hides debt). In the first place the healthcare providers gain liquidity in order to continue to run hospitals, pay doctors, etc, while those who effectively intermediate the transaction earn very high interest rates for their efforts, interest payments which have to be deducted from next years health care provision, and so on. <br /> <br />As the Orrick report points out, Italy’s national healthcare service (servizio sanitarionazionale, “nhs”) is regulated by the legislative decree of December 30, 1992, no. 502 (“decree 502/92”).The reform introduced by decree 502/92, as amended from time to time, provides for a three-tier system for the healthcare service, as outlined below: State level The central government provides a national legislation limited to very general features of the NHS and decides the funds to be allocated to the single regions according to specific criteria (density of population, etc.) for the NHS. <br /><br />As the Orrick analysts note: "the Healthcare Authorities usually pay the relevant Providers with a certain delay".<br /><blockquote>Usually, when healthcare funds are allocated, in the national provisional budget, the central government underestimates the amount of healthcare expenditure. Since the central government does not provide regions with enough funds, regions are not able to provide enough funds to Healthcare Authorities, and payments to the Providers are delayed. Since the Providers need liquidity, they usually assign their receivables toward the Healthcare Authorities. To deal with all the above issues, Italian market practice has been developing an alternative system of financing through securitisation and asset finance transactions of Healthcare Receivables.</blockquote><br /><br />As the analysts finally conclude:<br /><br /><blockquote>Despite of the risks concerning the judicial proceedings, Italian market players are still very interested on carrying on securitisation transaction on this kind of asset, <strong>principally because Legislative Decree no. 231/02 provides for very high interest rates on late payments</strong> (equal to the interest rate applied by ECB plus 7%) - my emphasis</blockquote><br /><br />Another technique Eurostat have identified as a means of concealing debt relates to the recording of military equipment expenditure, <a href="http://www.defense-aerospace.com/article-view/feature/67285/bureaucrat's-delight:-eu-rules-on-military-leases.html">as described in this report I found dating from 2006</a>. At the time Eurostat were worried about the growing provision of military equipment under leasing agreements. Basically they decided that such provision was debt accumulable.<br /><blockquote>Eurostat has decided that leases of military equipment organised by the private sector should be considered as financial leases, and not as operating leases. This supposes recording an acquisition of equipment by the government and the incurrence of a government liability to the lessor. Thus there is an impact on government deficit and debt at the time that the equipment is put at the disposal of the military authorities, and not at the time of payments on the lease. Those payments are then assimilated as debt servicing, with a part recorded as interest and the remainder as a financial transaction.</blockquote><br /><br />However, a loophole was found in the case of long term equipment purchases:<br /><br /><br /><blockquote><br />Military equipment contracts often involve the gradual delivery over many years of a number of the same or similar pieces of equipment, such as aircraft or armoured vehicles, or including significant service components, such as training. Moreover, in the case of complex systems, it is frequently the case that some completion tasks need to be performed for the equipment to be operational at full potential capacity. Some military programmes are based on the combination of several kinds of equipment that may be completed in different periods, so that the expenditure may be spread over several fiscal years before the system, globally considered, becomes fully operational. <br /><br />In cases of long-term contracts where deliveries of identical items are staged over a long period of time, or where payments cover the provision of both goods and services, government expenditure should be recorded at the time of the actual delivery of each independent part of the equipment, or of the provision of service. </blockquote><br /><br />Payment for such items are only to be classifed as debt at the time of registering the actual delivery, which may explain why, if my information is correct, the Greek military as of last December were still officially "testing" two submarines which had been provided by German contractors, since final delivery had still to be formally registered, and the debt accounted.<br /><br />A lot of information about the kind of things which were going on before the 2006 rule change can be found <a href="http://www.europlace.net/paris06/p9-charlotte_lavit_d_hautefort.pdf">in this online presentation from Europlace Financial Forum</a>. Here are some examples of private/public sector cooperation in Italy.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHbxx9NMo_wZF7hKDCMSK9OWQWQB3BPmBo8usYsdpMDURYP1G6V87C2s2o4WJtvd_HYiZJgj93AB64Wfb4IhUOy1Ijh2nqZqvQWP_AdJHuQ36bLdpOVVvM7Ad7mX9e2H_eHoRIKw/s1600-h/Italy+receivables.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 300px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5438045860714137330" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiHbxx9NMo_wZF7hKDCMSK9OWQWQB3BPmBo8usYsdpMDURYP1G6V87C2s2o4WJtvd_HYiZJgj93AB64Wfb4IhUOy1Ijh2nqZqvQWP_AdJHuQ36bLdpOVVvM7Ad7mX9e2H_eHoRIKw/s400/Italy+receivables.png" /></a><br /> <br />And here's a chart showing a list of advantages and possible applications:<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHHs-m_OYBHpsUJ18ivrCTi7i9hSP2YfGKJSz5SHut7TMIYEv5newWqIJ5vEeCierAbdY6-IAV05IzdkpObNMzzUm7Hjn6ezhHCY_bzVJfZzl44NXYIT_XqmYPDgpQ1KHt93ojkA/s1600-h/Receivable+projects.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 298px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHHs-m_OYBHpsUJ18ivrCTi7i9hSP2YfGKJSz5SHut7TMIYEv5newWqIJ5vEeCierAbdY6-IAV05IzdkpObNMzzUm7Hjn6ezhHCY_bzVJfZzl44NXYIT_XqmYPDgpQ1KHt93ojkA/s400/Receivable+projects.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5438046932968852178" /></a><br /><br />Now, at the end of the day, you may ask "what is wrong with all of this"? Well quite simply, like Residential Mortgage Backed Securities these are instruments that work while they work, and cause a lot of additional headaches when they don't. I can think of three reasons why debt aquired in this way in the past may now be problematic.<br /><br />a) they assume a certain level of headline GDP growth to furnish revenue growth to the public agencies committed to making the payments. Following the crisis these previous levels of assumed growth are now unlikely to be realised.<br />b) they assume growing workforces and working age populations, but both these, as we know, are now likely to start declining in many European countries.<br />c) they assume unchanging dependency ratios between active and dependent populations, but these assumptions, as we also already know, are no longer valid, as our population pyramids steadily invert.<br /><br />Given all this, a very real danger exists that what were previously considered as obscure securitisation instruments, so obscure that few politicians really understood their implications, and few citizens actually knew of their existence, can suddenly find themselves converted into little better than a glorified Ponzi scheme.<br /><br />And if you want one very concrete example of how unsustainable debt accumulation can lead to problems, you could try reading <a href="http://www.laverdad.es/murcia/v/20100214/region/indigencia-municipal-20100214.html">this report in the Spanish newspaper La Verdad</a> (Spanish, but Google translate if you are interested), where they recount the problems being faced by many Spanish local authorities who are now running out of money, in this case it the village of San Javier they have until the 24 February to pay a debt of 350,000 euros, or the electricity will simply be cut off! The article also details how many other municipalities are having increasing difficulty in paying their employees. And this is just in one region (Murcia), but the problem is much more general, as Spain's heavily overindebted local authorities and autonomous communities steadily grind to a halt.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-35312545231974004292010-02-03T16:40:00.009+01:002010-02-03T16:57:33.957+01:00So where is Hungary?<span style="font-weight:bold;">Response to Edward Hugh</span><br /><br />by Peter Oszko<br />Minister of Finance, Hungary<br /><br />The financial crisis has re-shaped the regions and countries in financial terms. New country groups emerge in analyses and decisions by the investors receiving specific interest or countries far from one another are compared. It is honourable that Hungary enjoys distinguished attention especially because international institutions, investment houses or even rating agencies more often than not appreciate that Hungary has been capable of a huge fiscal consolidation in the most difficult times of the crisis. Edward Hugh’s article ‘Hungary Isn’t Another Greece……Now Is It?’ is all the more striking. <br /><br />I think we could easily agree that the Hungarian economy and financial policy management by the Government had and have to face a lot of challenges while correcting mistakes made mostly in the past. It seems, however, that the greatest test is to prevent prejudices, perceptions based on false findings, poor information and mistaken conclusions or the consequences thereof. Unfortunately, we find several examples of this kind in Edward Hugh’s article as well. In this context, now we can take occasion to clarify the most characteristic mistakes and misunderstandings in relation to the Hungarian economic and financial policies.<br /><br />Such is one of the key findings in the article that plays down structural reforms made in the recent period. The author makes ironic remarks that reform measures would lie in the elimination of 13th month pension benefit and restructuring family allowances in total suggesting that it was all to take place as far as changes to the pattern of public expenditure are concerned. Against this background, if we want to list only the last year’s most important measures the following should be mentioned in addition to the elimination of 13th month pension benefit:<br /><br /><br />- We changed pension indexation with anticyclical effects for the subsequent years;<br /><br />- We modified the conditions of early retirement with the pension benefits included. Retirement before the statutory age shall involve lower pension benefit;<br /><br />- Retirement age will gradually increase from 2012 by six months each year until 65 years of age both for men and women;<br /><br />- We restructured our too generous housing subsidy scheme including the elimination of interest subsidies and social policy aid replaced by a narrower new subsidy scheme;<br /><br />- Energy price subsidies will be phased out of the social policy system in 2010;<br /><br />- We changed the method of sick-pay disbursement with a general rate lowered by 10 percentage points;<br /><br />- Entitlement criteria of family allowance were modified. Now it is available only until the lower limit of age,<br /><br />- We changed child-care subsidies with shorter periods of eligibility for both child-care allowance and child-care aid;<br /><br />- Headcount stop entered into force in government agencies from the summer of 2009;<br /><br />- Nominal wages were frozen for those employed in the public sector;<br /><br />- To limit spending on curing and preventing healthcare services, hospital financing regulation was created in support of focussed hospital care, i.e. the so-called “performance limit-based accounting system”;<br /><br />- Scheme of Treasurers was set up from the summer of 2009 to ensure disciplined budgetary management.<br /><br />These measures will cut pension expenditure in the general government budget by more than 3 per cent of GDP as a result of only the structural moves involving the pension system as shown in the Table below.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnY9U88IEkHo4yRZjr-W5AGT4ro2ubs7nOXhd3P6dZwz2XlDtp7CqXaGmyQUntJaoT-JWARoBXd2J_bRuBliX_HKJvmGNQ8T06nGNohIgU_KyZ5nxX5bv4dJ9yPP716-Pk9ps1TA/s1600-h/Hungary+One.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 216px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnY9U88IEkHo4yRZjr-W5AGT4ro2ubs7nOXhd3P6dZwz2XlDtp7CqXaGmyQUntJaoT-JWARoBXd2J_bRuBliX_HKJvmGNQ8T06nGNohIgU_KyZ5nxX5bv4dJ9yPP716-Pk9ps1TA/s400/Hungary+One.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434043966613756882" /></a><br /><br />In addition, restructuring of housing subsidies, energy price subsidies as well as family and sickness allowances will result in an expenditure cut by 1.0 per cent of GDP in the year of entry into force with increasing order of magnitude in the subsequent years. The Table below indicates well what size of savings we can achieve for more years from the measures relative to the Convergence Programme of Hungary created before 2009. While postponement of investment and development projects could obviously help short-term savings in the crisis period, restructuring of the social system, restraint on public sector wages, sustainable pension expenditure and controlled financing in healthcare should result in long-term, sustainable and structural savings for government budget.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGehiYxBzbI1q-lSOog4TEfjwGHVvXS1IpUd6Iks0MALz7cHFowtE6aaxljRd0b7ltxISncQRekKm0xZpWfFV-dplFVPJvy8ddVSUE86FX6IMLUbqqAoemFXh9_cy9UdnHpiKynQ/s1600-h/Hungary+Two.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 258px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGehiYxBzbI1q-lSOog4TEfjwGHVvXS1IpUd6Iks0MALz7cHFowtE6aaxljRd0b7ltxISncQRekKm0xZpWfFV-dplFVPJvy8ddVSUE86FX6IMLUbqqAoemFXh9_cy9UdnHpiKynQ/s400/Hungary+Two.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434044365145812450" /></a><br /><br />It follows that restructuring moves we took will ensure a declining budget deficit and public debt from 2010. Therefore, the following governments will not need any more to take new austerity measures requiring political sacrifices but to remain on the budget course now established and reap the profit from the results arising in the subsequent years.<br /><br />Of course, there are reform tasks left on the next government even after the present budget restructuring. The most recent fiscal reorganization involved the composition and balance of government budget. However, six or more month could not be enough to transform institutions and institutional framework. Only formal agreements could be signed for long-term restructuring of companies providing for public transport, which are yet to be fulfilled. Furthermore, more should be done to improve healthcare, education and local governments functioning with the purposes of efficient use of financial resources and raising the level in public services offered, rather than only financing. Thus, after the present fiscal restructuring should be followed by institutional changes during the next election period.<br /><br />As far as labour market conditions and tendencies are concerned, Edward Hugh has again some wrong findings. It is false that public sector employment grew. Headcount in the public sector went down by 100,000 from 2006. Last year saw only further slowing cut in employment, given the government order (approved in the summer of 2009) of unchanged staffing in force including vacancies.<br /><br />The new is the start of “Pathway to Work” Program, which is intended for those living on social aid to get back to labour market through communal services projects. In statistical terms, employment in communal services is included in the public sector. To receive a realistic picture, the figures must be adjusted for these effects. Presently, some 100,000 have been involved in the program that opens the way for those concerned to the business sector, rather than to the public one.<br /><br /><br />This process is reinforced by the shift in tax burden of 3 per cent of GDP. In this context, there is no understanding Edward Hugh’s remark that “… we have seen little in the way of noticeable impact on either employment or on Hungarian exports”. These measures have entered into force only recently (for a few weeks) so it is not reasonable to expect spectacular changes in export statistics applying to the present period yet to be published. That said labour cost cut is the highest in the lower income bracket while it is important for average wage as well. Tax wedge on average wage and marginal tax wedge will go down by 9 per cent and 20 per cent, respectively, relative to the previous year. As a result, changing tax legislation may cause significant improvement in not only labour cost but also in labour efficiency to entail increasingly better international competitiveness and position heading for export markets. As is seen from the figures below, independent analysts’ views underline this improved situation and positions of Hungary.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDSf98nkcz8mFiIdQguuL12_HABK9HGtNfiqy1RKRK8ToazxerM7LjWO01jpP4rwsp0UO8v92tl5qeK2YVSn7YhYkFdXES6ayHcV3F1w35-XJsNZ2YI_sdmyP5A4fwsRpugJZXyA/s1600-h/Hungary+Three.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 202px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDSf98nkcz8mFiIdQguuL12_HABK9HGtNfiqy1RKRK8ToazxerM7LjWO01jpP4rwsp0UO8v92tl5qeK2YVSn7YhYkFdXES6ayHcV3F1w35-XJsNZ2YI_sdmyP5A4fwsRpugJZXyA/s400/Hungary+Three.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434044999798460658" /></a><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1OKs9UwiZZkzTM9W9UYUgy99GoxBU7bu4l9O6Smb0S5NLpUPUSZWumaigA2jEL6QsQKqo3Yfgw82UC6Us4yn8JISAohOqul0t6sAxR_d0916Jkghr14DrCHd3N6epbLIZpRV3Uw/s1600-h/Hungary+Four.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 197px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1OKs9UwiZZkzTM9W9UYUgy99GoxBU7bu4l9O6Smb0S5NLpUPUSZWumaigA2jEL6QsQKqo3Yfgw82UC6Us4yn8JISAohOqul0t6sAxR_d0916Jkghr14DrCHd3N6epbLIZpRV3Uw/s400/Hungary+Four.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434045296468686402" /></a><br /><br />Based on the most conservative estimates, it is slowly expected that growth outlook in Hungary’s export markets improve putting the country on a more stable and sustainable course of growth than could be hoped on the basis of domestic consumption artificially boosted through further indebtedness both of the public sector already strongly indebted and of the private sector still more strongly indebted. <br /><br />Revision of 2010 forecasts does not reckon with higher domestic consumption from the former projections. We do not expect, in contrast with Edward Hugh’s allegation, economic growth. In our view, recession of 0.3 per cent could be achieved at export growth of 5.5 per cent. Since Hungary managed to achieve export growth at a higher rate than demand for imports grew in the export markets, the shift in tax burden, lower labour cost and higher labour efficiency, e.g. improving competitiveness suggest that the forecast below is reasonable or even much more careful than many projections given by analysts.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDnxYu2idKX6ahxaOm1lHV7h5QuD9_I4UQLZvEsuSTkQ_RuiATbiURoLxP76xHoxy037IIwBtTXueGQpGO-9JOBRwnW3zFSkR2CJuYPTKcHoHpZqKiWNpwSDCYpTMFgnGSE7A7rQ/s1600-h/Hungary+five.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 228px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjDnxYu2idKX6ahxaOm1lHV7h5QuD9_I4UQLZvEsuSTkQ_RuiATbiURoLxP76xHoxy037IIwBtTXueGQpGO-9JOBRwnW3zFSkR2CJuYPTKcHoHpZqKiWNpwSDCYpTMFgnGSE7A7rQ/s400/Hungary+five.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434045846728862306" /></a><br /><br />Critics over public debt are in sharp contrast with Edward Hugh’s remarks criticising domestic consumption drop. In particular, the lack of coherence seems on such an economic analysis that would, at one time, require artificial boost on the domestic consumption and a decreasing government debt. Public debt may be lowered below 60 per cent relative to GDP by 2015, due particularly to the fiscal consolidation underway while peaking undoubtedly at around 79 per cent in 2010. However, for the sake of decency, it must be said that 3 per cent of public debt makes only a part of debt in gross since it increases FX reserves from the IMF package. <br /><br />Also, it should be noted that average public debt relative to GDP in the euro zone will make 84 per cent at the same time. That said there is not much criticism to make over the ruling government moves, especially in relation to public debt since the measures taken in the recent past were as good as only suitable for pushing down the debt level. It is interesting that Edward Hugh’s analysis refers to Eurostat forecasts (autumn of 2009) in relation to fiscal deficit where the European Commission now admitted to have assessed Hungarian fiscal outlook with too much criticism. That is, while they had first found that government deficit would make 4.1 per cent of GDP for 2009, now they see it below 3.9 per cent as originally set out.<br /><br />Partly with reference to Mark Pittaway, Edward Hugh highlighted external debt as Hungary‘s most pressing problem, somewhat misunderstanding the economic history after the regime change in 1989, and implying that public debt had kept the Hungarian economic growth trapped all the way unlike other countries in the region with better debt figures at the time of regime change. However, this analysis does not consider the economic policy achievements in the second half of the 90s or the fact that public debt has resumed to seem growing since 2001 while private sector indebtedness increased importantly from 2006 on.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEhasZODmcmHARl3-vVerjZFRjHyamAZ3wtx0y-2sIwnZbzh5S-BHrhG71SG32dCp44UvhWhx9_a0c12sLFR3VhhWWRYT3uJBQ-_RSv36KA3poFgSV1f3mepy4crh5MeX6BBEn7Q/s1600-h/Hungary+Six.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 208px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEhasZODmcmHARl3-vVerjZFRjHyamAZ3wtx0y-2sIwnZbzh5S-BHrhG71SG32dCp44UvhWhx9_a0c12sLFR3VhhWWRYT3uJBQ-_RSv36KA3poFgSV1f3mepy4crh5MeX6BBEn7Q/s400/Hungary+Six.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434046239793463250" /></a><br /><br />If this is really supposed to be the most worrying problem of the domestic business environment, then it should be considered that definitely positive processes were shown on the country’s external debt in the recent months. We saw in 2009 that external financing capacity of Hungary could be positive amid a slightly negative balance of payments as a permanent feature for the coming years since the difference between the balance of payments and financing capacity results from EU capital transfers that may increase further in the years ahead. As a result of these processes, Hungary’s external indebtedness may continuously plunge. Therefore, the package of measures placing emphasis on domestic financial equilibrium and competitiveness in export markets due to which the ratio of imports to exports significantly improved, may offer a solution to external indebtedness as most pressing problem as well.<br /><br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihihzTY6GVHTI-Be4Kb0qEf_r4iuDxq-oE9HL-NF5M5yeKE98etSnBlLE4bxkYStnTOOSlH3hiBnbS9Ln2eQi8zYKnaYG-sMCKZDRQzXQ2bzF5SNbc2maf3HLj_LRUUXCjlUdSzA/s1600-h/Hungary+Seven.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 219px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEihihzTY6GVHTI-Be4Kb0qEf_r4iuDxq-oE9HL-NF5M5yeKE98etSnBlLE4bxkYStnTOOSlH3hiBnbS9Ln2eQi8zYKnaYG-sMCKZDRQzXQ2bzF5SNbc2maf3HLj_LRUUXCjlUdSzA/s400/Hungary+Seven.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5434046665295260226" /></a><br /><br />Also, measures taken in the recent past allowed for Hungary to restore market confidence and do without drawing on IMF loans. It is interesting that Edward Hugh cites separately my statement that “We don’t need IMF money any more and my expectation is that since Hungary is targeting the same track for the future, we won’t need financial help”. This comprises no novelty, however, for those being aware of financing plans of the Hungarian public sector. The country has not drawn down instalments due from the International Monetary Fund since September 2009.<br /><br /> Also, it is well-known that the Government wished to maintain co-operation with the IMF even in this form. What is more, the Parliamentary opposition made statements on similar plans in the recent past. There is no ground for the assumption that the country would deviate from the path of structural reforms, and that the market-based financing would endanger the structural balance of government budget. In this respect, drawing a parallel to Greek political declarations cited does not consider the – not so insignificant - fact that the Hungarian statement was made on the stable market financing after a stabilisation programme and as a result, beside an improving structural balance while Greece, in contrast, did so after a significant deterioration of its fiscal balance.<br /><br />Based on the foregoing, it could well be a matter of mistake or misunderstanding that this analysis found Hungary’s path similar to Greece’s in terms of economic and budgetary processes of 2009. However, it must be a warning to Hungary since it shows that unchanged preconceptions, perceptions and prejudices could imply the risk of misunderstanding even despite huge fiscal restructuring with the greatest political sacrifices.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-43450041577622677822010-01-21T14:07:00.003+01:002010-01-21T16:56:47.279+01:00Hungary Isn't Another Greece........Now Is It?I couldn't help being struck earlier this week by the following statement in an interview <a href="http://www.ft.com/cms/s/0/a73eb1ce-03a1-11df-a601-00144feabdc0.html"> the Financial Times had with Hungarian Finance Minister, Peter Oszkó</a>:<br /><blockquote>"Structural reforms of the pension and social welfare systems, plus a rebalancing of the tax system, should allow the government to report a 3.9 per cent budget deficit in 2009, on a par with the preceding year and in line with IMF requirements".</blockquote>"Structural reforms", I asked myself, "exactly which structural reforms are we talking about here?" Certainly the EU Commission and the OECD have been pounding away at the Hungarian authorities on the pressing need for major changes in the health and pension systems (these areas - and the way they are rising as the population ages - are, after all, the underlying cause of the structural deficit in the Hungarian budget). In fact it seems to me that the FT is merely re-iterating here Peter Oszko's own claim that the government's austerity measures are working (and no matter how many times you repeat something, it doesn't make it true).<br /><br />As I have argued <a href="http://hungaryeconomywatch.blogspot.com/2009/12/hungarys-economic-correction-still.html">time</a> and <a href="http://hungaryeconomywatch.blogspot.com/2009/09/as-hungarys-correction-heads-for-dead.html">time</a> (and <a href="http://hungaryeconomywatch.blogspot.com/2009/07/hungary-struggels-to-apply-its-own.html">time</a>) again, major doubts remain about whether the recent "austerity" measures (whether we are talking about the post June 2006 package, or the 2009 one) have really done anything substantial to restore long term competitiveness to the Hungarian economy, since the only measures which could come near to being called "structural reforms" which have been implemented to date are the withdrawal of a 13th month pension payment together with cuts in the maternity leave system (and these are not really "reforms" at all, but deficit reducing measures). The rebalancing of the tax system the FT refers to is the shift from payroll and income to indirect taxes, which could make labour cheaper to employ, but since the reduction is countebalanced by an increase in consumption tax (which weakens domestic demand) to date the only visible consequence has been a sharp fall in retail sales, while we have seen little in the way of noticeable impact on either employment or on Hungarian exports.<br /><br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXvgNh6AdpDx95pSeJaMtpLVxJ9BobiXDS7M9ymyQMzEDdBMa3l8J-Im8-Y5qoAXjqa4nmFROlPecb0K7X5WfI6nSIJ0HF98nZkfBW1BcujJjNpEUMz4WdDfyBFiGC1TXsijPG/s1600-h/Total+Employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5429091294915306194" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXvgNh6AdpDx95pSeJaMtpLVxJ9BobiXDS7M9ymyQMzEDdBMa3l8J-Im8-Y5qoAXjqa4nmFROlPecb0K7X5WfI6nSIJ0HF98nZkfBW1BcujJjNpEUMz4WdDfyBFiGC1TXsijPG/s400/Total+Employment.png" /></a><br /><br />Indeed the situation is rather worse than the above chart suggests, since the anti crisis measures have lead to a sharp increase in public employment.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjD4pGNtBK2nuxrRAO-Fau8RtoEnmuRKWlw20eYCFathWAvDL0qeSCmk7qI81x2FNpjx0apQsk1CVo55iC4t9r5kBTTyLjQSBdWk8DqxzedjxYf2EzlgJqeUpfeAC9OrYCibw4Z/s1600-h/Hungary+public+sector+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5429091831319746002" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjD4pGNtBK2nuxrRAO-Fau8RtoEnmuRKWlw20eYCFathWAvDL0qeSCmk7qI81x2FNpjx0apQsk1CVo55iC4t9r5kBTTyLjQSBdWk8DqxzedjxYf2EzlgJqeUpfeAC9OrYCibw4Z/s400/Hungary+public+sector+employment.png" /></a><br /><br />while private sector employment has fallen quite sharply.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-llz30foTeVSyPHoiOL9ZnBbzgiJI0EV3du38NAlN9eUEuY84xLweu6EPeOreBD03do-c9iBFzKJtKiapC3y9ZU8mXOyKbu1lsCYV3YFGrq3kja0FDkfNFu_XyXQL-SDJoRFp/s1600-h/hungary+private+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5429092225283192274" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-llz30foTeVSyPHoiOL9ZnBbzgiJI0EV3du38NAlN9eUEuY84xLweu6EPeOreBD03do-c9iBFzKJtKiapC3y9ZU8mXOyKbu1lsCYV3YFGrq3kja0FDkfNFu_XyXQL-SDJoRFp/s400/hungary+private+employment.png" /></a><br /><br />Peter Ozsko has also been appearing in the press in recent days to inform us that Hungarian 2010 gross domestic product numbers could be positively revised when compared with an earlier government forecast for a 0.6 percent fall. His reasoning - as put to Reuters - is that "export markets will perform better so there is a better outlook for the country." In fact <a href="http://www.reuters.com/article/idUSWEA195420091119">what he said</a> was that he expected the country to return to quarter-on-quarter growth in either the second quarter or third quarter of next year - a possibility that is certainly not excluded. What he did not say - although some newspapers seem to have implied this - was that annual growth would be positive. "That does not mean growth, but at most a smaller contraction," <a href="http://www.budapesttimes.hu/content/view/13778/159/">the finance ministry told Reuters later</a>, in order to clarify the reported comments. </p><br /><p>The correction to the earlier optimistic interpretation seems totally warranted, since the Organisation for Economic Co-operation and Development currently expect eurozone real final domestic demand to stagnate in 2010, with the Germany economy being forecast to grow by only 0.2 per cent, so it is hard to see the export market in the country that is Hungary's main customer giving that much-needed lift to Hungarian exports.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgICdN7r0kStLIAG3xh64OR0WjsRHgncTdWRQPZaPR74_7rctfHJcm_i0MX3CkWX0qgPGkRjdU-VMsVU305EYf2Ey3wY1VSe6rqXEOEN26zNm9cWx3tH42t-mXR3RsdpSuPKtJk/s1600-h/hungary+exports+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 222px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5429179528429354162" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgICdN7r0kStLIAG3xh64OR0WjsRHgncTdWRQPZaPR74_7rctfHJcm_i0MX3CkWX0qgPGkRjdU-VMsVU305EYf2Ey3wY1VSe6rqXEOEN26zNm9cWx3tH42t-mXR3RsdpSuPKtJk/s400/hungary+exports+two.png" /></a><br /><br />But even beside this point, it is hard to see any forseeable increase in exports making up for the drop in domestic demand. In the first place Hungary has badly lost international competitiveness in recent years.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJRoqwAPDC8U1tMjHcp-QaFVzXPbTNLX4K2z2PLQWI9_mChuYnV6ustIXa-O6zZwgjaL5xMi2VjR9lANhiCBKLI_8iJz2ovGunlTTWuRhxJV-dRoGy3bcr4tP59vbl7bL03m_7/s1600-h/Hungary+REER.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5429180268377133266" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJRoqwAPDC8U1tMjHcp-QaFVzXPbTNLX4K2z2PLQWI9_mChuYnV6ustIXa-O6zZwgjaL5xMi2VjR9lANhiCBKLI_8iJz2ovGunlTTWuRhxJV-dRoGy3bcr4tP59vbl7bL03m_7/s400/Hungary+REER.png" /></a><br /><br />And in the second both the Forint and consumer price inflation have been rising of late, only adding to these competitiveness problems. The best guess is that the Hungarian economy contracted by around 7% in 2009, yet despite this Hungarian consumer prices continued to rise, and are now up a whopping 72% on the 2000 level, yet the Forint has only fallen around 8% over the same period.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ27basczwATSxMr_8I731-8AcbT0ErDydMorRhUFlbeQh-q8m0pH4-iWguxyQMxP30BvrFyUWttzg5HaW7-AJcXTzmR-6Q73JZWgIcnqbWdbcuePPCgqa8R9t83B8xQfbN4dv/s1600-h/Ten+year+forint+chart.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 248px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5428440654955708690" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ27basczwATSxMr_8I731-8AcbT0ErDydMorRhUFlbeQh-q8m0pH4-iWguxyQMxP30BvrFyUWttzg5HaW7-AJcXTzmR-6Q73JZWgIcnqbWdbcuePPCgqa8R9t83B8xQfbN4dv/s400/Ten+year+forint+chart.png" /></a><br /><br />Something seems badly out of line in Hungarian policy. As Mark Pittaway, Senior Lecturer in European Studies at the UK Open University points out, the difficult issue for Hungarian economic management has always been what to do about the external debt. </p><br /><blockquote>The key is public debt, and the decision to which every Hungarian government has held to, not to ask for any re-scheduling and to insist on its precise repayment. This has forced the government to pursue consistently policies based on overly high interest rates to attract capital into the country - and this has been consistently the case since 1988-9.<br /><br />During the transition period this had two effects - to deny domestic businesses of credit, and to make it difficult for them to export given that the consequence was an overly strong Forint. In addition, the first post-1990 government was among the first to fully implement its bankruptcy law (earlier than Poland, and way earlier than either the Czech Republic and Slovenia) in 1991, in the depths of the first recession. The real economy was sacrificed on the altar of the financial stability of the state given the decisions made about public debt (remember the Czech debt was small, Slovenia de-facto defaulted on its share of the Yugoslav debt and eventually renegotiated it, and Poland gained partial forgiveness).</blockquote><br /><br />Hungarian gross government debt is now expected by the EU Commission to hit over 80% of GDP in 2011, but this is hardly the issue, since unless growth and competitiveness can be restored to the economy, the ageing and shrinking working age population problem will lead to what Moodys recently called (in the Greek and Portuguese cases) a slow death.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhsRqoIdc_s9mWy8XcuKMUp4rpm9IblQiTGvgg9JrU5gO3ZwfYG54iqREj60dWaTx6jN5sMdblsSVqCB1_Mxug_X0PlSKa73DmBffsaB4IJJQwRYKxSSr55oXAkImHJiIged-vU/s1600-h/Hungary+gross+government+debt.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5429188801393399090" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhsRqoIdc_s9mWy8XcuKMUp4rpm9IblQiTGvgg9JrU5gO3ZwfYG54iqREj60dWaTx6jN5sMdblsSVqCB1_Mxug_X0PlSKa73DmBffsaB4IJJQwRYKxSSr55oXAkImHJiIged-vU/s400/Hungary+gross+government+debt.png" /></a><br /><br />And to the large government debt must now be added the indebtedness of households in Swiss Francs, which simply reinforces an "unrealistically" high forint policy, as Mark says, sacrificing the future of the real economy to the needs of maintaining financial stability.<br /><br />And during the term of the present government the situation has only worsened, since last week the Hungarian Central Statistical Office announced that the consumer price index rose 5.6% year-on-year in December (see chart above), up from the 5.2% growth in the previous month, and well above the average consumer price inflation for 2009 of 4.2%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPx7_pM748_STQYzF6FeAwvxznON5U9ezf9IuEEmglTBvHSNN6yEgo8I9UP9M-wWIpZHzU5OuL0nftgwwHEGRQmgnsG8u57pq7Ot_u0fteC8Xtd6shzw5Nha6BaG9uHPNjV0Vr/s1600-h/hungary+CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5428447940433506242" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPx7_pM748_STQYzF6FeAwvxznON5U9ezf9IuEEmglTBvHSNN6yEgo8I9UP9M-wWIpZHzU5OuL0nftgwwHEGRQmgnsG8u57pq7Ot_u0fteC8Xtd6shzw5Nha6BaG9uHPNjV0Vr/s400/hungary+CPI.png" /></a><br /><br /><br />And the culprit isn't hard to spot, since the government raised the VAT rate in June by 5%. The impact on retail sales was not that hard to imagine either - they were down an annual 7.5% in October, and by a seasonally adjusted 0.6% on September.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh43KXgVgCPf-dJHZ9Vr9fHYOlMS_3tJvHiBoQB5sd6suNHmsxo6wPwRJKKCX048j2mipU5g7z3Xkwm_qPbBIglsIySwnldv7qB8l9Yrb7VlEZn-BKasBOX-tmcYGAzt62Mv8oP/s1600-h/hungary+retail+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 232px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5428443260417978626" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh43KXgVgCPf-dJHZ9Vr9fHYOlMS_3tJvHiBoQB5sd6suNHmsxo6wPwRJKKCX048j2mipU5g7z3Xkwm_qPbBIglsIySwnldv7qB8l9Yrb7VlEZn-BKasBOX-tmcYGAzt62Mv8oP/s400/hungary+retail+two.png" /></a><br /><br /><strong>Elections Loom In Hungary</strong><br /><br />And on top of all these issues, Hungary is shortly to have elections, a situation which is leading to all sorts of speculation about what might happen to the deficit. According to a recent research report from HSBC analyst Kubilay Ozturk, there is a clear risk that Hungary's budget deficit could deviate from the current fiscal path agreed with the International Monetary Fund (IMF), if - as seems likely - opposition party Fidesz assumes power later this year. While this year's budget deficit may well come in on target, economists close to the opposition party have been warning that the 2010 deficit could balloon again to 7% of GDP. The ins-and-outs of the argument are complex (since the figure is based on incorporating debt accumulated in state owned entities), but clearly the IMF would not be happy at such a development. But then Peter Ozsko argues <a href="http://www.portfolio.hu/en/cikkek.tdp?h=16&k=2&i=19313">Hungary may well no longer need the IMF money</a> - which is only well and good, since the lending agency <a href="http://www.portfolio.hu/en/cikkek.tdp?k=2&i=19337">have specifically warned against declaring this level of deficit</a>, and may be hard to convince if the deficit figure starts to head north again.<br /><br /><blockquote>Today, the IMF has warned Hungary again that it would not tolerate the country’s budget deficit swelled to 7.0% of GDP this year, a level envisaged by the opposition party Fidesz, the likely winner of this year's general elections. The government targets a budget shortfall of 3.8% of GDP, under its IMF-European Union credit line. In an interview with Dow Jones, IMF Hungary representative Iryna Ivaschenko noted that "the definitions [of government debt]are not always comparable, so you should not compare the 3.8% [of GDP] with the 7%. You cannot say they are not right, but it is comparing apples and oranges." "But if you do take, consistent with our definition, the deficit all the way to 7% [of GDP], such policies can clearly not be tolerated, because that would undermine fiscal sustainability and be detrimental for market confidence," Ivaschenko added.</blockquote><br />But what if Fidesz simply didn't want to accept the unpopularity for a policy which may not be working, and a further fiscal squeeze? The political logic of coming straight out with a "they have overspent" type of argument could be compelling, although it should be remembered what just happened to the last government who did this (in Greece), or what happened in Hungary in June 2006, after the then Prime Minister Ferenc Gyurcsany's "<a href="http://news.bbc.co.uk/2/hi/europe/5359546.stm">lies morning noon and night</a>" speech.<br /><br /><blockquote>"I know that this is easy for me to say. I know. Do not keep bringing it up against me. But this is the only reason it is worth doing it. I almost perished because I had to pretend for 18 months that we were governing. Instead, we lied morning, noon and night. I do not want to carry on with this".</blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7Be0-DI438ArIec0fqhJ6J9gsXkMF-8OfMcK15ufz89dii0D7rNcE87hyh4MuDbMQLFahjwpqThulBDox7xPHKAfofUyYDLA5GzqLiYyJauw510MNtXsLbEw2E1msoDFSKK4j/s1600-h/Hungary+fiscal+deficits.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 228px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg7Be0-DI438ArIec0fqhJ6J9gsXkMF-8OfMcK15ufz89dii0D7rNcE87hyh4MuDbMQLFahjwpqThulBDox7xPHKAfofUyYDLA5GzqLiYyJauw510MNtXsLbEw2E1msoDFSKK4j/s400/Hungary+fiscal+deficits.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5429198827992261474" /></a><br /><br />That time the country had to admit to a fiscal deficit which was way beyond what they had been talking about previously, and the country then enetered a financial crisis which has now lasted three and a half years. Of course, this time nothing so dramatic will have been happening (there has been an IMF programme in place), but this does not mean problems may not arise, since financial markets are, after all, extremely nervous. And certainly analysts are anticipating upward movement in the 2010 deficit level. <a href="http://www.portfolio.hu/en/cikkek.tdp?k=2&i=19346">As Portfolio Hungary notes</a>: "The market is now more convinced than a month ago that Hungary will not meet its budget deficit target in 2010, the consensus estimate of analysts showed in a Reuters poll on Thursday. The median forecast for Hungary’s 2010 budget deficit came to 4.4% of GDP, up from 4.1% a month ago". <br /><br /><br /><strong>Greece Serves As the Example</strong><br /><br /><blockquote>"We don’t need IMF money any more and my expectation is that since Hungary is targeting the same track for the future, we won’t need financial help." <br />Peter Oszkó, Hungarian Finance Minister<br /><br />'We are not expecting anyone to come to our rescue. Greece has not asked for it, nor is it expecting anything of that sort....We will be able to satisfy our borrowing requirements in international markets in the next weeks and months, according to the schedule we have,' <br />George Papaconstantinou, Greek Finance Minister</blockquote><br /><br /><br />So if Hungary does, as seems quite possible, decide not to take up more loans from the IMF, where exactly does that leave the country? Who will have the leverage to ensure the structural reforms which evidently are still needed. Evidently Greece can give us some indication, since while at the present time it is not totally clear whether or not the Mediterranean country will finally have to go the IMF itself, Europe's institutional structure is changing rapidly as a result of the challenge which Greek statistics and debt have presented for all the other EU countries. Only this week Europe's Finance Ministers warned Greece that it had to step up its efforts to tackle a fiscal crisis that threatens to spread to other countries across the region. <br /><br />Indeed the bulk of the discussion an the finance ministers meeting was occupied up with their concerns over Greece, since despite being in the eurozone, the country's credit ratings have plunged following the revelation that its government deficit estimates for 2009 were grossly understated.<br /><br />Greece has now presented the commission with a new plan aimed at cutting its deficit from the currently estimated 12.7 per cent of gross domestic product to below the EU's threshold of 3 per cent of GDP by the end of 2012. As a result of that report, the commission will propose an action plan in February and will 'lay down certain dates from June onwards in order to launch a discussion at least three times during the rest of the year on how the programme and reforms are going to be implemented,' according to Commissioner Almunia. That is, progress in deficit correction procedures will now be carefully monitored. As many observers have commented, this is the closest the EU has so far come to putting its hand directly on the economic policy of a eurozone member. 'The Greek programme concerns Greece firstly, but also concerns all the eurozone,' Luxembourg Finance Minister Jean Claude Juncker said on leaving the meeting.<br /><br />The Credit Rating agency Moody's Investors Service maintained its negative outlook on Greece following the announcement of country's stability and growth program saying that while the Greek government's plan to restore its fiscal credibility, reform its tax system and combat tax evasion is relatively well designed, at least for the short term, uncertainty remains about the Greek government's ability to implement the program. That is to say, it is action not words which now matter in the financial markets, and both Greek and Hungarian governments would do well to remember this.<br /><br /><strong>Where Does Greece Go From Here?</strong><br /><br />The next step is for the EU Council to set a deadline for when the Greek government must achieve its goals. This deadline is likely to be 2012, simply because the Greek government itself has set this target. All the relevant recommendations will finally be endorsed by euro zone finance ministers at their next meeting on Feb. 15-16 when they formally give notice to Greece to reduce the deficit, marking the last stage of the procedure before sanctions of various kinds that are provided for under the EU Stability and Growth Pact.<br /><br />Greece will then have four months, so until June, to act on the recommendations for policy action endorsed by the ministers. If it acts in a way which the Commission consider to be consistent with the undertakings given, the excessive deficit procedure will be then held in abeyance, until Greece reaches its target of a deficit below 3 percent. If, at the end of the three year period the Commission believes that the improvement is sustainable, it will ask the ministers to end the excessive deficit procedure.<br /><br />If on the other hand the Commission decides in June that Greece has not complied (unlikely), the Finance Ministers can then consider imposing sanctions. Since such measures should be imposed no later than 16 months after the decision that Greece had an excessive deficit, which was taken on April 27, 2009, the time scale would imply August 2010.<br /><br /><br /><br />The sanctions envisaged in EU agreements first take the form of a non-interest-bearing deposit with the European Commission and comprises:<br /><br />* a fixed component equal to 0.2 percent of GDP;<br /><br />* a variable component equal to one tenth of the difference between the deficit as a percentage of GDP in the year in which the deficit was deemed to be excessive and the reference value of 3 percent of GDP.<br /><br />The deposit cannot, however, be higher than 0.5 percent of GDP per year. If Greece were to find itself at that stage, this is how much it would have to pay.<br /><br />Sanctions could also include:<br /><br />- stopping the EU's cohesion funds to Greece.<br /><br />- stopping credit from the European Investment Bank.<br /><br />- asking Greece to issue additional information, as specified by the ministers, before issuing bonds and securities.<br /><br />If Greece continued to ignore the recommendations, ministers could in 2011 intensify the sanctions by requiring an additional deposit equal to one tenth of the difference between the deficit as a percentage of GDP in the preceding year and the reference value of 3 percent of GDP.<br /><br />If, after two years, the deficit still remains above 3 percent, the deposit is converted into a fine. If the deficit falls below 3 percent, the deposit is returned.<br /><br />The interest on the deposits lodged with the Commission and the yield from any fines is distributed among EU countries without an excessive deficit, in proportion to their share of the total gross national product of those eligible.<br /><br /><strong>Commission Powers Now To Extend Well Beyond Monitoring Deficits</strong><br /><br />Luxembourg Finance Minister Jean-Claude Juncker also announced that there was about to be an overhaul of how the 16 nations using the euro coordinate their economies, with countries being be formally warned if they are running much higher inflation, average wage rises or current account deficits than their neighbors. Juncker said Finance Ministers are about to get involved into a range of far wider issues on how the economy is run, including government policies on structural reforms - such as making labour markets more flexible.<br /><br />From next month, countries will probably be warned by the European Commission if their countries differ too much from the rest of the euro zone on broad policy guidelines or on specific areas such as inflation, wages or current account deficit. That warning would not be backed by any penalty.<br /><br /><blockquote>"We need to broaden surveillance in the euro area," Juncker said, adding that closer monitoring should also extend to European countries whose currencies are linked to the euro and who hope to join the currency zone, such as Estonia and Latvia.</blockquote><br /><br />So, Hungarian politicians be warned- You are not Greece right now, but you could so very easily end up where that poor, unfortunate country finds itself, and especially so if you make wildly optimistic growth scenarios, and debt to GDP forecasts, and doubly so if you think that coming out of the loving arms of the IMF will leave you free to go about your business as you see fit. The world around you is changing, and you need to get ready to adapt to those changes.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-63552095458008777882009-12-28T18:53:00.001+01:002009-12-28T23:34:31.820+01:00Hungary's Economic Correction Still Fails To Convince<blockquote>"Hungary’s potential economic growth should be 2 percentage points over the corresponding EU figure in order to ensure convergence".<br />Prime Minister Gordon Bajnai, speaking in London in October </blockquote>Two contrasting pieces of news about Hungary's economic plight have caught my eye over the last week. In the first place, and in an evident sign of the times, retail sales reportedly fell at their fastest annual rate in over ten years in October, whilst secondly, and more surprisingly, I learnt that Hungary’s economic-sentiment index rose to its highest level since the October last year, when the gale force wind sent by the fall of Lehman Brothers engulfed the country. How can this be, I thought? These two pieces of information would, at least on the surface, seem to be pretty contractictory, with the former suggesting the deepest recession in living memory is getting even worse, while the latter seems to add backing to government claims that the worst is now behind them.<br /><br />In fact Hungary’s retail sales dropped 0.6% month on month in October, just slightly more than they did in September (-0.5%). In fact Hungary’s retail sales have risen only twice in monthly terms over the past 12 months, and one of these months was June (+0.2%) when consumer anticipation of an impending 5% VAT hike drove large crowds into furniture and household electronics stores. Not unexpectedly this was followed by the July numbers, which saw the largest monthly drop in a decade (-2.3%).<br /><br /><br />But a glance at the chart below should also reveal that the decline in retail sales is now long term, and not just a product of the recent crisis. Sales peaked in mid 2006, and have since been falling steadily, and while the year-on-year drop was as large as 7.5% in October - another decade long negative record - in fact they are now down nearly 12% from the August 2006 peak, and there are no strong grounds for believing that this trend will now reverse. And the reasons are obvious since in addition to shrinking personal income levels, and a tighter credit environment credit, Hungary's ageing and declining population is also increasingly acting as a damper on household consumption.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidnKm7tm0uB6Lpi5HG9LmCNgKxlAhIJ46NXIDw5C5sKosMkAsJvR-UT95qDPA8HLVioOYBtaa-O-qHCW5NDIMxdH5zcISOcSgKaoTa-i6adPWMvtEHwrXbIoMb4CE7ELbRKISU/s1600-h/hungary+retail+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 232px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418870002665822866" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidnKm7tm0uB6Lpi5HG9LmCNgKxlAhIJ46NXIDw5C5sKosMkAsJvR-UT95qDPA8HLVioOYBtaa-O-qHCW5NDIMxdH5zcISOcSgKaoTa-i6adPWMvtEHwrXbIoMb4CE7ELbRKISU/s400/hungary+retail+two.png" /></a><br />In fact the situation with vehicle and auto part sales (which are not included in Eurostat retail sales) is even worse than the above data indicate, since given that Hungary is in the midst of a fiscal crisis, there is no room for a cash for clunkers type programme, and sales volume fell an annual 40.1% in the ten months to October, with the decline in October alone being 50.5% (following a 52.3% annual drop in September).<br /><br />And there is worse news to come for the car sector, since even though the government hiked both the excise tax on petrol and the rate of VAT to 25% from 20% in July, sending fuel prices up like never before, yet another excise tax increase is now on its way. The excise tax on fuel is set to go up as of 1 January 2010 driving the price of gasoline and diesel up by roughly HUF 11 and HUF 7 a litre, respectively. As VAT is levied also on the excise tax, the VAT burden will also increase even if the rate itself won't change.<br /><br /><strong>Confidence Rises</strong><br /><br />On the other hand according to the GKI sentiment index, confidence is now back at its highest level since October last year, when the credit crisis engulfed the country. The rise follows widely publicised government forecasts that the economy is now heading out of its worst recession in 18 years. The GKI sentiment index rose to minus 25.4 in December from minus 27.5 in November and a record-low of minus 46.2 in April. Business confidence rose to minus 16.7 from minus 18.9 and consumer confidence increased to minus 50.1 from minus 51.9.<br /><br />According to Finance Secretary of State Tamas Katona Hungary’s economic decline bottomed in the third quarter of 2009 and the rate of contraction should ease in the final three months of the year. Katona suggested the economy may shrink 5 percent in the fourth quarter after contracting 7.1 percent in July-September. The economy is likely to contract an annual 6.7 percent this year and 0.6 percent next year before a return to growth in 2011, according to government forecasts (the EU Commission forecast a 6.5% decline in 2009, and a 0.5% one in 2010, while the IMF are predicting a 6.7% drop this year followed by a 0.9% drop next year). In the short term therefore, all are agreed that the economy will keep contracting, even if the possibility of a quarter of positive growth (which would technically mean exiting recession as currently defined) is not excluded.<br /><br />The real issue is thus not 2010, but the extent of any rebound in 2010. It is on this rebound, and the level of inflation associated with it, that the future Hungarian fiscal deficit numbers, and the even more critical debt to GDP numbers, sensitively depend. The EU Commission currently forecasts 3.1% growth in 2011, while the Hungarian Central Bank is forecasting 3.4% growth in 2011 (see chart below).<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXegHZY5v3Yp8WMZvv8YWE0UtZ3s8p-lK1EaU0EF97crmRC6Nf1nmWd1RoOySuln3Ge06p6h7PM_UWxE-8a-TZNxpJrmNE0iAn5oS8U05Cmno7x0xMnQ7rSaUsrwvMs4o0wZCR/s1600-h/bank+of+Hungary+GDP+forecast.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 264px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420217663096376914" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXegHZY5v3Yp8WMZvv8YWE0UtZ3s8p-lK1EaU0EF97crmRC6Nf1nmWd1RoOySuln3Ge06p6h7PM_UWxE-8a-TZNxpJrmNE0iAn5oS8U05Cmno7x0xMnQ7rSaUsrwvMs4o0wZCR/s400/bank+of+Hungary+GDP+forecast.png" /></a><br /><br />The question is, are these expectations for such a strong rebound in 2011 really realistic, and even more to the point, <a href="http://www.xpatloop.com/news/hungary_pm_bajnai_dreams_about_4_gdp_growth">is there any evidence for Prime Minister Bajnai's claim that a large number of analysts share his governments view that Hungary’s long term GDP trend growth potential is around 4%</a>. Certainly I can say that this analyst doesn't. Even the reasonable and ever moderate Portfolio Hungary were moved to raise an eyebrow at this claim, saying they "read Bajnai’s statement with a measure of surprise, as GDP estimates for Hungary have been typically way below 4%". The most pessimistic forecast they had seen was below 2% (this would certainly be my view, possibly 1% trend growth would be realistic at this stage), and they stated they were unaware of any "serious estimates above the 3% mark". What is so striking (and in my view so unrealistic) about the Bank of Hungary forecast chart above, is that not only the median estimates seem to assume a "V" shaped rebound, even the outer limit, worst case type scenarious are based on the idea of a fairly strong rebound, and almost no consideration is given to the idea that this may not happen, and that the country may be stuck nearer to an "L" shaped non-rebound, where rates of contraction slow, and slow, but growth proves to be surprisingly elusive and hard to come by.<br /><br /><br />These issues are not new, and I have blogged about then before (in this post - <a href="http://hungaryeconomywatch.blogspot.com/2009/05/hungarys-trend-growth.html">Hungary's Trend Growth And Debt Sustainability</a> - about the scenarios offered for debt repayment in a paper by Lajos Deli and Zsuzsa Mosolygó from the National Debt Agency. Despite protests to the contrary, and despite the IMF's argument that "In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility" it is really all about growth, more growth, and only about growth. <blockquote>Non-Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.<br />IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008</blockquote>The simple issue is, if domestic demand is (for demographic reasons) not able to rebound as the IMF (and the signitaries of the very influential Oriens Report "Recovery, A Programme For Economic Revival In Hungary") imagine how is GDP growth going to be strong enough to reduce the weight of debt to GDP?<br /><br />As everyone recognises, if domestic demand remains weak, growth will critically depend on exports, but the export potential of the economy will depend on the pace of recovery elswhere in the EU, and on relative prices as expressed through the value of the HUF, and almost no consideration is given to the possibility that either the HUF is overvalued compared to the need to export or that EU growth may also be weaker and harder to come by than most median forecasts are assuming. <p></p><p>The real question, as ever, is where the ingredients for growth are going to come from. Remember, Hungary's population is now declining steadily.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjemsNiI5GmJuebK-56TQtLedcsfqBYMcl-dxju2GD6H4BqrHmY4XHZTdTLgqYQjdn37zoZ9N4LSt8l-lzs06RwwRAga_cVJHONr23Hg-V15mtybw-o6QHJ2ZQjf7ydeZ1nMaDE/s1600-h/hungary+population.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420224174103877746" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjemsNiI5GmJuebK-56TQtLedcsfqBYMcl-dxju2GD6H4BqrHmY4XHZTdTLgqYQjdn37zoZ9N4LSt8l-lzs06RwwRAga_cVJHONr23Hg-V15mtybw-o6QHJ2ZQjf7ydeZ1nMaDE/s400/hungary+population.png" /></a><br /><br />and ageing<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq5F5EQ4s26Z9sY-pYmPprW-YVQ28VL3lESJhrKXWy0eDErqODWmyouQY8gyXyBXCQXEmcDcQ12gCQ-hi1JG9_aq44PcuSJsZu7j-j3ANKRn1L6yAS1Fo6owR-Ug8ngosoO3Wwaw/s1600-h/hungary+median+age.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5339801643991065634" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq5F5EQ4s26Z9sY-pYmPprW-YVQ28VL3lESJhrKXWy0eDErqODWmyouQY8gyXyBXCQXEmcDcQ12gCQ-hi1JG9_aq44PcuSJsZu7j-j3ANKRn1L6yAS1Fo6owR-Ug8ngosoO3Wwaw/s400/hungary+median+age.png" /></a><br /><br />and the working age population is also irredeemably falling.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs0sOVcCPbOF5oNqdt0g3CTV-ZzjVPvaguNLwUa6zpn3rsjt4NV4BcHJTvSEH6ry1omF-atd027f5eBvSOQD1I9hhjfmBKe_0jMQ53XeYDbD4S_QhfZlwm-S8PgHSTy-zzAazY/s1600-h/Hungary+Working+Age+Population.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 206px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420225441831055330" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjs0sOVcCPbOF5oNqdt0g3CTV-ZzjVPvaguNLwUa6zpn3rsjt4NV4BcHJTvSEH6ry1omF-atd027f5eBvSOQD1I9hhjfmBKe_0jMQ53XeYDbD4S_QhfZlwm-S8PgHSTy-zzAazY/s400/Hungary+Working+Age+Population.png" /></a><br /><br />As I said about the retail sales data above, they have now been falling since mid 2006, so it is hard to believe that we are going to see any significant resurgence (taking retail sales as a proxy for private consumer demand), especially as it seems Hungarian's are not now borrowing to anything like the extent they were two or three years ago (see below).<br /><br /><strong>Where Is The Growth Going To Come From?</strong><br /><br /><blockquote>"Looking at the structure of the Hungarian economy I frankly have difficulty seeing where the growth is going to come from. Without a major devaluation (and even then given international circumstances) Hungary will have problems attracting FDI in even the reduced quanities it has been doing over the last five years. The domestically owned private sector has enormous problems and is tied closely to the level of state spending. The financial sector and business services suffers from international problems and it isn't as if Hungary's largest bank - OTP - doesn't have some fairly serious problems of its own tied up in Ukraine, Bulgaria etc. Agriculture and food processing? Well, perhaps - but that isn't in that great a state either."<br /><br />"It is worth pointing out that except for a brief period at the end of the 1990s when privatization receipts and above trend economic growth eased the situation Hungary has had a long term problem with its external debt going back to 1978 that it has never really escaped from. Successive Hungarian governments have prioritised the precise payment of the debt and have refused to seek rescheduling or restructuring on the grounds that this would damage business confidence. One can actually read the history of economic policy prior to 2000 as being about securing Hungary's public financing needs given this policy choice, to the detriment of the needs of the real economy. I read the relaxation of budgetary discipline after 2000 (and especially post-2002) as being about the interaction of mounting frustration at low living standards among the population with the dynamic of party competition." <p></p><p>"That having been said, if one looks at the long view it is difficult to believe seriously that Hungary's debt burden will ever be paid off. Given that servicing these debts will depress the level of economic growth, I think it really is time that the EU, IMF and the authorities in Budapest swallowed hard and accepted reality - a realistic debt consolidation/restructure that takes in both the public and private sector debt is a fundamental condition of stablizing the situation. This is what no-one wants to recognise."<br />Mark Pithaway, Senior Lecturer in European Studies, UK Open University</p></blockquote><br />Hungary’s third-quarter GDP contracted by 7.1% year on year in the July-September period compared to the 7.5% fall in Q2 .Quarter on quarter the economy contracted by1.8%, the sixth quarter in a row that the economy has shown negative growth. <p></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIMLn03hTEYjsWlOrF6aA5gqJpEG8BbUpoeeeETbHOxL635BP0-JzbfiExG2PpC7ZITcHSCfnjxVJ3UGkuFDRaF8zi8-gcnUHTStq5dBSi4f0F-dOVahqhqTfL3lt0NZs3857g/s1600-h/gdp+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 233px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418876847461025794" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIMLn03hTEYjsWlOrF6aA5gqJpEG8BbUpoeeeETbHOxL635BP0-JzbfiExG2PpC7ZITcHSCfnjxVJ3UGkuFDRaF8zi8-gcnUHTStq5dBSi4f0F-dOVahqhqTfL3lt0NZs3857g/s400/gdp+2.png" /></a><br />Quarter on quarter Hungary's export-driven economy shrank 1.8 percent following a revised 1.9 percent contraction in the second quarter. This was the sixth quarter in a row that GDP growth was negative. The rate of contraction is down considerably on the 2.6% rate of fall seen in the first quarter, but the velocity of contraction is still alarmingly high.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdHHLbbJarEZZgLYLFbwwolqLNYjoC-4FfiiwXAy8mu0VVFMsXBJXfcR6e9I8OCfYLWLvW7kkRX2TZbbB9IyIHrc5k9woGQnzvPJyxAd0ONgs3qiHoDQdJYlD3Ohp3P-9ywsFa/s1600-h/GDP+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 199px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5418877243562969090" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdHHLbbJarEZZgLYLFbwwolqLNYjoC-4FfiiwXAy8mu0VVFMsXBJXfcR6e9I8OCfYLWLvW7kkRX2TZbbB9IyIHrc5k9woGQnzvPJyxAd0ONgs3qiHoDQdJYlD3Ohp3P-9ywsFa/s400/GDP+one.png" /></a><br />In fact domestic demand fell by 13.3% year on year in the third quarter (see chart below), so the fall in GDP would have been much larger if it had not been for the impact of net trade.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzAIWYBics_A4IFj9JUfXd0HEcWeG-qrzyJYUxKL12KlfbI8_Lus6hCbYdNP158oXZVpcEq1XdEpJoHyHA6ShYEB7SaSHkOCZD-7vr1oPvZDgbxBv6X3Ua71zv-vIVoptJcG8i/s1600-h/hungary+domestic+demand.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 221px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420333345628375490" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzAIWYBics_A4IFj9JUfXd0HEcWeG-qrzyJYUxKL12KlfbI8_Lus6hCbYdNP158oXZVpcEq1XdEpJoHyHA6ShYEB7SaSHkOCZD-7vr1oPvZDgbxBv6X3Ua71zv-vIVoptJcG8i/s400/hungary+domestic+demand.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSxx0v02nAZ-FZ4U-00ngGjZ6nOYKIhyphenhyphenlru8SjLr3Ok2BYspZGcu0SMD4nNjxFOpxgjOA0WnidZao79MZHqjji3aZ3AMyCLeGEOL0I1I4EJHJvE89FSOf7zlrUK6OO-OaFMxcr/s1600-h/Hungary+Net+Exports.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420333944921562370" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhSxx0v02nAZ-FZ4U-00ngGjZ6nOYKIhyphenhyphenlru8SjLr3Ok2BYspZGcu0SMD4nNjxFOpxgjOA0WnidZao79MZHqjji3aZ3AMyCLeGEOL0I1I4EJHJvE89FSOf7zlrUK6OO-OaFMxcr/s400/Hungary+Net+Exports.png" /></a><br /><br />Hungary’s export-import gap rose again in October, to 9 percentage points from 5.9ppts in September, after a record of 13.5 ppts in July, which was by far the largest in recent years.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFWqKBg94tOO3rHCE_Td5n4365Y_ba5NfgOmS_eOvpZ3V7U3UAxfUGre8bMpAtIp17S3INU4BDJbuv0LOUl4ONO0XlEP73VHqbLKXOoQkLhw1ZPEitJw1R-9jwFBvDB85EFcjV/s1600-h/Hungary+exports+and+imports.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420334206261673554" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFWqKBg94tOO3rHCE_Td5n4365Y_ba5NfgOmS_eOvpZ3V7U3UAxfUGre8bMpAtIp17S3INU4BDJbuv0LOUl4ONO0XlEP73VHqbLKXOoQkLhw1ZPEitJw1R-9jwFBvDB85EFcjV/s400/Hungary+exports+and+imports.png" /></a><br />This impact, of course, was not caused by a strong recovery in exports, but rather by the fact that imports fell even more than exports (on an annual basis). Basically, GDP when there is a movement in the net trade balance caused by a drop in imports GDP falls more slowly (following a pattern we have already seen in Spain, Greece etc). In fact, for statistical reasons a fall in imports appears as an INCREASE in GDP because the net trade position improves. But unless this drop in imports is accompanied by a significant improvement in the competitiveness of domestic industry (and hence a trade surplus driven by exports) then all you have is economic stagnation and falling living standards, since, for example, house prices will continue to fall, and everyone will feel worse off. Unemployment will obviously also rise, as those involved in the retail sector selling the imports will lose their jobs. People working in the ports for domestic directed external trade trade ditto.<br /><br />This is the whole argument for devaluation in these kind of circumstances (Greece, Spain, Latvia, Hungary etc), since the devaluation not only helps export industries, it also helps the domestic sector by making imports more expensive. Thus, if demand was there, then a fall in imports would be compensated by a rise in domestic supply, and your interpretation of the equation would not hold.<br /><br />The whole problem, however, in the cases of the former current account deficit countries is that the internal demand is now longer there, since it was based on unsustainable borrowing in the first place, borrowing that appeared to be supported by rising property values or state guarantees (in the case of fiscal deficits) as collateral. The property prices are now falling, and the deficits are now being slashed back, and neither are going to rise back again anytime soon and therefore the kind of borrowing we saw before isn’t coming back again anytime soon. So the bottom line is there is a sharp fall in consumption, whatever the headline GDP number says.<br /><br />In fact the causal mechanism is that the absence of capital inflows leads to a drop in consumption, which in turn means there are less imports. But my big point is that the accounting mechanism used to generate the GDP number (making Net Exports a positive input convention) masks to some extent the actual drop in living standards, since Net Exports was previously negative (and hence a drag on GDP), and the drop in domestic consumption and imports simply makes it less negative. </p><p>Of course, there are two ways to make imports less attractive, one is devaluation and the other is structural reform to make the domestic sector more competitive, and that is the Oriens/Bajnai approach, and there is little objection at all to much of what they propose, except that, as we are seeing in one country after another this procedure doesn't act quickly enough to undo the severe distortions that had been produced earlier, but then I doubt, from what they say, that the Oriens signitaries would accept that these distortions were as severe as I argue they are - just look, for example, at the drop in domestic consumtion - 13% - and this after three years of near economic stagnation. Hope against hope.<br /><br /><br />This having been said, exports, and the current account balance have been improving in recent months, although not by a long way fast enough to push the economy back up towards growth. Hungary posted another huge foreign trade surplus of EUR 471 million in October, according to the latest revised numbers released by the Central Statistics Office. October marks the ninth month in a row when Hungary posted a trade surplus in the EUR 320-550 million range.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgseQde_gfguVNxVXwuWluDXZkRgP4BgXRiyaqsLeolf3ybRooZDTh-ov6CXUEjtGNRiwYuTNKogWLKGsf-zkvZUhrSwefe0rmuRJE1ZNHzjHbNzYoQMYm6TxVh4JCWLv_3ErHN/s1600-h/Hungary+trade+deficit.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420335297208659890" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgseQde_gfguVNxVXwuWluDXZkRgP4BgXRiyaqsLeolf3ybRooZDTh-ov6CXUEjtGNRiwYuTNKogWLKGsf-zkvZUhrSwefe0rmuRJE1ZNHzjHbNzYoQMYm6TxVh4JCWLv_3ErHN/s400/Hungary+trade+deficit.png" /></a> Despite this significant improvement in the trade balance the Current Account only just managed to sneak into surplus in the second quarter, largely as a result of the very strong negative balance in the income account, which is a product of the very negative net investment position of the Hungarian economy (ie non Hungarians own a long more of Hungary than Hungarian's own of the rest of the world, and this creates a huge imbalance, and as Mark Pittaway says the bullet will have to be bitten - one way or another - about what to do about this at some point.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghsmyeD8W2tisyjRS9_YSsl8bMDXmxNCVCQz6akVbQYfnqZvRsULytFIw2bGrDVNKwDFlOzoMamiuOBblQVTSh1uZq0sF7wr5nUxIS16MtRRFUTKtwTXMll9-0YnogyBJcV1T0/s1600-h/current+account+balance.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 237px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420334917010526786" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghsmyeD8W2tisyjRS9_YSsl8bMDXmxNCVCQz6akVbQYfnqZvRsULytFIw2bGrDVNKwDFlOzoMamiuOBblQVTSh1uZq0sF7wr5nUxIS16MtRRFUTKtwTXMll9-0YnogyBJcV1T0/s400/current+account+balance.png" /></a><br /><br />In October, exports dropped 11.8% year on year (on a euro basis), while imports plunged by 20.8% year on year.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNskEfwYxCbgWzcaL8A0fSGBS67x3vIVFoVMKQFp8ZZagKE0tIyH_y8CUMbyZECPlX4VTekG9Mr4keC91wjnGrmY7DrxXaBUU1jNNZ5qTic_0tnkAPz9wJdvYj-OUDKYnrQEH-/s1600-h/hungary+exports+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 222px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420338286409312978" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNskEfwYxCbgWzcaL8A0fSGBS67x3vIVFoVMKQFp8ZZagKE0tIyH_y8CUMbyZECPlX4VTekG9Mr4keC91wjnGrmY7DrxXaBUU1jNNZ5qTic_0tnkAPz9wJdvYj-OUDKYnrQEH-/s400/hungary+exports+two.png" /></a><br /><br />This gradual improvement in Hungarian exports has also lead to a modest recovery in the industrial sector, mainly due to stimulus-programme-induced stronger demand in western Europe. Industrial output fell 15.6 percent in the third quarter, down from a fall of 20.5 percent in the previous three months, while recent data showed output grew month on month for the second time in a row in October.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsGhlUVE58tX_vpVTXeqiBe7w_rzITKVTshCnU6W0rk_s3L2ToLzVKVsl6CdEfAsyG8vlfP7QopC2y5gXVDye7GAtqZYSOPJBI2ba6c4qrLJPPsc10jYUWkVYr2TIsjWhTeWI4/s1600-h/hungary+IP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420338880479874530" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsGhlUVE58tX_vpVTXeqiBe7w_rzITKVTshCnU6W0rk_s3L2ToLzVKVsl6CdEfAsyG8vlfP7QopC2y5gXVDye7GAtqZYSOPJBI2ba6c4qrLJPPsc10jYUWkVYr2TIsjWhTeWI4/s400/hungary+IP.png" /></a><br /><br />Against this background, weak exports, and domestic demand in full retreat it is not surprising that investment has been falling, and dropped 6.8% year on year in the third quarter.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF-rnTDdhGwmPN9g7kgsRH2HLYt3SNAsH22kRGeHpge4VRaSRr3yBbOWBy-vF-w43AeDjLI8xHnHPe8Qh8DjC2A5Aqj-tO7WhC4zSzk5_511M9cpZmMLoLc_ud_EMPPOY9jakj/s1600-h/Hungary+investment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 212px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420330760449524546" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF-rnTDdhGwmPN9g7kgsRH2HLYt3SNAsH22kRGeHpge4VRaSRr3yBbOWBy-vF-w43AeDjLI8xHnHPe8Qh8DjC2A5Aqj-tO7WhC4zSzk5_511M9cpZmMLoLc_ud_EMPPOY9jakj/s400/Hungary+investment.png" /></a>What these continuing declines in investment mean is that the level of investment is now at much lower levels than it once was - below the 2005 level according to the rough and ready index I prepared for the chart below. <br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgD6SWu0YGqdARwT-EwIkKl_xEGVgDtWEmr6sUHMOpljTsCakPqbdJOV5d6q-gYenL-iuyT8vYjDoyu_478oSxvnWxx0iN1ZghxAFDSecH_zkTeYh_fN-lhrOb4tAhW_sA9ANXL/s1600-h/Hungary+investment+Index.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420330618893038466" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgD6SWu0YGqdARwT-EwIkKl_xEGVgDtWEmr6sUHMOpljTsCakPqbdJOV5d6q-gYenL-iuyT8vYjDoyu_478oSxvnWxx0iN1ZghxAFDSecH_zkTeYh_fN-lhrOb4tAhW_sA9ANXL/s400/Hungary+investment+Index.png" /></a><br />Construction activity is also well down, and has been for some long time now, following the sharp drop between summer 2006 and summer 2007 on the back of the first austerity programme (see chart).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiglUKP2nRSdTFGhbf0Y54M8WfLCZWTQZnGn3Unnqs0lKYVLmXUjDHXl2rXZj81pqKaEAE42gfD5xN1JN3LyTD-DTBfmIThgG_yT3dA64IRQCy0Ts1bKkl9rKT6iTVNAYsGI5Cc/s1600-h/hungary+construction+index.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420339651009501490" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiglUKP2nRSdTFGhbf0Y54M8WfLCZWTQZnGn3Unnqs0lKYVLmXUjDHXl2rXZj81pqKaEAE42gfD5xN1JN3LyTD-DTBfmIThgG_yT3dA64IRQCy0Ts1bKkl9rKT6iTVNAYsGI5Cc/s400/hungary+construction+index.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZPwOhjQhLUe0n5HzhGbZZaH8HAaqNz7sqQEix2E-1dojSQDJp3pJO_EEpvjpEa1SCw4HqSW4q_qdFD9eOh6JSfrkFgf375AA78L__ZA_nus5f4q7IYleIx16ZxX-I6oEtLMCl/s1600-h/Hungary+construction+P2P.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420339260005697698" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZPwOhjQhLUe0n5HzhGbZZaH8HAaqNz7sqQEix2E-1dojSQDJp3pJO_EEpvjpEa1SCw4HqSW4q_qdFD9eOh6JSfrkFgf375AA78L__ZA_nus5f4q7IYleIx16ZxX-I6oEtLMCl/s400/Hungary+construction+P2P.png" /></a><br />Government consumption is also contracting due to the pressure to reduce the fiscal deficit.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibx7InKxyCrrTFOGigfTCuYN8QuoMBwz_ISWAqqMeS0JosvANyqLvTrvEsNoJCOyqbrSEMj2GrqDiOscP5ZtAJzNYhsrMDwIalXAtYUK2S00BJYqHc5UD5AWLhlcrooAjCv12z/s1600-h/Hungary+government+consumption.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 234px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420331659836048898" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibx7InKxyCrrTFOGigfTCuYN8QuoMBwz_ISWAqqMeS0JosvANyqLvTrvEsNoJCOyqbrSEMj2GrqDiOscP5ZtAJzNYhsrMDwIalXAtYUK2S00BJYqHc5UD5AWLhlcrooAjCv12z/s400/Hungary+government+consumption.png" /></a><br /><br />All in all, the third quarter GDP data indicate that Hungary's domestic economy is not showing any signs of recovery whatsoever, nor should we expect it to do so. The hike in VAT in July hurt private consumption while capital spending has been continually cut back given the failure of export demand to rebound as strongly as hoped. The need to maintain a restrictive fiscal policy stance will also indirectly weigh on consumer and corporate spending, with the consequence that in my view GDP will decrease by nearly 7% in 2009 and then by around 1.5% in 2010.<br /><br /><strong>Monetary Policy Tangle</strong><br /><br />Hungary's central bank (NBH) last week cut its base rate by 25 basis points to 6.25%. The move which suprised the market participants (the consensus had been for a 50-bp reduction in surveys conducted by both Portfolio.hu and Reuters) now means the benchmark rate has been cut by 3.25% since July. Not everyone was surprised however, since in an interview on 10 December, Centrak Bank MPC member Péter Bihari had said it would be wise to calm rate cut expectations. "Any overshoot in (rate cut) expectations can backfire later. We (the central bank) need to stay sober, and we also need to communicate this sobriety outside," he said.<br /><br /><br />Although Hungary’s inflation outlook might have justified a 50-bp cut, the recent weakening in the forint (the HUF hit a 6-week low vs. the EUR last week) and the rise in the 5-yr CDS spread to a 3-month may well have signalled the need for a more cautious move, since following events in Dubai and Greece questions are rising about how long the relatively favourable global investor mood can last. Also, the imminence of elections, and the dangers of fiscal loosening (either before or after the election) urge prudence, especially in the light of what we have just seen in Greece.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQU6vbHV0crStOXaMmeuAg-GOEsSaKCdMLCPoDG2w20Hcn0hKjteK4jXJYrFTRZazPrkls_95-Eq9K5I4eP9Bc2aeum26E-pMMVPHQfYkPYvnQzjeRGqo68v9w6jD7bv3yNIGH/s1600-h/Hungary+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420340834826528786" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQU6vbHV0crStOXaMmeuAg-GOEsSaKCdMLCPoDG2w20Hcn0hKjteK4jXJYrFTRZazPrkls_95-Eq9K5I4eP9Bc2aeum26E-pMMVPHQfYkPYvnQzjeRGqo68v9w6jD7bv3yNIGH/s400/Hungary+interest+rates.png" /></a><br /><br /><br />The smaller than expected move also suggests that easing will be cautious in the first months of next year, and that the bank will be sensitive to any signs of worsening market conditions (especially ahead of next spring’s elections). Weaknesses in the real economy still argue for lower rates, and without moving towards closing down the interest rate gap forint loans will never become competitive with Euro or CHF ones" </p><blockquote>Despite this afternoon’s decision by the National Bank of Hungary (NBH) to cut interest rates by a smaller than expected 25bps to 6.25%, there is a good case for further monetary easing over the coming months. We continue to think that the profile for interest rates priced into the market is too high."<br /><br />"Both we and the consensus had expected a larger 50bps cut today, although the fact that one member of the Council voted for a smaller 25bp reduction in November did suggest that a slowdown in the pace of easing was possible. The forint gained 0.25% against the euro immediately after the decision."<br /><br />"Nonetheless, while policymakers may now move in smaller steps than we had previously thought, the case for further monetary easing remains strong. The decision to cut by just 25bps today is likely to have been motivated in part by signs that output in some sectors (notably industry) has started to pick up. But while the prospects for some parts of the economy have undoubtedly improved in recent months, the overall pace of recovery will remain subdued."<br /><br />"In particular, domestic demand will remain a significant drag on growth. A combination of a fragile banking sector, a high proportion of fx-denominated debt and the continued rise in non-performing loans, means that the overall availability of credit remains constrained."<br /><br />"And although the bulk of the tightening measures have now been implemented, a public sector wage freeze, and private sector wage restraint needed to offset the recent sharp rise in unit labour costs, means that the pain will linger into 2010 and 2011."<br />Neil Shearing, Capital Economics</blockquote><p><br /><br /><strong>Inflation Overshoots Expectations In November</strong><br /><br /><br />Hungary’s consumer prices rose 5.2% year on year in November, an acceleration from the previous month (4.7%). Month on month prices were up 0.3% . This was an upside surprise since analysts forecasts had been for a rise of 5.0%.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBftd4CE4XeIPioiPK9yqDWvK6Be-qmWxb5rCoiHpg_jPregGWrwm0m5MOWAJkY8LVLpIaOYpd-rROkspy-UNSoj45GpLUPRuOkYVLS94KDP8bhRa4iqofO7FMWGuFnouiNqgu/s1600-h/hungary+CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420344477848358850" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBftd4CE4XeIPioiPK9yqDWvK6Be-qmWxb5rCoiHpg_jPregGWrwm0m5MOWAJkY8LVLpIaOYpd-rROkspy-UNSoj45GpLUPRuOkYVLS94KDP8bhRa4iqofO7FMWGuFnouiNqgu/s400/hungary+CPI.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4QYcf1AvsRZSQIx5p-rjEVH-j_LEZv5PP3kdmpcGrlSk84sTjGQ0jhcwL1AEJKOlGbd7hhATRVhs4l_2BDUqJPEPWX20vqG0QWSj1eeFFfe1bQfiZbHxt8zzkxMfo9PArVdIJ/s1600-h/bank+of+hungary+inflation+forecast.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420344314704094706" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi4QYcf1AvsRZSQIx5p-rjEVH-j_LEZv5PP3kdmpcGrlSk84sTjGQ0jhcwL1AEJKOlGbd7hhATRVhs4l_2BDUqJPEPWX20vqG0QWSj1eeFFfe1bQfiZbHxt8zzkxMfo9PArVdIJ/s400/bank+of+hungary+inflation+forecast.png" /></a><br /><br />The main reason for the increase was an increase in the prices of unprocessed food (especially fruits and vegetables), energy and fuel. Disinflation is slowing in tradable goods, driven mainly by the durable goods sector (especially new and used vehicles and televisions), while market services disinflation came to a halt (most service prices increased except for tourism and books). </p><p>The impression is that the underlying disinflation process has started to slow and there are risks to the medium term inflation outlook. The seasonally adjusted core inflation has been stagnant at around 5% since July, while the CPI adjusted for tax changes started to accelerate in November (it moderated from 3.7% YoY in June to 0.9% in October and picked up to 1.4% in November).<br /><br />Which means the NBH’s inflation forecast of 1.9% for 2011 may come under pressure. Inflation may well accelerate to 5.6% in December and peak at around 5.8% in January and can then fall to below 3% by the end of 2010. As Neil Shearing says "Despite the uptick in inflation to 5.2% in November (from 4.7% in October), we support the Central Bank’s view that it will "significantly undershoot" the 3±1% target when July’s VAT hike drops out of the annual comparison." Still maintaining this sort of price range with the present Forint value is simply going to prolong and prolong the economic downturn.<br /><br /><br /><strong>Employment Falling As Unemployment Rises</strong><br /></p><p>Unsurprisingly, against this background unemployment is rising and rising, hitting 9.9% of the labour force in October, according to Eurostat seasonally adjusted data.<br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI1tBeF0LjiGdhlU2pbeLfMpoPjqUNp4lnApa6Y_m0pbeYwpD6J41opXyCvnSohizCERa7V76FDdkqb7BCk5KpngKZYe376I6hc1StQpLIr4X13gKp-Ti79n-aw1IuWGlQ-bmP/s1600-h/hungary+unemployment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420348176409972738" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhI1tBeF0LjiGdhlU2pbeLfMpoPjqUNp4lnApa6Y_m0pbeYwpD6J41opXyCvnSohizCERa7V76FDdkqb7BCk5KpngKZYe376I6hc1StQpLIr4X13gKp-Ti79n-aw1IuWGlQ-bmP/s400/hungary+unemployment.png" /></a> Total employment has been on a downward trend since the middle of 2006.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRq0QLBjWOnCeDqy-5ialVD9W06ur-5GlDew77jSPnmHL_sVC62FJEMrruFHRs09fd7cX3gOstKZjmFjaQ_S6-4_A0dXWYR7VZ7tDNbyJKXeGt2eWv7O5Lp_bj4jMt9YoSld3h/s1600-h/hungary+total+employed.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 216px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347962953323602" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRq0QLBjWOnCeDqy-5ialVD9W06ur-5GlDew77jSPnmHL_sVC62FJEMrruFHRs09fd7cX3gOstKZjmFjaQ_S6-4_A0dXWYR7VZ7tDNbyJKXeGt2eWv7O5Lp_bj4jMt9YoSld3h/s400/hungary+total+employed.png" /></a></p><p>But one of the impacts of the economic crisis has been that employment in the public sector, after falling under the austerity programme has risen sharply since the spring (due to a number of employment schemes designed to keep unemployment down, especially in the regions), and is now back up above its earlier level.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhef8P3Qi8yp6evREu7JQTGqyqGkPn6LzE8GQiotT9BBeaYfz-KlafjcGq-kDKsTNdStDMQUt4_rZXNkerHd8X0Ukt9nBa6CT4ufvHo_iiUd6N74muJFvXOBQmlXi2aDzbB3SoF/s1600-h/Hungary+public+sector+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347784100302066" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhef8P3Qi8yp6evREu7JQTGqyqGkPn6LzE8GQiotT9BBeaYfz-KlafjcGq-kDKsTNdStDMQUt4_rZXNkerHd8X0Ukt9nBa6CT4ufvHo_iiUd6N74muJFvXOBQmlXi2aDzbB3SoF/s400/Hungary+public+sector+employment.png" /></a> Real ex-bonus wages (the central banks targeted measure of wage inflation) has been in negative territory (by around 1%) since the summer.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJA2yKo2k9MkPHWWUsRjhkI4WFDyutt6diC-RYMlsf7kLEWQIySmIYfP_0qosWvuNDby9ft3rG-uoQNUDulVcswa9MuqkzTcSMBxbzJMe_7VoMguCdysZpowlkreZ2LV2w25Sc/s1600-h/hungary+real+wages.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 208px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347595293738114" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiJA2yKo2k9MkPHWWUsRjhkI4WFDyutt6diC-RYMlsf7kLEWQIySmIYfP_0qosWvuNDby9ft3rG-uoQNUDulVcswa9MuqkzTcSMBxbzJMe_7VoMguCdysZpowlkreZ2LV2w25Sc/s400/hungary+real+wages.png" /></a><br /><br /><strong>Bank Credit Turning Negative</strong><br /></p><p>As is well known a very high proportion of mortgages in Hungary are non-forint denominated (over 85%, mainly in Swiss Francs), but the HUF value of these mortgages has been falling for over a year now.</p><p><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi54AoxxnMR7GlgTwhAUf2dsNj9-Rja9GiDUwv1rfPfRA3C90_p8wotTyLGWIwWaaowMOeuE5KfGDvmfN3wUluXLqIyHe0_GgszBDAX1Y00JVSza5xM3zFbfH-hY0MciDXLB7NI/s1600-h/forex+mortgages.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420347109363434050" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi54AoxxnMR7GlgTwhAUf2dsNj9-Rja9GiDUwv1rfPfRA3C90_p8wotTyLGWIwWaaowMOeuE5KfGDvmfN3wUluXLqIyHe0_GgszBDAX1Y00JVSza5xM3zFbfH-hY0MciDXLB7NI/s400/forex+mortgages.png" /></a> As has the total value of outsanding mortgages in any currency.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT1B7_kOwp2jzhjhYXknPB2fwnGTri1ZWO4poiS9I7jaR9ez7D7Nvv8hxeg571MLeqhkNFQU6bba2XJyhX8BH4CxFTXlZl_CJk3c_MaQYpYbzGR8Nuu1lZzHe65taA9J_wxVJF/s1600-h/Hungary+-+total+mortgage+lending.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 237px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420346638437692082" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT1B7_kOwp2jzhjhYXknPB2fwnGTri1ZWO4poiS9I7jaR9ez7D7Nvv8hxeg571MLeqhkNFQU6bba2XJyhX8BH4CxFTXlZl_CJk3c_MaQYpYbzGR8Nuu1lZzHe65taA9J_wxVJF/s400/Hungary+-+total+mortgage+lending.png" /></a> Although the stock of mortgages had not been high by some West European standards (around 50% of GDP), they had been growing at a rate of around 20% per annum over the last several years (see chart) but the crisis brought this to an end, and the year on year increase was down to only 2% by October, and will more than likely be negative by the end of the year. Which means, credit expansion and new house construction will NOT be driving any coming Hungarian recovery.<br /><br />In the current climate, with unemployment rising, and wages falling, and an economy contracting at nearly 7% a year, it isn't hard to understand why not that much new bank lending is going on. Those who are creditworthy are trying hard to save, while those who need to borrow normally aren't that creditworthy, so pleading to the banks to lend more is rather like asking them to subsidise new bad debts, and that is really not something you can do. What kicked the whole current process off in Hungary was a short sharp credit crunch, but now it is the contraction in the real economy which is following its own dynamic, till someone finds a way to put a stop to it. It is the drop in output that is preventing banks from lending, and not banks being unwilling to lend that is causing the contraction to continue.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinC3d6u9lDjVvouvPgqMhmEy2e2zAZBBjYJhVKtB60-Da2fuAEVkGUp3eiNCx_Bxvk9nPk_rCedxB5WJEHlaHyqM6fxexl1LW1c9P14z4h4a0-o12SqNV-r2D1KWy8PvpEaC1N/s1600-h/Hungary+-+total+mortgage+lending+y-o-y.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 238px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5420346410323733730" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinC3d6u9lDjVvouvPgqMhmEy2e2zAZBBjYJhVKtB60-Da2fuAEVkGUp3eiNCx_Bxvk9nPk_rCedxB5WJEHlaHyqM6fxexl1LW1c9P14z4h4a0-o12SqNV-r2D1KWy8PvpEaC1N/s400/Hungary+-+total+mortgage+lending+y-o-y.png" /></a><br /><br /><br /><strong>Election Chaos Looming</strong><br /><br />Having seen the shennanikins which have recently taken place in Greece, it was obvious that the run in to the coming election was always going to be complicated, with accusation and counter-accusation being thrown from one party to another. The big problem is that neither party has exactly clean hands in this context, but one thing seems sure, that the 2010 budget is liable to slippage, whether because of the current ruling party moving invoices from 2009 to 2010 (on the assumption that they are going to lose the election, so what the hell), or because the incoming party is going to make promises which will lead to an overspend which they will then blame on their predecessors.</p><p>A group of economists close to opposition party Fidesz now claim next year’s budget "is full of tricks", including unrealistic macroeconomic assumptions that will lead to a deficit far larger than the cabinet’s projection. The current Finance Ministry Péter Oszkó played down the criticism as politicking ahead of the coming elections, and this may well be, but some of the points they make to not, for all that, lack validity. <br /><br />The 29 economists, who promoted a 'no’ vote on the 2010 budget bill in November, include Zsigmond Járai (Finance Minister of the Fidesz government and former Governor of the central bank), Ákos Péter Bod (Ministry of the Industry in the MDF cabinet and former Governor of the NBH), György Szapáry (former Deputy Governor of the NBH, currently responsible for international relations in Fidesz), Tamás Mellár (head of the statistics office (KSH) during the Fidesz government) and Károly Szász (head of financial markets watchdog (PSZÁF) in the Fidesz era).<br /><br />Zsigmond Járai argues that, on the one hand the 2010 budget is based on unrealistic macroeconomic assumptions - e.g. only a 0.6% economic contraction while GDP may well shrink by considerably more, possibly by as much as 1.5%, while on the other planned austerity measures, like reduced subsidies, will also worsen the balance. Among his list of "overestimation tricks" the former central bank head mentioned VAT and corporate tax revenues. The economists claim that the underestimation of the GDP contraction will result in something like HUF 200 bn less budget revenues, adding that another HUF 200 bn shortfall due to smaller-than-expected revenues from taxes and contributions.<br /><br />The current official estimate for the general government deficit in 2010 is 3.8% of GDP, a target which is considered to be realistic by both the IMF and the European Commission. The Fidesz economists claim the gap - without supplementary bufget changes - could be as high as 7-8% of GDP. György Matolcsy, a leading Fidesz economic spokesman stressed that such a large deficit would be unacceptable for Fidesz as well, and made clear that they are not saying such a massive budget overrun should be tolerated.<br /><br />Matolcsy said the 2010 budget included no reforms or system overhauls to jumpstart growth in the second half of 2010 as the cabinet expects, and that in his opinion a sustainable growth path is unlikely to be reached before 2013.<br /><br />The document has not been slow to attract criticism, and apart from Finance Minister Ozskó, Lajos Bokros, Hungary’s former Finance Minister and PM candidate from the minor opposition party MDF, lashed out at the group saying their argument was "ridiculous".<br /><br />In an interview with public television MTV, Bokros said that "the only alternative to sovereign default was to cut budget spending, take away welfare contributions, e.g. the 13th-month pension and 13th-month wage in the public sector that spun the economy into catastrophe and that led to (government) debt to surge sky high." "How do you create growth from these (measures)? Only via reforms," he stressed.<br /><br />A large part of the issue seems to revolve around what to do with the bulging debts of quasi governmental institutions like hospitals, the state-owned railway company MÁV and the Budapest Transport Company (BKV) . Fidesz seems to assume that these debts will need to be swallowed. Bokros does not agree: "If a budget were about consolidating the debts of every (state-owned) companies automatically and without restraint the next year, it would be but a rejection of any reform," he said. "Reforming" according to Bokros means not covering the debt of "inefficiently operating public institutions", because these liabilities had probably been accumulated due to their profligacy."So, what do you have to do then? [You need to implement] reforms and a create a competitive situation that will have inferior companies go bust and good-quality institutions double in size." </p><p>While sympathising with Bokros in the spirit, it is not clear to me that things are going to be so easy as he imagines in the letter. One thing is however clear, he is right that if solutions are not found for these issues, especially in the problematic pensions and health sectors, Hungary will go bankrupt.<br /><br />One thing is clear though, life is not going to be easy in post election Hungary. If Fidesz is voted back to power it will create a new budget, a new tax regime and a new labour policy for as early as July, according to György Matolcsy, and the new government should also sign a new Stand-By Arrangement with the IMF. Matolcsy reiterated that Fidesz has three scenarios for the tax system: one proposing a radical reduction of personal income tax with a flat family rate; another which would decrease rates on the entire spectrum of taxes; and a third which would cut social-security and health-insurance contributions for employers and employees alike. The only thing which doesn't seem clear is how he expects to pay for all these, especially since he doesn't anticipate a serious return to growth before 2013.<br /><br /><br />Matolcsy also claims that the budget deficit will be 3-4 percentage points higher than the targeted 3.8% of GDP, citing central bank staff projections in their Inflation Report that the gap is likely to be 4.3% of GDP. Fidesz expects the gap to come in at 4.5% and foresees that state-owned enterprises such as the railway company would need debt consolidation amounting to 3% of GDP. Matolcsy also pointed out that there may be other downside risks to next year’s budget beyond the 7.5% deficit he claims it already incorporates, including a larger-than-expected contraction in consumption, unemployment and a fall in lending to households that could lead to smaller tax revenues. All of these points are not without some validity. Further the ongoing drop in investment will continue to eat into tax revenues and lower-than-forecast inflation could decrease budget income next year, he added.<br /><br /><strong>Fidesz The Likely Winners, But By How Much?<br /></strong><br />The gap between Hungary’s two main political parties has narrowed slightly of late, according to the latest opinion survey by Medián. While an increasing number of voters reported a lack of strong party affiliation, Fidesz has witnessed some decrease in its supporter base. Support for Fidesz within eligible voters has been gradually melting away in recent months, and is now down to 40% in December from 43% in November and 47% in July. The Hungarian Socialist Party meanwhile saw a only a minor and not statistically significant increase in support. But this change in percentage support is more due to an increase in undecided voters than anything else, since 66 per cent of respondents — all decided voters — would vote for Fidesz in the next legislative election, up one point since October. <br /><br />The ruling Hungarian Socialist Party (MSZP) remains a distant second with only 19 per cent, followed by the Movement for a Better Hungary (Jobbik) with 10 per cent. Support is much lower for the Hungarian Democratic Forum (MDF), Politics Can Be Different (LMP), and the Alliance of Free Democrats (SZDSZ). <br /><br /><br /><blockquote>We should not forget that although Bajnai is portraying himself as being the head of a technocratic government, he is in reality the head of a government which is supported by MSZP. It is clear that the 2010 elections are lost. The game is already for 2014 elections. The government now have apparently stabilised the forint, slowed down the shrinking of the economy, and restored some kind of order and feeling of leadership. The price is high, but it seems that the population by and large accepted the situation as it is. The slight increase of popularity of MSZP and Bajnai himself may support this statement. Now, compromises have been made for a short time with major public service sector agents to accept the restrictions. But, somewhere around next August everyone will be up in arms for new financial support. The latest move of the government, to finally accept the long term and symbolic demand of FIDESZ to cut the VAT on the gas-price to 5% is already, I think, a mine for FIDESZ laid down to explode next year. All the messages of the members of the government are now portraying the government as a similar "responsible" stabilisation force as the 1995 Bokros package was, which would propel again Hungary into a "sustained" high growth as was experienced between 1997-2005 (of course now we all see better the price of this decade of growth). So what we are seeing here is a creation of a "new development" discourse, which it is expected will be destroyed by the "incompetence" etc of the Orban government. - Andras Toth, Sociologist</blockquote><p><br /><br /><strong>Huge Structural Reforms Gamble</strong><br /><br />Well, I think I have said more than enough already in this post, so I think I will leave your with the thoughts Gábor Egry (a Hungarian political scientist) expressed in an e-mail interview with me.</p><blockquote><p>Gábor Egry - Research Fellow, Poltikatörténeti Intézet (Institute for Political<br />History)<br /><br /><br />Maybe it is worth taking a look at the history of this idea of 4% trend growth. As far as I can recall it - apart from the constant remarks of politicians that Hungary needs a growth 2 points higher than the EU core states and this was somehow always expected to be 4% - both before and after the last elections a group of economists started putting forward ideas for the renewal of sustainable growth in Hungary and they elaborated a series of - let's put it this way - Slovak-type measures would very soon result in 4% trend growth. As the then government chose another type of policy mix for their budget consodilation, these critics never failed to emphasize that with this Slovak-type set of measures not only would the slow growth period after the budget (austerity, 2006) restrictions have been avoidable, but that these Slovak measures were the only possible way to elevate the trend growth to 4%. Usually it was the same guys coming with the same proposals, just branded differently. (CEMI, Oriens etc). Then, when in 2008 the Reform Aliiance was formed, they recycled these ideas. And even though the Bajnai government is an MSZP supported one at least initially it was the result of Gyurcsány's attempt to compell the party to accept the Reform Alliance program. From this persepctive Bajnai's statement is quite logical: they are implementing measures that were proposed by experts with the promise that they would lead to a 4% trend growth. Anyway, the idea that such measures will restore a higher and sutainable trend growth is deeply anchored in the Hungarian economist's thinking, and most of them - among others Bajnai, who was the loyal but critical supporter of these ideas in the Gyurcsány government - will adhere to it as it was the main component of their criticism of earlier policy and as such it is a core component of their common identity. </p><p> Beyond the historical anecdotes I see some serious faults and gaps in the reasoning behind the approach, especially as their reasoning is really causal, but rather based on the use of analogies. The main thrust of the approach is not simply to make production in Hungary wage-competitive by cutting the so called tax wedge, but also through making labor cheaper for local companies and attracting FDI, thus raising the employment rate. So, they work with both a direct causal relationship between tax rates and the employment rate and with an indirect one, but they then connect this second one causally to the tax rates again. I would argue, that such soft factors, as labour mobility have had at least as as important impact in the Hungarian case. According to Oriens, the FDI sector in Hungary is said to be overcapitalized, but I'm not sure whether this is because of the relatvely high labor costs or is a result of the immobility of the workforce. It is really important to observe how unemployment is geographically distributed in Hungary, and how this geographical distribution has not changed in the last two decades, despite efforts to change this situation with methods in principle similiar to the present ones, i.e. giving incentives indirectly through economic policy to market forces. </p><p>There really are areas where even near-starvation was not capable of moving people out of their villages and making them go look for employment elsewhere. I know that there are counter-examples in the sense that in huge areas a lot of people remained deliberately unemployed as they have found easier ways of making money in the grey or black economy, for example, near the Ukrainain border. Such people, instead of being moved by the modern dynamic of the market economy, resorted to - let's put it vaguely - pre-capitalist methods of work organization and resource redistribution. I don't really see how any kind of tax cuts will move them out from these places and as they have no significant taxable or taxed income it won't generate surplus demand for local companies either. Otherwise, I wouldn't neglect the fact that the fall of unemployment and the rise of employment in many Eastern countries coincided not only with lower taxes, but with EU accession, making it much easier for people to seek work in the West. And in fact millions did it. (For example at least 10% of the Slovak workforce worked abroad before the crisis.) But this is mobility is more or less lacking in Hungary, and Hungarians by and large never left for the West seeking work.<br /></p><p>On the question of the deficit, it wouldn't surprise me if there was some accountancy massaging going on behind the scenes. The government may well have put a part of this years deficit on last year's one, raising that from 3,2 or 3,4% to 3,8 and they try to convince the state railways not to reclaim their VAT this year etc. Oszkó conveys self-assurance but he is paid for that. I wouldn't be surprised to find out at the end that this year deficit will be higher than forcast, but I don't see too much room for the IMF to protest, either. <br /><br />They let Latvia raise its deficit a number of times, Romania is not only doing the same but may even finance the deficit (or in a more populist tone, this year's pensions) from IMF money and - at least as far as I can see - even accept political arguments regarding government incapability to implement unpoular measures before specific elections as arguments to support non compliance. Maybe Hungary will overshoot the deficit, but at least on the surface - in terms of measures implemeted - it is adhering to the terms. The government can simply tell them, ok, guys we did what you proposed, a slightly higher deficit was the result, accept it. Moreover, with the animal spirits currently prevailing around the world I really don't think the news of a 4,1% deficit will do any harm as long as markets are in love with recovery, while even a surplus can not prevent a collapse if their mood changes fundamentally... </p></blockquote><p></p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-82513895978935029032009-11-03T15:15:00.000+01:002009-11-03T15:16:58.453+01:00Global Manufacturing, France Outperforms, As Spain Continues To FlounderWell, it is not as if I relish rubbing salt into old wounds, but this quote from the <a href="http://www.ft.com/cms/s/0/8bb0da5a-c7dc-11de-8ba8-00144feab49a.html">latest piece by Ben Hall in Paris and Ralph Atkins in today's Financial Times</a> is just too good to resist.<br /><br /><blockquote>French manufacturing output rose at its fastest rate for nine years, according to a survey on Monday, confirming that France has become the economic powerhouse of continental Europe. Purchasing managers’ indices for manufacturing showed France performing significantly better than the continent’s other main economies – thanks to robust domestic demand.</blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjm5jdfPXMexdl_hNwMsxVm-UT-mv1f3CqZMa7-C3KAEE6mtWUxFx8HroRo-E6shjNfq7m5iT4ItSL65mexR7RAIHlSuSkxa83aA1wXVaXCy3Y53Y79jqB8p_iaTXN3ToYq02Dx/s1600-h/france+manufacturing.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399836193272533858" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjm5jdfPXMexdl_hNwMsxVm-UT-mv1f3CqZMa7-C3KAEE6mtWUxFx8HroRo-E6shjNfq7m5iT4ItSL65mexR7RAIHlSuSkxa83aA1wXVaXCy3Y53Y79jqB8p_iaTXN3ToYq02Dx/s400/france+manufacturing.png" /></a><br /><br />Plenty of food for thought in this paragraph it seems to me. As <a href="http://spaineconomy.blogspot.com/2009/10/french-rebound-continues-in-october.html">foreshadowed in this earlier post</a>, it is the French economy - and not the German one - which is rebounding sharply, and this seems to be for essentially three reasons:<br /><br />i) there is still life in domestic demand, due to the fact that demographics are good, and lending to households (at an average rate of increase of 11%) was a lot less during the last boom than it was in the bubble societies (20% per annum in Spain and Ireland<br /><br />ii) France's more favourable demography means that the French government has more space for fiscal stimulus (when compared with Germany) which means the "cash for clunkers" can roll on a bit longer.<br /><br /><br />iii) the combination of these above two factors means that stimulus actually can work, since it can fire up domestic consumption which is not already dead on its feet. That is, the situation is a win-win one in the classic sense (although, as I was arguing at the end of last week, the ECB will now need to do some pretty adroit monetary footwork if it wants to avoid firing up an asset bubble in France, to follow hot on the heels of the one which has just deflated in Spain.<br /><br />As Jack Kennedy, economist at PMI survey organisers Markit put it:<br /><br /><blockquote>“The strong recovery in French manufacturing continued in October, with output rising at the fastest pace for nine years. While some of the current strength reflects a rebound from the extreme financial crisis, it nevertheless offers further evidence that the France is towards the front of the pack among developed economies in emerging from the downturn. Domestic demand remains the key driver of growth as confidence continues to recover.”</blockquote><br /><br /><strong>Climbing The Tourmalet</strong><br /><br />The current recovery could be conceptualised as a group of Tour de France cyclists set on scaling the slopes of the notorious Tourmalet. One group of riders - mainly emerging economies like China (current PMI 55.4), Brazil (53.7), India (54.5) and Turkey (52.8) are out in front, with just two developed economies having "escaped" from the main group to try and catch them, France (55.6) and Sweden (56.7).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEichX2cShzZYl7yeu306GhM3aCAaiHNb7wxITGSCALlA-9qhJUh9KhLZ9AHBo9JzU0QCAmvgVam5ZCbCUlP4NEwTjwvoblbZxXhzL2mrJnWW6k1xziaRxrdmmeMNVkbPhnvHmP6/s1600-h/sweden.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 228px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399841411964174546" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEichX2cShzZYl7yeu306GhM3aCAaiHNb7wxITGSCALlA-9qhJUh9KhLZ9AHBo9JzU0QCAmvgVam5ZCbCUlP4NEwTjwvoblbZxXhzL2mrJnWW6k1xziaRxrdmmeMNVkbPhnvHmP6/s400/sweden.png" /></a><br /><br />Then comes the main group, who continue to show a modest recovery, howevering around or even (at last) somewhat over the 50 point break even mark (Germany (51), the US (55.7), Japan (54.3), the UK (53.7), the Netherlands (50.5), Austria (51.1), etc). In Eastern Europe, the Czech Republic (49.8) and Poland (48.8) though still weak continue to gain ground, while the Russian team this month unexpectedly had a puncture, and dropped back into contraction territory (49.6), after registering growth in September.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmNeGx-F5gHv2zYeZ52JzPbwBtjYqfBNYotWhiZySoF0wOAgKmmt1Dr5q2PgKJORxTunS4aR1UQnlymvWoiBfvcdfVl_a6e7LTdevC_XfONcyrLOy3vMIAIh_nQrZBE12bVoTN/s1600-h/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399842631870848562" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgmNeGx-F5gHv2zYeZ52JzPbwBtjYqfBNYotWhiZySoF0wOAgKmmt1Dr5q2PgKJORxTunS4aR1UQnlymvWoiBfvcdfVl_a6e7LTdevC_XfONcyrLOy3vMIAIh_nQrZBE12bVoTN/s400/russia.png" /></a><br /><br /><br />And then come the stragglers lead by Italy (which is peddaling furiously, but - with a PMI of 49.2 - doesn't seem to ever quite make it over that critical 50 mark, oh well, next month perhaps),followed closely by Hungary (48.2), Greece (48), Ireland (48), South Africa (47.8) and of course, in last place, I think the rider is now so weary he is getting off to walk the bike up the hill, comes poor old Spain (46.3), where more or less predictably, the contraction continues. In particular Spain stands out as almost the worst case scenarion now, with a manufacturing sector which continues to bleed jobs in a country where no one seems to have any serious proposals about what to do except wait in the hope that things might get better eventually, and of their own accord. The sky in front with always be clearer mañana, of course.<br /><br /><strong>Italy</strong><br /><br />Commenting on the Italy Manufacturing PMI survey data, Andrew Self, economist at Markit said:<br /><br /><blockquote>“Italian manufacturers reported that their recession which has spanned eighteen months finally ended in October, two months behind the Eurozone as a whole. Production rose for the first time since March 2008, driven by a marginal return to growth of new orders. Although the October survey represents a step in the right direction on the road to recovery, weakness persists which suggest that a sustainable upturn is by no means guaranteed."</blockquote><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0vBB9E29vCJlvwNNvxgTDWOCeP234gR2S62C7TwLWQur5-PvbPJQ7W1QYyOXXso9HTP4fRdVH2Kmy1S1u-CQeF4qhrVdnMambwe0RgoDm2VyiEn9P0aMbiaFJFgxNa8vAk6Tr/s1600-h/italy.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399844012886667458" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0vBB9E29vCJlvwNNvxgTDWOCeP234gR2S62C7TwLWQur5-PvbPJQ7W1QYyOXXso9HTP4fRdVH2Kmy1S1u-CQeF4qhrVdnMambwe0RgoDm2VyiEn9P0aMbiaFJFgxNa8vAk6Tr/s400/italy.png" /></a><br /><br /><strong>Hungary</strong><br /><br />Hungary's manufacturing purchasing manager index dropped 0.8 percentage points to 48.2 points in October, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM). The October reading suggest the steady improvement that started in the spring may now have come to a halt.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvxxnhU5eEB7Q6brJNfRFYa1WeKs4iPSVzupn1JdzxpR69J0hipLd77-15mDrPBn1AAC-F9Wkl7xTL8M1R4Km1CArpYtZzFtg1LhrYtrVDt-Akq33QR-yfHFM7Nge-KsUrlb1B/s1600-h/hungary.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 228px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399844834913259250" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvxxnhU5eEB7Q6brJNfRFYa1WeKs4iPSVzupn1JdzxpR69J0hipLd77-15mDrPBn1AAC-F9Wkl7xTL8M1R4Km1CArpYtZzFtg1LhrYtrVDt-Akq33QR-yfHFM7Nge-KsUrlb1B/s400/hungary.png" /></a><br /><br /><strong>Greece</strong><br /><br />The seasonally adjusted Markit Greece Purchasing Managers’ Index fell marginally to 48.0 in October from 48.5 in the previous month. The latest reading signalled another slight deterioration in operating conditions across Greece’s manufacturing economy.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJCw52FOvqcEuVMPu5Ijgj3fMwRNU_8rcKo7qkj0rM9bDxZYTPkZy5wpjuyEoj-srNMn6qAEYwAfnEhvOfQvZfyrxtxmpVLIvXs2_3MQ5R_-QLMPJutgb0_d9Hk2V6rBxjtznH/s1600-h/Greece.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 228px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399845536266252642" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJCw52FOvqcEuVMPu5Ijgj3fMwRNU_8rcKo7qkj0rM9bDxZYTPkZy5wpjuyEoj-srNMn6qAEYwAfnEhvOfQvZfyrxtxmpVLIvXs2_3MQ5R_-QLMPJutgb0_d9Hk2V6rBxjtznH/s400/Greece.png" /></a><br /><br />Commenting on the Greece Manufacturing PMI survey data, Gemma Wallace, Economist at Markit said:<br /><br /><blockquote>“The hope raised in August of an imminent recovery in Greek manufacturing production has dwindled somewhat over the past two months, as the PMI has sunk back into negative territory. Nevertheless, the headline index continued to signal only a slight weakening of the business environment. Additionally, almost all of the surveyed variables are improved on their twelve-month averages – in most cases noticeably so. These are clear signs that progress has been made and therefore show that the sector is on the right path to stabilisation and recovery, even if it has not quite got there yet.”</blockquote><br /><br /><strong>Ireland</strong><br /><br />In Ireland the October data indicated that, while operating conditions at Irish manufacturers continued to deteriorate during the month, the sector moved a step closer to recovery. Both output and new orders fell only slightly, and purchasing activity decreased at a markedly slower rate. The seasonally adjusted NCB Purchasing Managers’ Index rose to 48.0 in October, from 46.6 in the previous month. This signalled that the rate of deterioration in business conditions eased to the weakest since February 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdE1CmdDAGYQEQ2ufq5m8rnCWfji27Ig1rq98hhKsoKcvAyC09DtzeCNbxyqPaCVWiovE8DsaSW27AbE1Q9hA0GlYV4HNOrCVXvS82QoBxLlmh_KF70g_D3T3ItAZFkABMl0Gg/s1600-h/ireland.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 189px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399846069305649842" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgdE1CmdDAGYQEQ2ufq5m8rnCWfji27Ig1rq98hhKsoKcvAyC09DtzeCNbxyqPaCVWiovE8DsaSW27AbE1Q9hA0GlYV4HNOrCVXvS82QoBxLlmh_KF70g_D3T3ItAZFkABMl0Gg/s400/ireland.png" /></a><br /><br />Commenting on the NCB Republic of Ireland Manufacturing PMI survey data, Brian Devine, economist at NCB Stockbrokers said:<br /><br /><blockquote>“The output and new orders components very nearly breached the sacred 50 mark in October. New export orders did however fall away marginally after breaching 50 last month. The fall in new export orders reflected sterling weakness which is continuing to squeeze the manufacturing sector. With UK exports under pressure it is a welcome sign that the US economy posted impressive GDP growth in Q3, even when account is taken of their scrappage scheme. With global economic activity gathering momentum we are still hopeful that the Irish economy will begin growing in Q4 of this year and the latest PMI was comforting in this regard.”</blockquote><br /><br /><strong>South Africa</strong><br /><br />South Africa’s purchasing managers’ index rose to its highest level in 16 months in October as the country’s first recession in 17 years eased, according to the monthly report from Kagiso Securities. The seasonally adjusted index increased to 47.6 from a revised 45.9 the month before. The index has been below 50, which points to a contraction in output, since May 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvBCMZrPCOjWBPgo5pQRZplppT8ZRz0C2_J9llVjOJRBuO8bu3dgOIDWtJBZueVg1Txsat7e0jRXrlJCC7MddSQwpJVqeVsh2okKvrf6YJbXucUABgaBAhBETYMHmUaNHh-6gM/s1600-h/south+africa.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 238px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399846903412774338" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvBCMZrPCOjWBPgo5pQRZplppT8ZRz0C2_J9llVjOJRBuO8bu3dgOIDWtJBZueVg1Txsat7e0jRXrlJCC7MddSQwpJVqeVsh2okKvrf6YJbXucUABgaBAhBETYMHmUaNHh-6gM/s400/south+africa.png" /></a><br /><br /><br /><strong>Spain</strong><br /><br />Operating conditions in the Spanish manufacturing sector continued to deteriorate in October. Output fell further over the month, while new orders contracted at the sharpest pace since May. Supplier lead-times lengthened for the first time in nineteen months.<br /><br />The seasonally adjusted Markit Purchasing Managers’ Indexcontinued to signal a marked decline in overall business conditions, posting 46.3 in October. Operating conditions have worsened in each month since December 2007. Output decreased modestly in October as the wider recession in Spain continued to impact negatively on demand. Production has now contracted in twenty of the past twenty-one months.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVL5CbyFGpwXEsXIF63otg3UPBbA4Y1XvdmQxpS_OH0rM2aRUGy2PygDnDeZjzSM4amDGI5S8Mxt8QQ67DwVUXZM3a_QqgnqobUKUjzAgI3iSXLBXnzIEgGFC-MJMihSOpJcCb/s1600-h/spain.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 220px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399847336875329986" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVL5CbyFGpwXEsXIF63otg3UPBbA4Y1XvdmQxpS_OH0rM2aRUGy2PygDnDeZjzSM4amDGI5S8Mxt8QQ67DwVUXZM3a_QqgnqobUKUjzAgI3iSXLBXnzIEgGFC-MJMihSOpJcCb/s400/spain.png" /></a><br /><br />Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker, economist at Markit, said:<br /><br /><blockquote>“Spain's recovery continues to lag the upturn seen across the Eurozone as a whole, and a steeper contraction of manufacturers' order books in October will be of particular concern as it points to a further delay to any prospects of stabilisation.Competition is so intense that firms are being forced to slash prices, despite their raw material prices increasing. The stabilisation of unemployment in the third quarter signalled by official figures is likely to be only temporary with PMI data continuing to show considerable falls in employment in the manufacturing sector as firms seek cost cuts.”</blockquote><br /><strong><br />Global Improvement - But Watch Out For The Stragglers, And Those Overly Dependent On Exports</strong><br /><br />So, as JPMorgan say in their Global Manufacturing report, the Global Manufacturing PMI hit a 39-month high in October, and at 54.4 posted its highest reading since July 2006. The PMI has now remained above the neutral 50.0 mark for four successive months. But while the general picture is one of solid, if modest, growth, the group of stragglers at the back of the pack (to which would could add names like Latvia, Portugal, Romania, Finland, and Ukraine, where PMI surveys do not currently exist) point to potential problems further on down the line in 2010.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9KrbMTLg2xYChOGBda3YfoiAaqnCI6-VdShDU4i_hb4R8n13d-VbBf_nWUv4QnrrUkvQVmyHLmOmM5vKiQiwZUsBAWq5UT6kYWT7JDFAXKtV2eWckZ9YkW101p0VaR3HZauzN/s1600-h/JPMorgan+Global.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 226px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5399848773531959362" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9KrbMTLg2xYChOGBda3YfoiAaqnCI6-VdShDU4i_hb4R8n13d-VbBf_nWUv4QnrrUkvQVmyHLmOmM5vKiQiwZUsBAWq5UT6kYWT7JDFAXKtV2eWckZ9YkW101p0VaR3HZauzN/s400/JPMorgan+Global.png" /></a><br /><br />Also of concern is the way the index in export dependent countries like Germany and Japan (both suffering the added impact of having a high currency following the ongoing dollar weakness) continue to struggle for air. This is more apparent in the German than the Japanese case at this point, but the survey organisers specifically highlightend the way in which survey respondents in Japan are already reporting a lack of "bounce" in export orders, and this once more serves to highlight the weak spot in the current recovery picture - where are all the customers for all those exports eventually going to come from.<br /><br />Commenting on the Nomura/JMMA Japan Manufacturing PMI data, Minoru Nogimori, Economist of Financial & Economic Research Centre at Nomura, said:<br /><br /><blockquote>“October’s Japan Manufacturing PMI fell for the first time in nine months, by 0.2 points to 54.3. It remains above the key dividing line of 50.0, indicating that production activity continues to recover, but suggesting that the pace of improvement is slowing. The New Export Orders Index, a leading indicator of Japanese exports, fell 2.5 points to 51.6. Although this is the fifth consecutive month in which the figure has been higher than 50.0, the October reading suggests that the pace of improvement has obviously slowed. An improvement in export demand was the main factor behind the rebound in Japanese manufacturing output. Therefore, we think that the strong rebound in production activity in Q2 and Q3 now looks likely to run out of steam from 2009 Q4.”</blockquote><br /><br /><br />This final point, along with the negative impact that problems among the "stragglers" may present for the main group later on up the hill suggests, to me at least, that while many emerging markets remain strong, we will almost certainly not see anything resembling a "V" shaped global recovery, and especially not in the OECD countries. As far as I am concerned this hypothesis can already be safely discarded.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-57610832873869147052009-09-20T14:29:00.026+02:002009-09-20T18:43:22.498+02:00As Hungary's "Correction" Heads For A Dead End, Time For A Change Of Course?Hungary's economic correction still fails to convince. Indeed I am not the only one who remains unconvined by the viability of what is currently taking place it seems, since according to the opposition supporting local daily newspaper Magyar Hírlap, none other than the Hungarian Prime Minister himself may be having doubts, as he is reportedly thinking of leaving the helm of the struggling ship placed under his charge before the next general election, which is scheduled to take place sometime early next year.<br /><br />If this version of events is ultimately confirmed it will only add to the IMFs growing problems out East, since events in Latvia are not going at all according to their liking - see FT Alphaville's Izabella Kaminska's "<a href="http://ftalphaville.ft.com/blog/2009/09/18/72706/another-latvia-wobble/">Another Latvian wobble</a>" of last Friday - and indeed Latvia’s government rapidly cobbled together another 275 million lati ($575.6 million) in spending cuts for 2010 yesterday after EU Economic and Monetary Affairs Commissioner Joaquin Almunia called on Latvia on Friday to “renew a national consensus”, and Prime Minister Valdis Dombrovskis paid a flying vist to Brussels, following a parliamentary vote against sending a real-estate tax bill through to the committee stage, implicitly rejecting part of an agreement with the IMF and EU. How many times this year does that now make it that the national consensus has had to be urgently renewed under directives from either Washington or Brussels, could someone please remind me?<br /><br />Further, Hungary's main opposition party - Fidesz - which looks well-positioned to win next year's general elections, are threatening to rewrite the current ever-so-carefully written 2010 budget when they comes to powe next year, according to the latest statements from party president Viktor Orban.<br /><br />"This (the IMF text, EH) is the most dangerous budget of the past 20 years ... never before has a budget put hundreds of. thousands, or even millions of Hungarian families at such grave risk," Orban told private broadcaster Hir TV in an interview late on Friday. "This budget will not remain in place, we will draw up another one instead," said Orban, a former prime minister, adding that if in power, his government would create one million new jobs in 10 years.<br /><br />Well, things certainly do not look good either for Gordon Bajnai or for the EU Commission/IMF team who are behind the budget. Perhaps that is why the IMF's representative in Hungary, Iryna Ivaschenko, told national news agency MTI yesterday that while the government was committed to its 2010 fiscal targets, there were economic and implementation risks on the nature of which she declined to elaborate.<br /><br /><strong>As Political Pressures and Bad Loans Mount, While The Economy Retreats Underground, It Is Hard To See How The "Correction" Can Work</strong><br /><br />Clearly the above mentioned report about the PMs intentions does come from a rather biased source, but it is interesting to note that credibility is being given to it by <a href="http://www.portfolio.hu/en/cikkek.tdp?k=2&i=18483">normally more impartial sources like Portfolio Hungary</a>, and as they themselves point out there has been no outright denial of the suggestion from government sources.<br /><br />Perhaps even more astonishing was <a href="http://online.wsj.com/article/BT-CO-20090918-708158.html">the statement by the Hungarian Finance Minister Peter Oszko to Dow Jones Newswire on Friday</a> that the most difficult reforms to address economic imbalances have now been completed. "I believe the most difficult part of our job is done - our package creates not only short-term but mid- and long-term fiscal balances" he said. I say astonishing, since as far as I personally can see (take a look for yourself at the charts below) the changes that are needed haven't even begun yet. The whole emphasis have been on cutting the deficit, with little serious thought being given about how the Hungarian economy can get back to growth - which is the only real way the fiscal balances can become stable - all that seems to have happened is a 5% VAT hike to squeeze domestic consumption even further, and some compensatory tax changes on the other side to stimulate employment, but the real economic imbalances have been left untouched. A supply side micro-economists paradise, whisper the words "long term steady state growth" to yourself three times, cross your fingers, and hope for the best. <br /><br />However, the underlying mirky political realities may soon burst their way into the parlour room, to disrupt this happiest of happy families. Indeed everything may well now hinge on getting the budget through parliament and then disrcetely leaving by the side entrance, since Magyar Hirlap suggest that the Hungarian Parliament may well be dissolved directly after the vote on the 2010 budget - which is currently scheduled for 30 November. Apparently everyone's calculations have been thrown awry by the early re-election of José Barroso, and the imminent reappointment of the EU Commission. Plenty of food for thought here.<br /><br />The paper also suggests that Prime Minister Gordon Bajnai now totally accepts that the forthcoming electtions are inevitably lost - the only bit of realism I can see in all this - and as a consequence seeks to have them advanced to February from the currently probable date of April or May.<br /><br />In this way Bajnai would be able to offer himself to replace the present Hungarian representative László Kovács, who is currently Commissioner for Taxation and the Customs Union. Bajnai, it will be remembered, has only been Prime Minister since last April, but then, with these sort of techniques it doesn't take that long to put a country straight, now does it?<br /><br />Advancing elections in a situation where the present budget proposals are massively unpopular may make perfect sense according to a certain democratic political logic, but the economics lying behind the idea must be making people in Washington and Brussels throw up their arms in despair.<br /><br />More evidence to back the idea that the current programme is not working came in the latest report released by the committee which monitors the long term legalisation of Hungary's underground economy. The process is not only not advancing - it has been thrown into reverse gear, it seems.<br /><br />According to Committee president, and Central Statistical Office analyst, Csák Ligeti some HUF 100 billion (EUR 369.17 million) in tax revenues were lost in the first half of the year due to a ressurgence in the growth of the black economy. In his report he noted, by way of contrast, that during the previous two years the state budget had received around HUF 200-250 billion (EUR 738.1-922.6 million) in extra revenue due to the "whitening" process initiated in the autumn of 2006 as part of a programme to correct the large fiscal deficits the country was running.<br /><br />On another front, the IMF warned last week that while Hungary's banking sector had so far weathered the crisis reasonably well - thanks to the multilateral rescue programme - and now has sufficient capital buffers, asset quality still looks set to deteriorate steadily due to weakness in the domestic economy, and especially rising unemployment. This, of course, is another good reason why they should have been including a rapid return to export lead growth in the correction strategy, since obviously if you simply sit back and wait to see what happens, there will be no big surprise - the percentage of Non Performing Loans will just go up and up.<br /><br /><br />"Developments in the banking sector have been positive; so far so good, and in line with one of the main objectives of the (IMF) program to preserve financial stability," Iryna Ivaschenko, the IMF's resident representative in Hungary, told Down Jones in an interview on Thursday.<br /><br />However she immediately added that the IMF projects the amount of non-performing loans, which stood at a "still moderate" 4.8% of overall loans at the end of June, "will peak and at least double in the first quarter of 2010,".<br /><br />This IMF warning follows a Standard and Poor's one at the end of August. The financial profile of Hungarian banks is set to weaken over the near term as a result of the country's ongoing recession, the weak and volatile national currency, and pressure on funding, according to the S&P report.<br /><br />The report, which was entitled "Banking Industry Country Risk Assessment: Hungary", followed the recent decision by Standard & Poor's to revise its ranking of the Hungarian banking system to reflect increased economic risks in the country (BBB-/Negative/A-3) and structural weaknesses in the country's economy and banking industry.<br /><br />"Hungary's significant external financing needs, which stem from high public-sector leverage and large external imbalances, represent a structural weakness that exposes the economy to the tight and expensive funding conditions in global markets," according to Standard & Poor's credit analyst Harm Semder, who wrote the report.<br /><br />The report argues that nonperforming loans and depressed recovery rates are likely to cause a material rise in credit losses, which will in turn subdue bank profits and capital through 2011.<br /><br />Credit risk is heightened by the rapid growth of unseasoned loans - particularly commercial real estate mortgages - over the past five years and a significant increase in loans denominated in foreign currency that lack the foreign currency revenues to service them.<br /><br />The report estimates that cumulative gross problematic assets, which include restructured loans and repossessed collateral, could increase to 25%-40% of total loans during the course of the current domestic recession. It further suggests that the eventual recovery will be slow.<br /><br /><strong>Which Way To Turn? </strong><br /><br />The entire situation in Hungary vis-a-vis wages, employment and inflation continues to be preoccupying. The country is in the midst of a huge correction, and depends on improving exports in order to attain economic growth.<br /><br />Yet the correction is not proceeding as planned. Inflation - at an annual rate of 5% in August, is far too high in contrast to benchmark German inflation which remained negative in August (minus 0.1% ) to be recovering competitiveness. Real wages have continued to rise, and only sneaked into negative territory for the first time in over six months in July - with a 1.1% drop in the benchmark ex-bonus hourly rate in the private sector. Total employment is falling slowly, but even this process masques an important shift towards public sector employment, as the number of public employees has risen substantially in recent months while the number of employees in the private sector has continued to fall - exactly the opposite of what was meant to be happening. Meanwhile the country continues to get ever deeper in debt thanks to the relatively generous financing conditions offered by the EU and the IMF. The point is where does this all end? Where is the correction here?<br /><br />The National Bank of Hungary is struggling to find an adequate monetary response. The bank lowered its benchmark interest rate by 50 bp to 8% last week, but this still represents a real interest rate of around 3%.<br /><br />The move followed a surprise 100-bp rate cut at the end of July. While a month ago, the market was expecting 50 bp easing, this time there was no real surprise. As for the future, the National Bank of Hungary release uses standard central bankspeak that intentionally remains ambiguos and guarantees the Bank Council is not committed in any particular direction. As long as there is no change in the international environment over the coming months, the the Council will be most likely having to decide whether to cut a further 50 bp or more.<br /><br />So while the bank has evidently eased policy considerably, monetary conditions are evidently still far too tight to stimulate dynamic activity in the private sector, which is almost literally wilting on the vine at the present time.<br /><br />Meanwhile, in a further sign that the recession is settling in for the long haul, Hungarian retail sales extended their decline to 29 months in June as IMF/government measures to narrow the budget deficit continued to sap consumer spending.<br /><br /><strong>True Love In The Eternal Embrace?</strong><br /><br />Well, despite the fact that many may think the expression "eternal triangle" in the present context refers to the Hungarian government, the EU Commission and the IMF, they would be wrong since one convenient way of thinking about what just happened in Hungary could be to use another kind of eternal triangle the one developed in Nobel Economist Paul Krugman’s model of the same name, which postulates that when it comes to tensions within the strategic trio formed by exchange rate policy, monetary policy, and international liquidity flows, maintaining control over any one implies a loss of control in one of the other two.<br /><br />In the case of the Central Europe “four”, Poland and the Czech Republic opted for maintaining their grip on monetary policy, thus accepting the need for their currency to “freefloat” and move according to the ebbs and flows of market sentiment. As it turns out this decision has served them remarkably well, since the real appreciation in their currencies which accompanied the good times helped take some of the sting out of inflation, while their ability to rapidly reduce interest rates into the downturn has lead to currency depreciation, helping to sustain exports and avoid deflation related issues.<br /><br />The other two countries (Hungary and Romania), to a greater or lesser degree prioritised currency stability, and as a result had to sacrifice a lot of control over monetary policy, in the process exposing themselves to the risk of much more violent swings in market sentiment when it comes to capital flows. Having been pushed by the logic of their currency decision towards tolerating higher inflation, they have seen the competitiveness of their home industries gradually undermined, and as a consequence found themselves pushed into large current account deficits for just as long the market was prepared to support them, and into sharp domestic contractions once they were no longer disposed so to do.<br /><br />A second problem which stems from this “initial decision” has been the tendency for households in the latter two countries to overload themselves with unhedged forex loans, a move which stems to some considerable extent from the currency decision, since in order to stabilise the currency, the central banks have had to maintain higher than desireable interest rates, which only reinforced the attractiveness of borrowing in forex, which in turn produced lock-in at the central bank, since it can no longer afford to let the currency slide due to the balance sheet impact on households. Significantly the forex borrowing problem is much less in Poland than it is in Hungary or Romania, and in the Czech Republic it is nearly non-existent.<br /><br />The third consequence of the decision to loosen control on domestic monetary policy has been the need to tolerate higher than desireable inflation, a necessity which was also accompanied by a predisposition to do so (which had its origin in the erroneous belief that the lions share of the wage differential between West and Eastern Europe is an “unfair” reflection of the region’s earlier history, and essentially a market distortion). The result has been, since 2005, a steady increase in unit wage costs with an accompanying loss of competitiveness, and an increasing dependence on external borrowing to fuel domestic consumption.<br /><br />So, if we look at the current state of economic play in the four countries, we find two of them (Hungary and Romania) undergoing very severe economic contractions - to such a degree that in both cases the IMF has had to be called in. At the same time both of them are still having to “grin and bear” higher than desireable inflation and interest rates. In the other two countries the contraction is milder, the financial instability less dramatic, and both inflation and domestic interest rates are much lower. Really, looked at in this light, I think there can be little doubt who made the best decision.<br /><br /><strong>Hungarian GDP - The Big Slide</strong><br /><br />While wages and prices more or less steadily wend there way upwards, we have no hurry hear, you understand, GDP has been in freefall. Year on year it was down an annual 7.5% in Q2 (and a seasonally adjusted 2% from the first quarter) . The Hungarian government currently expects the economy to contract 6.7 percent this year, in the largest drop in outout since 1991. My view is that we have a total policy trap in operation here, since neither monetary or fiscal policy are available to an adequate degree (even after today's change interest rates are still at 8%), and there is thus little support available to put under the economy at this point. The only way to break the circle in my opinion is to violently kick start exports by letting the forint drop, bringing down interest rates, and restructuring all those CHF loans.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIbwt7xmEx_Vmlg9sisbCdHk-ZknDTICnIQ6l1pzjMgjPKnGGJ3R1psf1rKt34RtDeoFvMWxSm6kuDVA2BUAw2KxpxW98AQVbZojPVRgSiLm1qvbNuQsXdzabsnYSy4g2mz0Bo/s1600-h/GDP+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 198px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383528067714758754" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIbwt7xmEx_Vmlg9sisbCdHk-ZknDTICnIQ6l1pzjMgjPKnGGJ3R1psf1rKt34RtDeoFvMWxSm6kuDVA2BUAw2KxpxW98AQVbZojPVRgSiLm1qvbNuQsXdzabsnYSy4g2mz0Bo/s400/GDP+one.png" /></a><br /><br />If, instead of browsing over all those diplomatic statements we look at what is going on on the ground, then we find that private sector employment is now well down, by 9.2% y-o-y in July. While in the same month industrial output was down 19.4% over a year earlier. Something just doesn't seem to be working as it should be here.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwLXLtbzZZPctHNvPdlsH8ZibXxFsaR2VGk5j2ZEgiTJaft2bumL9J0AkJ2JPxukixxHOSnVwWAGkGaShQ6lyqLrkjcOzbL_Kng-pg0SWi23aiNCEB3O8BUdDvbuDMozrYA5Er/s1600-h/gdp+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383528674861012434" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiwLXLtbzZZPctHNvPdlsH8ZibXxFsaR2VGk5j2ZEgiTJaft2bumL9J0AkJ2JPxukixxHOSnVwWAGkGaShQ6lyqLrkjcOzbL_Kng-pg0SWi23aiNCEB3O8BUdDvbuDMozrYA5Er/s400/gdp+2.png" /></a><br /><br /><strong>Unbalanced Movements In Employment</strong><br /><br /><br />Not surprisingly given the strength of the contraction total employment fell back again, for the second consecutive month, in July, and stood at was 2.657 million. There were 1.803 million in the private sector and 765 thousand in the public sector. Total employment was thus down 4.4% over July 2008.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhL9iVMIi1hxqXIbjq1wcZIdQaD7577psgSMdiNNfFl5zRP8F2CgiQvfqCp2-LLiQFcZtrjJ3z3GVOOufcb9mASD2uAGr0oClohVXoczTww1VIIDwHaR4f8U3nYzwKM8w3YkNkh/s1600-h/Total+Employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383529101482905266" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhL9iVMIi1hxqXIbjq1wcZIdQaD7577psgSMdiNNfFl5zRP8F2CgiQvfqCp2-LLiQFcZtrjJ3z3GVOOufcb9mASD2uAGr0oClohVXoczTww1VIIDwHaR4f8U3nYzwKM8w3YkNkh/s400/Total+Employment.png" /></a><br /><br />Private sector employment is well down in Hungary, by 9.2% y-o-y in July. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMeB9nOB0JBbXyV69WTZjnvUXcec5f_J-g6lqrwXiydGT7JkBssIynhHqA21hAAGoC7lUMekAulGLgWpncYzO58uVjslER_ZOUg8XWcX2t-mqXqMr6bfx6A4t50_dKYZ1vzbyj/s1600-h/hungary+private+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383529460455600114" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiMeB9nOB0JBbXyV69WTZjnvUXcec5f_J-g6lqrwXiydGT7JkBssIynhHqA21hAAGoC7lUMekAulGLgWpncYzO58uVjslER_ZOUg8XWcX2t-mqXqMr6bfx6A4t50_dKYZ1vzbyj/s400/hungary+private+employment.png" /></a><br /><br />On the other hand, public sector employment has been chugging away on the up and up, due to job creation under the short term stimulus programme, courtesy indirectly of the IMF, who have permitted a larger than anticipated budget deficit.<br /><br />But don't get me wrong, it's not the stimulus I am quibbling about here, it is what it is being used for, and the absence of a realistic plan. It's easy enough to run up debt, especially when the EU Commission and the IMF guarantee you, but its a lot harder to pay it down again later, and Hungarian debt to GDP now looks set to go through the 80% of GDP level in 2010. So, the outcomes we are seeing simply don't seem to me to be producing a large enough structural change in the right direction. On the other hand, even this public sector employment boost now seems to have started to turn, since even public sector employment fell back on the month in July - for the first time in six months - although it was still up 5.6% year on year.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggKODtEtGvkiMiAGxlFfEftbDCgZninlhy_V8zqyUwrfZHEoMuswMjoF-8wQI75Jk5kPYL43mT8GQXhpsKzr3TuaNzpfJfhpkeEEsk3dtvvl3RRKEdfa5sAEVs3QLA0TKM4hbv/s1600-h/Hungary+public+sector+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383530086376145346" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggKODtEtGvkiMiAGxlFfEftbDCgZninlhy_V8zqyUwrfZHEoMuswMjoF-8wQI75Jk5kPYL43mT8GQXhpsKzr3TuaNzpfJfhpkeEEsk3dtvvl3RRKEdfa5sAEVs3QLA0TKM4hbv/s400/Hungary+public+sector+employment.png" /></a><br /><br />Hungary's gross average ex bonus private sector real wages entered negative territory in June, for the fisrt time in over six months, and fell at annual rate of minus 1.1 percent.<br /><br />Real public sector wages continue to fall sharply, and contracted by an annual 11 percent year-on-year in July following a 13.4 percent contraction in June - although some of the volatility here is the result of a changed system of payment for the additional (13th) month's salary. What is happening in Hungary is really an obvious example of "sticky wages" if ever there was one as far as I can see, since employment in the private sector is falling, and unemployment rising, so you would expect the opposite effect to operate, and real wages to be falling sharply at this point. According to Erika Molnarfi of the stats office, the upward drift in average private sector salaries is the outcome of a sharp decline in production workers which was not accompanied by a decline in administrative workers, exactly the opposite result to that you want to see.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisxWaT49YUhSavPJoZ3TWTBW_s4Hyei958KCFEGVGEUx3i51nKkhKTtCti_5OMV0q2QVtuL_zT2-r_FbL2UneUzJJZWoVwWJbD9k1_dk-xwVO_iNVrT1TgVvg91mNgJFUbfWGB/s1600-h/hungary+real+wages.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 207px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383531989533723138" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisxWaT49YUhSavPJoZ3TWTBW_s4Hyei958KCFEGVGEUx3i51nKkhKTtCti_5OMV0q2QVtuL_zT2-r_FbL2UneUzJJZWoVwWJbD9k1_dk-xwVO_iNVrT1TgVvg91mNgJFUbfWGB/s400/hungary+real+wages.png" /></a><br /><br /><strong>Inflation Stubbornly High</strong><br /><br />Far from the current recession leading to a significant downward shift in wages and prices, real wages had been rising continuously until July, while Hungary's consumer prices were still running year on year at 5% in August - up from 3.7% in June due to the VAT effect, and still far to high to start restoring competitiveness. . If the current trend continues, and the HUF remains in the region of its current euro parity, then Hungary's agony looks set to continue unabated well into 2010.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvxfH6EW82duEUjWFLENAS46J3gaKOBznBgejtqge1WcUyvkcvmlgA0Nuq9tRwO0hyZ4bgD8YbEI1C4zXDOwisn7xGOrSnKtjFU4bimPbFDmy9dl8qWXBdc36LxMInwYTH-AGw/s1600-h/hungary+CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383533663939667778" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvxfH6EW82duEUjWFLENAS46J3gaKOBznBgejtqge1WcUyvkcvmlgA0Nuq9tRwO0hyZ4bgD8YbEI1C4zXDOwisn7xGOrSnKtjFU4bimPbFDmy9dl8qWXBdc36LxMInwYTH-AGw/s400/hungary+CPI.png" /></a><br /><br />And Hungarian manufacturing output fell back again in July, and industrial output decreased by 19.4% compared to July 2008. The volume of production was 22.1% lower over the first seven months of 2009 than in the same period of the previous year. The volume of industrial production fell back in July by 0,7% on June according to seasonally and working-day adjusted indices. Industrial export sales declined by 25.2% in the first seven months of 2009 and by 19.8% in July compared to the same period of the previous year, as a result of a sharp fall in external demand.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1k65nDoVTPSMjDiKbZfNDKr8W7GuhucqbyxV3wrDAVOogE9eOOiNnsZM91veLcJK7DONS5dOFjjLu4sPdcFym1VmlyEHO4iwETL4g8hO9yUxoFGLRCsK7CHA1598_278KMcDb/s1600-h/IP+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383534164564347202" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh1k65nDoVTPSMjDiKbZfNDKr8W7GuhucqbyxV3wrDAVOogE9eOOiNnsZM91veLcJK7DONS5dOFjjLu4sPdcFym1VmlyEHO4iwETL4g8hO9yUxoFGLRCsK7CHA1598_278KMcDb/s400/IP+two.png" /></a><br /><br />So Hungary is suffering from a generalised drop in demand - domestic, export, government, and investment - for which it is difficult to see any short term remedy.<br /><br />Investments fell in the second quarter of 2009 by 4.7% compared to the same period of 2008. In the first half of 2009 investments in the national economy were 6% down over the corresponding period of the previous year. Investments did however increased by 0.4% quarter on quarter, but when we break this down we find that of the 4.7%annual drop in investments in the second quarter those in machinery and equipment fell by 11.6%, while the volume of construction investments – due to investments in dwellings and motorway constructions – grew by 1.1% compared to the same period of 2008. But when we look at the construction data we find that the improvement in construction is all about civil engineering, so any increase in machinery and equipment investment is still some way off at this point.<br /><br />Evidently the first sign of any real recovery in the Hungarian economy will come when machinery and equipments investments stabilise and even start to increase, since that will be a reflection of the expectation of future demand arriving further down the pipeline, and will be a measure of real employment creating possibilities.<br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNOZnn-DiqN0fD7H5y8tLm4JiLSlMVBdWKrnQvXpEDmISWuJpG2MaeWDE5xtVwbizKk0tm1Rx0OCK43DoKgFG2rI2jdLssZIBm6VVu3KajKRLvjMVXDtbGP3B3hlNbg22IuGYN/s1600-h/hungary+IP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383533972147529202" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNOZnn-DiqN0fD7H5y8tLm4JiLSlMVBdWKrnQvXpEDmISWuJpG2MaeWDE5xtVwbizKk0tm1Rx0OCK43DoKgFG2rI2jdLssZIBm6VVu3KajKRLvjMVXDtbGP3B3hlNbg22IuGYN/s400/hungary+IP.png" /></a><br /><br />But things don't look set to improve soon, since Hungary's purchasing manager index dropped by 3.4 points to 45.8 points in August, according to the most recent report from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM). The latest data is highly disappointing not only because Hungarian manufacturing has now been contracting for 11 straight months, but because the August eurozone PMI index showed a larger-than-expected pickup. This thus suggests that Hungary is being left behind in the scramble.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkz8kEH9vyAyWtkJ-1u_HOMrMI0aNFu9homIm-HSNjm8DRbIbdsyqAxrXnbKBW0_ZL-YxWwIdP3RSRbDLgAPLIFMZ041O4zwYnAwAGTxPF6d7WDwaBQo5BphzlKP5V9IPdjmQv/s1600-h/hungary.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 228px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383535214992523890" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkz8kEH9vyAyWtkJ-1u_HOMrMI0aNFu9homIm-HSNjm8DRbIbdsyqAxrXnbKBW0_ZL-YxWwIdP3RSRbDLgAPLIFMZ041O4zwYnAwAGTxPF6d7WDwaBQo5BphzlKP5V9IPdjmQv/s400/hungary.png" /></a><br /><br />E<strong>xports Remain Weak, And Imports Are Even Weaker</strong><br /><br />Hungary recorded its fifth monthly trade surplus in June, coming in at 457,3 million euros slightly below the 490.1 million euros acheived in May but well above the 30.8 million euros of June last year.<br /><br />Now good news is always good news, but it is important to understand that this result was almost entirely achieved via a dramatic drop in imports, which plunged an annual 30.4 percent in June (following a 32.3 percent decline in May). It is impossible to talk of any marked improvement in exports, since these fell by an annual 21.1 percent, decelerating from the 24.1 percent drop in May, but still very large. While in the short term this substantial drop in imports (and hence rise in the trade balance) is GDP positive, it is very negative for living standards in the longer term, and the whole situation needs to be reversed by a large boost in exports leading imports as the eurozone economy eventually recovers. But to be able to achieve this Hungarian industry needs to do more, much more, to achieve competitiveness.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicH91UlRGJoBdZQapZkuUF2ulp1FhBGW6kIjftitZ6b6cY_d8ZLadzVXESt6sajYOsQWPVeU49nVFEvuq-pzhFouRs6bTyS_GloHl5vRSjyCfFCglLTWJcxm9eNQkikAsMdBN4/s1600-h/hungary+exports+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383535528268211394" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicH91UlRGJoBdZQapZkuUF2ulp1FhBGW6kIjftitZ6b6cY_d8ZLadzVXESt6sajYOsQWPVeU49nVFEvuq-pzhFouRs6bTyS_GloHl5vRSjyCfFCglLTWJcxm9eNQkikAsMdBN4/s400/hungary+exports+one.png" /></a><br /><br />Over the January-June period, the volume of exports and imports fell by 20 and 25 percent, respectively, compared to the same period of the preceding year. The trade balance showed a surplus of HUF 606 billion (EUR 2,055 million), which meant an improvement of HUF 534 billion (EUR 1,766 million) compared to the surplus of HUF 72 billion (EUR 288 million) in January-June 2008. In January-June 2009, the forint price level of exports and imports both increased by 6 percent, respectively, The forint exchange rate had however weakened by 17 percent with repsect to a basket of leading foreign currencies, and within this by 14 percent to Euro and by more than 30 percent to the dollar. So, if getting the growth needed to drive GDP is the objective, and this is any evidence, then there is still a long long way for the forint to fall.<br /><br />Over January-June 2009, the export and import volumes of machinery and transport equipment, which constitute 60 percent of exports and nearly 50 percent of imports, fell by and above average 24 percent in the case of exports, and by 27 percent in the case of imports.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE4aLL7Hm0XuBDYM-HwufBwiDImjpMnl37EyUde4UZitTV5HDo7Q17imXRGvEcy6Y7-jTVllzcPCqgQXjaqJ_DrtSvh9Mk6SfNNa8AfdnLatixV16sXgiRJUJtgFLN7T7V4gCR/s1600-h/hungary+exports+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 205px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383535621102219570" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgE4aLL7Hm0XuBDYM-HwufBwiDImjpMnl37EyUde4UZitTV5HDo7Q17imXRGvEcy6Y7-jTVllzcPCqgQXjaqJ_DrtSvh9Mk6SfNNa8AfdnLatixV16sXgiRJUJtgFLN7T7V4gCR/s400/hungary+exports+two.png" /></a><br /><br /><br /><strong>Domestic Demand Drifts On Downwards</strong><br /><br />Construction activity was down by 5.1% in July as compared to July 2008. In the first seven months of 2009, output was down by 2.4%. In comparison June, production fell by 12.2% in July according to indices adjusted for seasonality and working days. This large drop is really only a reflect of the pre VAT introduction surge registered in June.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQXMBGu95cVStBbka4ELwrWMHyrC4C8Dm5th8scAja76WfA50QUmAvNHJuy9gknoVHT1Z3HOiWzPxCYq3TsX-PViQ5Zu2D1EAdiK_dBjsp6isA9NbdjmC54KD3eIpSDBH9j04N/s1600-h/hungary+construction+index.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383536194142123922" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQXMBGu95cVStBbka4ELwrWMHyrC4C8Dm5th8scAja76WfA50QUmAvNHJuy9gknoVHT1Z3HOiWzPxCYq3TsX-PViQ5Zu2D1EAdiK_dBjsp6isA9NbdjmC54KD3eIpSDBH9j04N/s400/hungary+construction+index.png" /></a><br /><br />The two construction sectors are moving in opposite directions at the moment. Within the 5.1% aggregate increase, building construction was down by almost a quarter, while civil engineering works expanded by 19.6%. From the start of the year the construction of new buildings is down by 12.7% while civil engineering works are up by 12.3%.<br /><br />From the September 2006 peak construction activity as a whole is now down by 27.58%. September 2009 will mark the start of the third year of contraction.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwy23SpiWlXNEHTXNP6KRxsUwtmMbw6EoQr2s1aXttedryiSbYLCcOPNE-gRFkYiAyOolHNuKSyfFrFyjOJpAszTHPbYuvmkOygZBrVLzMgnB_y6kP1wlraAcK5tRKjpiMuv32/s1600-h/Hungary+construction+P2P.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 212px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383536405141047298" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhwy23SpiWlXNEHTXNP6KRxsUwtmMbw6EoQr2s1aXttedryiSbYLCcOPNE-gRFkYiAyOolHNuKSyfFrFyjOJpAszTHPbYuvmkOygZBrVLzMgnB_y6kP1wlraAcK5tRKjpiMuv32/s400/Hungary+construction+P2P.png" /></a><br /><br />Hungary's retail sales fell by 2.2% in June compared to June 2008, although sales did increase by 0.5% compared to the previous month. Of course, we need to remember in this case that the 5% VAT hike was introduced on 1 July, so it is perhaps surprising that the increase wasn't bigger.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxR-NbMLGgnV66YbXz40dsOXpMtBzx4kiY8oMZ3oLF7XViBjiKUmErPyoFFYgci53l982TA9DxOGbix89lOzsHBxz7njGA40lYP00fenuy0nlP5uJLNNfzql5vZBzM_Zp2YrLs/s1600-h/hungary+retail+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383537607271538946" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxR-NbMLGgnV66YbXz40dsOXpMtBzx4kiY8oMZ3oLF7XViBjiKUmErPyoFFYgci53l982TA9DxOGbix89lOzsHBxz7njGA40lYP00fenuy0nlP5uJLNNfzql5vZBzM_Zp2YrLs/s400/hungary+retail+one.png" /></a><br /><br />Thus the month on month increase is very misleading, since it was evidently driven by the government decision to raise value-added tax on the first of July - in an attempt to compensate for revenue losses which will be produced by forthcoming reductions in personal income and payroll taxes . So the increase in sales was in fact due to an attempt to avoid the 5% rise in VAT, and we should be ready for a sharp drop in July. Prime Minister Gordon Bajnai is in the process of implementing spending cuts worth 1.3 trillion forint ($6.9 billion) over a period two years in an attempt to keep the budget deficit in check.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidFy8xP7LBCsl8QuXVWFzZk_gafLsU5a46hgD6WYWs2RT41CTBOLNVE7XdFEoAvnoSY88F7GrIW4PPKjIsFu9woyTSXb4GImlGXdxHWZAedBf_OTLTjqFh_XGu2LK6sjKW___5/s1600-h/hungary+retail+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383537907127943634" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEidFy8xP7LBCsl8QuXVWFzZk_gafLsU5a46hgD6WYWs2RT41CTBOLNVE7XdFEoAvnoSY88F7GrIW4PPKjIsFu9woyTSXb4GImlGXdxHWZAedBf_OTLTjqFh_XGu2LK6sjKW___5/s400/hungary+retail+two.png" /></a><br /><br /><br /><strong>While The Central Bank Is Caught In A Policy Trap</strong><br /><br />Hungary’s central bank cut its benchmark interest rate to the lowest level in 17 months at the end of August to try to help jolt the countryt out of its worst recession in almost two decades. The Magyar Nemzeti Bank lowered the two-week deposit rate to 8 percent from 8.5 percent. Monetary policy makers voted for the 50 basis-point cut with an “overwhelming” majority over a reduction to 7.75 percent according to central bank President Andras Simor. In fact the minutesd showed that the bank cut interest rates by a seven to one majority, with one member voting for a 75 base point cut.<br /><br />In fact many analysts now see further easing in the pipline, but in taking this stance they need to think about two points.<br /><br />i) The Hungarian government is still incredibly complacent about the inflation problem, and currently forecasts that inflation will only slow by the end of next year to something just below the central bank's current medium-term target which is itself very complacent.<br /><br />"We expect inflation to slow from [an annual average of] 4.5% this year to 4.1% in 2010. As for 2010, the December inflation figure may start with a digit 2," Finance Ministry State Secretary Tamas Katona told journalists last week.<br /><br />In its latest report on inflation, published in August, the National Bank of Hungary projected that inflation will likely dip below the 3% mark from the third quarter of 2010 onward. The central bank's annual inflation forecast is 2.5% on average for the second half of next year.<br /><br />But if Hungary wants to avoid a substantial devaluation then the internal devaluation needs to operate, and to a significant degree, which makes these current forecasts simply laughable. You wouldn't have thought, given all the complacency that the economy was contracting at around an annual 7% rate.<br /><br />ii) the key problem for the central bank is the value of the forint - given the level of household exposure to Forex loans. My opinion is that the recent recovery in the currency value has been almost entirely driven by yield differentials, and by self-fulfilling expectations (traders expect the currency to rise), rather than by any change in the underlying economic fundamentals, which as we have seen, has not taken place.<br /><br />But with consumption sinking, government spending falling and exports insufficiently competitive to drive the necessary surplus, the whole thing is now becoming rather a mess, with no clear economic policy objective in the short term (except, of course, cutting the bfiscal deficit and maintaining a strong exchange rate), while in the long term the emphasis is rightly on increasing exports. But no one has any idea of how exactly to correct prices sufficiently with the CHF mortgages stuck in the middle, and it remains to be seen how the markets will ultimately respond to these rate reductions as and when the wind of risk sentiment changes, as it will.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhS1s89AyBrvV-YVEhKpxjPyvpY6NedowM6hk-N_a2Hm-9Du-QYMGnrLJtl8QDPTi3VsXwNild0Gnoa4uzHROB2QT2JU3luU7juI1cnVLhVN7NqqCkNA6YMs8wXHay51-WOA0pA/s1600-h/Hungary+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 248px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383538131362307778" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhS1s89AyBrvV-YVEhKpxjPyvpY6NedowM6hk-N_a2Hm-9Du-QYMGnrLJtl8QDPTi3VsXwNild0Gnoa4uzHROB2QT2JU3luU7juI1cnVLhVN7NqqCkNA6YMs8wXHay51-WOA0pA/s400/Hungary+interest+rates.png" /></a><br /><br />Basically the problem is the value of the forint. My opinion is that the recent recovery in the currency value (see chart below) has been almost entirely driven by yield differentials, and by self-fulfilling expectations (traders expect the currency to rise), rather than by any change in the underlying economic fundamentals, which as we have seen, has not taken place.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizxUyEPKDNHpQgYb7WqSrydcEoTvuoNfwEI7ZdeCT2swrfKyxoIw4Nw0iRR3RcVhJcYIJtYgWoCTlo45b20o7JkL8rqx3mTMjEnNkqf1xG1WlFBid_mpX6kcABsBumB0jKtqqf/s1600-h/five+year+forint+chart.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383538415132361474" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizxUyEPKDNHpQgYb7WqSrydcEoTvuoNfwEI7ZdeCT2swrfKyxoIw4Nw0iRR3RcVhJcYIJtYgWoCTlo45b20o7JkL8rqx3mTMjEnNkqf1xG1WlFBid_mpX6kcABsBumB0jKtqqf/s400/five+year+forint+chart.png" /></a><br /><br />The problem the central bank and the Finance Ministry have to address is the ongoing issue of the mountain of Swiss Franc denominated mortgages.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlGefH1m41eD_bYgWl7ggpJbP6T6LUbFaeaQJxf1RnGI_9-puX1god0E17TDFDCyex-cCB3BW384O70bHDQyJizbmpT1QlP-QQxs6zvh-jnhDJo3pNB90clrDwOPTe4kxp9skm/s1600-h/forex+mortgages.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 236px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383538726334263634" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlGefH1m41eD_bYgWl7ggpJbP6T6LUbFaeaQJxf1RnGI_9-puX1god0E17TDFDCyex-cCB3BW384O70bHDQyJizbmpT1QlP-QQxs6zvh-jnhDJo3pNB90clrDwOPTe4kxp9skm/s400/forex+mortgages.png" /></a><br /><br />These have stopped increasing in recent times, but still constitute a serious obstacle to any devaluation of the HUF, due to the non performing loans issue this would create for the banking sector. Not only has money been borrowed against homes for to fund house purchases, it has also been loaned for consumption, so indeed the fact that even these loans are stagnating hardly bodes well in any way for domestic demand.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFW6_7JUxIkhSrjxw46ZCrMYIew2g5Q10EVOKkNV3iT6IXO024c2BAlMDH2XdYOnJO4AOO4UeW68haxYlDkMMj1XVoNmQoJc35dvAV363co1Lm_huaR19ry2oABw86swLn_H_8/s1600-h/Hungarian+Refis.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 252px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383539011507488898" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFW6_7JUxIkhSrjxw46ZCrMYIew2g5Q10EVOKkNV3iT6IXO024c2BAlMDH2XdYOnJO4AOO4UeW68haxYlDkMMj1XVoNmQoJc35dvAV363co1Lm_huaR19ry2oABw86swLn_H_8/s400/Hungarian+Refis.png" /></a><br /><br />The result of all this botched policy is that Hungary’s EU harmonised unemployment rate rose to the its highest level in at least a decade in May and has been stick there ever since - and with the rise of unemployment, of course the percentage of impaired loans in the banking sector will also continue to grow. The rate rose to a seasonally adjusted 10.3 percent, the highest since at least 1996 and was still there in July (the latest month for which we have Eurostat data).<br /><br />And the situation is more likely to deteriorate than improve, with the central bank forecasting lay-offs of around 180,000 across 2009-2010, nearly 5% of the total number of employed, and now even the number of employees in the public sector is starting to fall back.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTSzL-30NlaEVpISQsju2TYWz33Ilg59v8ODIhL8h7FiMVQ0Y14lcFUtffZSW9v7uuAMy0Ec_6HBd4lC3YBY6d6CsAlcMHzyWQasEYYiVxb00WgIoiLcJyh_5q40xi9U0gpDTo/s1600-h/hungary+unemployment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5383539236649633058" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTSzL-30NlaEVpISQsju2TYWz33Ilg59v8ODIhL8h7FiMVQ0Y14lcFUtffZSW9v7uuAMy0Ec_6HBd4lC3YBY6d6CsAlcMHzyWQasEYYiVxb00WgIoiLcJyh_5q40xi9U0gpDTo/s400/hungary+unemployment.png" /></a>Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-36596111.post-21523571850017658122009-08-14T11:02:00.001+02:002009-08-18T15:00:48.641+02:00From Original Sin To The Eternal Triangle - Lessons From Central EuropeThe non-biblical concept of original sin, as <a href="http://fistfulofeuros.net/afoe/economics-and-demography/escaping-original-sin-in-hungary/">Claus Vistesen notes in this post</a>, when propounded in its standard Obstfeld & Krugman textbook version refers to the situation where many developing economies who are not able to borrow in their own currencies feel forced to denominate large parts of their sovereign and private sector debt in non-domestic currencies in order to attract capital from foreign investors - as evidenced most recently in the countries of Central and Eastern Europe. Well, piling insult upon injury, I'd like to take Claus's point a little further, and do so by drawing on another well tried and tested weapon from the Krugman armoury, the idea of the "eternal triangle".<br /><br />As is evident, the reality which lies behind the current crisis in the EU10 is complex, and has its origin in a variety of causes. But one key factor has undoubtedly been the decisions the various countries took when thinking about their monetary policy and currency regimes. The case of the legendary euro "peggers" - the three Baltic countries and Bulgaria - has been receiving plenty of media attention on late, and two of the remaining six (Slovenia and Slovakia) are now members of the Eurozone, but what of the other four, Romania, Hungary, Poland and The Czech Republic? What can be learnt from the experience of these countries in the present crisis.<br /><br />Well, one convenient way of thinking about what just happened could be to use Nobel Economist Paul Krugman’s Eternal Triangle” model (<a href="http://web.mit.edu/krugman/www/triangle.html">see his summary here</a>), which postulates that when it comes to tensions within the strategic trio formed by exchange rate policy, monetary policy, and international liquidity flows, maintaining control over any one implies a loss of control in one of the other two.<br /><br />In the case of the Central Europe "four", Poland and the Czech Republic opted for maintaining their grip on monetary policy, thus accepting the need for their currency to "freefloat" and move according to the ebbs and flows of market sentiment. As it turns out this decision has served them remarkably well, since the real appreciation in their currencies which accompanied the good times helped take some of the sting out of inflation, while their ability to rapidly reduce interest rates into the downturn has lead to currency depreciation, helping to sustain exports and avoid deflation related issues.<br /><br />The other two countries (Hungary and Romania), to a greater or lesser degree prioritised currency stability, and as a result had to sacrifice a lot of control over monetary policy, in the process exposing themselves to the risk of much more violent swings in market sentiment when it comes to capital flows. Having been pushed by the logic of their currency decision towards tolerating higher inflation, they have seen the competitiveness of their home industries gradually undermined, and as a consequence found themselves pushed into large current account deficits for just as long the market was prepared to support them, and into sharp domestic contractions once they were no longer disposed so to do.<br /><br />A second problem which stems from this "initial decision" has been the tendency for households in the latter two countries to overload themselves with unhedged forex loans, a move which stems to some considerable extent from the currency decision, since in order to stabilise the currency, the central banks have had to maintain higher than desireable interest rates, which only reinforced the attractiveness of borrowing in forex, which in turn produced lock-in at the central bank, since it can no longer afford to let the currency slide due to the balance sheet impact on households. Significantly the forex borrowing problem is much less in Poland than it is in Hungary or Romania, and in the Czech Republic it is nearly non-existent.<br /><br />The third consequence of the decision to loosen control on domestic monetary policy has been the need to tolerate higher than desireable inflation, a necessity which was also accompanied by a predisposition to do so (which had its origin in the erroneous belief that the lions share of the wage differential between West and Eastern Europe is an “unfair” reflection of the region’s earlier history, and essentially a market distortion). The result has been, since 2005, a steady increase in unit wage costs with an accompanying loss of competitiveness, and an increasing dependence on external borrowing to fuel domestic consumption.<br /><br />So, if we look at the current state of economic play in the four countries, we find two of them (Hungary and Romania) undergoing very severe economic contractions - to such a degree that in both cases the IMF has had to be called in. At the same time both of them are still having to "grin and bear" higher than desireable inflation and interest rates. In the other two countries the contraction is milder, the financial instability less dramatic, and both inflation and domestic interest rates are much lower. Really, looked at in this light, I think there can be little doubt who made the best decision.<br /><br /><br /><strong>Appendix</strong><br /><br />Here for comparative purposes are charts illustrating the varying degrees of economic contraction, inflation, and interest rates. GDP contraction rates actually present a little problem at the moment, since one of the relevant countries - Poland - still has to report. However Michal Boni, chief adviser to the Prime Minister, told the newspaper Dziennik this week that the economy expanded at an annual rate of between 0.5% and 1% in Q1. So lets take the lower bound as good, it is still an expansion.<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqYyF9vUbk2rDiD9cU61XzsN5vhM-cattnj1YCH_QVOr-4Q9R0cjCCXaTY7F4-Y-vazJbc7BUReJ7NSGSzBNPb2lpf7QshDmSqvhRMji3N7VrNolPPQvdAXwqO_cgTQTbIj9AbZg/s1600-h/gdp.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520243749636306" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqYyF9vUbk2rDiD9cU61XzsN5vhM-cattnj1YCH_QVOr-4Q9R0cjCCXaTY7F4-Y-vazJbc7BUReJ7NSGSzBNPb2lpf7QshDmSqvhRMji3N7VrNolPPQvdAXwqO_cgTQTbIj9AbZg/s400/gdp.png" /></a><br /><br />The economy in the Czech Republic contracted by an estimated 4.9% year on year in the second quarter.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgD2GIlti0Hj9zUIH_iDB6jEKsoZn3MWYy57roAxRHASjdaWQxbndfoybO6S8-qcQMKI7wMmQfXlGLS15AK6umQLQujfAb7vNcpdSQAGIZnD6IG5jDGgXswJ40lrEcfHQAenFikdw/s1600-h/gdp.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 232px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516514917178322" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgD2GIlti0Hj9zUIH_iDB6jEKsoZn3MWYy57roAxRHASjdaWQxbndfoybO6S8-qcQMKI7wMmQfXlGLS15AK6umQLQujfAb7vNcpdSQAGIZnD6IG5jDGgXswJ40lrEcfHQAenFikdw/s400/gdp.png" /></a> The Hungarian economy contracted by an estimated 7.4% year on year in Q2.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcFlxl9VEwD-EkgejI5OgyvHZ76vNgxizp9awfM68-YFEVgIbEsADyYWCKNBO8c5ykYgZTsWVeYgOiw01RmOgBHhGmW4fKWABTMe6c5s57c2eRLjJrdaOd4tNJnWAO4WZFh3Nljg/s1600-h/gdp+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510800079158962" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcFlxl9VEwD-EkgejI5OgyvHZ76vNgxizp9awfM68-YFEVgIbEsADyYWCKNBO8c5ykYgZTsWVeYgOiw01RmOgBHhGmW4fKWABTMe6c5s57c2eRLjJrdaOd4tNJnWAO4WZFh3Nljg/s400/gdp+2.png" /></a><br /><br />While the Romanian economy contracted by an estimated 8.8% year on year.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCDD_7meMLT0mMStaNh8HMYXfRqudpf0C3c-zwxOhUsLra0NeE5CMlnTtEsyVT4uTArGbzmeGe1_A_MoAPGSeXtzzBsowcDt-PMha2RjUdLx6LAsSY4TjmTdFVqYHS90EYTPwTrg/s1600-h/romania+GDP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369513200130394306" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjCDD_7meMLT0mMStaNh8HMYXfRqudpf0C3c-zwxOhUsLra0NeE5CMlnTtEsyVT4uTArGbzmeGe1_A_MoAPGSeXtzzBsowcDt-PMha2RjUdLx6LAsSY4TjmTdFVqYHS90EYTPwTrg/s400/romania+GDP.png" /></a><br /><strong>Inflation Rates</strong><br /></p><p>Poland's CPI rose by an annual 4.2% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibruLVyU_4tmMOuV8nYY1waO6PvaJCGuZKZ-8rP7hLuaPlUZQV1qSntABtbz43uxj0EUWnZyw3Uq2-Ky0MBflrcLGAXflclX5CeWvtzUsCfRz1EqmexxuDhcH4WXW9t-2Mav94Ag/s1600-h/CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 186px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520178830452706" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibruLVyU_4tmMOuV8nYY1waO6PvaJCGuZKZ-8rP7hLuaPlUZQV1qSntABtbz43uxj0EUWnZyw3Uq2-Ky0MBflrcLGAXflclX5CeWvtzUsCfRz1EqmexxuDhcH4WXW9t-2Mav94Ag/s400/CPI.png" /></a><br />The CPI in the Czech Republic rose by an annual 0.3% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhz5WqjY6RRv1cTTR_gdNlu71QdVXVDT2Oe18ve0_24bRgVqH5JtLMFxbdYfyLfUpIP4N9DGYEb8g9XjCd9Xsp_PzLT0ceUURWODoSNhsliRUkjDv-iTofXBjQBl-8-LOILZvN7og/s1600-h/CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 217px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516440042775362" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhz5WqjY6RRv1cTTR_gdNlu71QdVXVDT2Oe18ve0_24bRgVqH5JtLMFxbdYfyLfUpIP4N9DGYEb8g9XjCd9Xsp_PzLT0ceUURWODoSNhsliRUkjDv-iTofXBjQBl-8-LOILZvN7og/s400/CPI.png" /></a><br /><br />Romania's CPI rose by an annual 5.1% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgxEgQGUWLfEi_LXgKagBDieOSragwBZFYLWbvHlBjcEIScqORCriZRN1f-Ievm5NOclRRinHGDNFvKK83SKQynEvPt_85OVXHlcSGhN8-p13Yg_sH-MpT7eMEd3pQxEwTFrJewA/s1600-h/CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369513059447983618" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgxEgQGUWLfEi_LXgKagBDieOSragwBZFYLWbvHlBjcEIScqORCriZRN1f-Ievm5NOclRRinHGDNFvKK83SKQynEvPt_85OVXHlcSGhN8-p13Yg_sH-MpT7eMEd3pQxEwTFrJewA/s400/CPI.png" /></a><br />Polands CPI rose by an annual 5.1% in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKSQXV_WMJFbxyzZm7bWQfDV_4G0cE7jKLWUo6eOt8qIchrvR6yEzy4P5CbXjzor9iPRAajt1ip-lgLTnt68uRh0qSsPfQhyphenhyphenLbqQHi8DK5IUKbcy01NxL5AdBCWD1Qounwm2mGgA/s1600-h/hungary+CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510635155610482" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKSQXV_WMJFbxyzZm7bWQfDV_4G0cE7jKLWUo6eOt8qIchrvR6yEzy4P5CbXjzor9iPRAajt1ip-lgLTnt68uRh0qSsPfQhyphenhyphenLbqQHi8DK5IUKbcy01NxL5AdBCWD1Qounwm2mGgA/s400/hungary+CPI.png" /></a><br /><strong>Interest Rates</strong><br /><br />The benchmark central bank interest rate in Poland is currently 3.5%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWjz_ZiBkb9-KsUSvkdZvNcchjSy84yGW3v06wXJz4DowRbONuLpTHcHRTb3vSD4tAWHXHZdpNJEfYVSGg988q31Y_wKDzLpGMV9u8oamOBTCDj3SyVQGuwOoBl724dXtQWAOhmA/s1600-h/interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369520115353289810" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWjz_ZiBkb9-KsUSvkdZvNcchjSy84yGW3v06wXJz4DowRbONuLpTHcHRTb3vSD4tAWHXHZdpNJEfYVSGg988q31Y_wKDzLpGMV9u8oamOBTCDj3SyVQGuwOoBl724dXtQWAOhmA/s400/interest+rates.png" /></a> The benchmark central bank interest rate in the Czech Republic is currently 1.25%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi36Qj2wY7xfqCeMA7X9WPpvSYDWp1TwHOirpPmfKF9NrxcIfWQQ3uWQI6WZ7x6d3XfiGpSs8e9rRp15gyoS86QOJYsGTDgAvug9jmhe4Ipk63EXLhbU-ADxQnshbGVh3SS93YlPg/s1600-h/interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369516359161761794" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi36Qj2wY7xfqCeMA7X9WPpvSYDWp1TwHOirpPmfKF9NrxcIfWQQ3uWQI6WZ7x6d3XfiGpSs8e9rRp15gyoS86QOJYsGTDgAvug9jmhe4Ipk63EXLhbU-ADxQnshbGVh3SS93YlPg/s400/interest+rates.png" /></a><br />The benchmark central bank interest rate in Romania is currently 8.5%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVp6ENE3r7tjkAiIWqyTtyf1KklRaKBKLzDGs9IyxxSXDtxvCCJ7rpR1lW36bwvC5-g8UkTZgCLL3mvG7f23iDTZ5GhwOsUQHp1VIWESg1NsovA0rOCO6OQUwdy66xgjmRMKp6/s1600-h/Hungary+interest+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 243px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjVp6ENE3r7tjkAiIWqyTtyf1KklRaKBKLzDGs9IyxxSXDtxvCCJ7rpR1lW36bwvC5-g8UkTZgCLL3mvG7f23iDTZ5GhwOsUQHp1VIWESg1NsovA0rOCO6OQUwdy66xgjmRMKp6/s400/Hungary+interest+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5371287640518185298" /></a><br /><br />The benchmark central bank interest rate in Hungary is currently 8.5%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOtasN3XRDGx1Q9KpCdcR8jMrny6g-0Msv7SXTEseYPLXT0CijDD14ATxN-yinyN8F3-tUM_kkBQv8BrNu_2TAh8YcMr7ecf-YcBbOwLog0kI50hRDHuJ5rHwbMbxpg9d_fx9y8A/s1600-h/Hungary+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5369510538558067954" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOtasN3XRDGx1Q9KpCdcR8jMrny6g-0Msv7SXTEseYPLXT0CijDD14ATxN-yinyN8F3-tUM_kkBQv8BrNu_2TAh8YcMr7ecf-YcBbOwLog0kI50hRDHuJ5rHwbMbxpg9d_fx9y8A/s400/Hungary+interest+rates.png" /></a> </p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-67593858145619104482009-07-23T22:31:00.001+02:002009-07-23T22:33:04.569+02:00Escaping Original Sin in Hungary?by Claus Vistesen: Copenhagen<br /><br />According to <a href="http://www.amazon.com/International-Economics-MyEconLab-1-semester-Student/dp/0321488830">the well known textbook in international economics</a> by Maurice Obstfeld and Paul Krugman [1] the notion of original sin refers to the fact that many developing economies are not able to borrow in their own currencies but are forced to denominate large parts of their sovereign debt in order to attract capital from foreign investors. The argument then goes that if and when the goings get tough those countries will face difficulties paying off their liabilities and once the dust have settled the sin, as it were, has only become more binding when these same economies yet again venture onto international capital markets.<p></p> <p>It is interesting to ponder this story in relation to Eastern Europe where far from being a sin the ability to denominate liabilities in foreign currencies such as Euros and Swiss Francs was almost seen as a virtue of modern capital markets during the boom years which followed the famous meeting in Copenhagen which saw the European family expand to 25 countries, a number which now has risen to 27. On the face of it, it is not difficult to see where this virtue came from. Aggressive expansion by western European banks into the CEE and a low volatility environment ultimately driven by the notion of a road map towards convergence bound to bring forth an equalization in living standards and, in the case of many CE economies, a certain membership into the Eurozone underpinned the fact that the ability to shop foreign currency loans was hardly a sin, but a natural counter product of the newly formed European community.</p> <p>Now, all this has capsized and those economies who where so busy raising rates going into crisis in order to quell the massive inflationary pressures, which further intensified the flow of foreign currency loans, are now effectively stuck with no ability to tweak monetary policy since the low rates which are needed are either impossible (in the case of the Baltics and their Euro pegs) or de-facto impossible in the context of e.g. Hungary and Romania. Moreover, and in a world where major central banks are stuck at the zero bound and where the level of volatility may itself be volatile as we move from optimism to pessimism all that liquidity may yet again prove to be a destabilising factor in the context of Eastern Europe where we were all, I am sure, amazed, to learn a couple of months ago how some analysts were advising clients to play the carry trade with Eastern European economies as designated targets, for more on this see <a href="http://clausvistesen.squarespace.com/alphasources-blog/2009/5/25/the-carry-trade-and-the-global-monetary-credit-transmission.html">this post</a>. </p> <p>So what does all this has to do specifically with Hungary? Well, today we learned from Finance Minister Peter Oszko that Hungary would certainly prefer to issue local currency debt in the future, but given the fact that the IMF loan is not, by nature of it being a loan, permanent Hungary also need to find a viable way to make its policy tools work most effectively. The following excerpt is from Bloomberg;</p> <blockquote> <p>Hungary doesn’t plan to raise foreign-currency debt in the “near future” and will increase sales of forint-denominated bonds to finance the <a onmouseover="return escape( popwQuoteShort( this, 'HUGBCBAL:IND' ))" href="http://www.bloomberg.com/apps/quote?ticker=HUGBCBAL%3AIND">budget</a>, Finance Minister <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Peter+Oszko&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Peter Oszko</a> told Nepszabadsag. “In the short term, the budget doesn’t need foreign- currency denominated financing sources,” Oszko said in an <a onmouseover="return escape( popwOpenWebSite( this ))" href="http://nol.hu/gazdasag/20090723-ha_akarunk__ki_tudunk_menni_a_piacra" target="_blank">interview</a> with the Budapest-based newspaper. The Finance Ministry has confirmed the comments to Bloomberg. “Increasing forint-based issuance is more worthwhile.”</p> <p>Hungary sold 1 billion euros ($1.42 billion) of debt last week in its first offering since the flight of investors forced it to take a 20 billion-euro bailout from the <a onmouseover="return escape( popwOpenWebSite( this ))" href="http://imf.org/" target="_blank">International Monetary Fund</a>, the European Union and World Bank in October. The country is working to wean itself off emergency financing. The IMF-led loan, which “secures a comfortable situation,” runs out in March 2010 and the government must work to ensure the country can finance itself from the market at lower rates by then, Oszko said.</p> <p>“The July auction’s primary importance wasn’t to secure financing but rather to strengthen confidence in the country,” Oszko said. A “smaller” foreign debt sale is possible in the future as “it’s our basic interest to be active in the market.” Hungary could next target U.S. investors with the sale of dollar-based bonds, the newspaper Napi Gazdasag reported today, citing <a onmouseover="return escape( popwSearchNews( this ))" href="http://search.bloomberg.com/search?q=Laszlo+Balassy&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1">Laszlo Balassy</a>, a Budapest-based executive at Citigroup Inc., which helped organize last week’s sale.</p> </blockquote> <p>It should immediately be clear that this represents the original sin issue in full vigour although somewhat in reverse one could argue. Consequently and notwithstanding the obvious problems facing Hungary in the context of lowering rates, the country needs to balance the between issuing debt in foreign currency which would mean further currency translation risk and an even further entrenchment of the high domestic interest rates or issuing in domestic currency which might not be possible at current rates (i.e. rates would need to go up further) or simply not viable given the future financing needs.</p> <p>To put all this in the context of a solid macroeconomic analysis I am in luck since <a href="http://globaleconomydoesmatter.blogspot.com/2009/07/hungary-struggles-to-apply-its-own.html">Edward has just dished out an up to date look at Hungary's economy</a>. As Edward notes straight away, Hungary has now embarked on the great experiment also currently being tested in Latvia of internal devaluation and the long hard climb, through deflation, towards the competitiveness Hungary so badly needs. Now, I know that I tend to move closely together with Edward on many accounts but I dare anyone not to share the sentiment expressed by Edward as he points to the obvious point. The current strategy taken in Hungary to battle the crisis is <em>not</em> working and at some point one really has to stop to ask why.</p> <p>One striking data point is the fact that while the real economy seems in absolute free fall real wages are still rising and given the inevitable point that Hungary needs wages to fall, and a lot, absent devaluation one wonders silently what kind of contractory jolt the real economy needs in order to engender this effect. Meanwhile, Hungary has also recently pulled out the good old trick of raising the VAT something which will surely to push up the main inflation index, once again pulling in the wrong direction.</p> <p>As usual Edward is thorough, very thorough, and I can only suggest to spend the 20 minutes it takes to superficially digest his points. Especially the point about a monetary policy trap is mandatory reading. In terms of a summary of the situation the following gets to the heart of the matter;</p> <blockquote> <p>And in case you had forgotten, here is what is happening to Hungarian GDP: while wages and prices are rising steadily, GDP is in free fall. Year on year it was down 4.7% in Q1 and Hungary’s government currently expects the economy to contract 6.7 percent this year, the most since 1991. My view is a total policy trap is in operation here, since neither monetary (interest rates are currently 9.5%) or fiscal policy are available, so there is little support to put under the economy at this point. The only way to break the circle in my opinion is to let the forint drop, bring down rates, and restructure the CHF loans.</p> </blockquote> <p>As will no doubt come as a big surprise, I completely agree. Hungary needs to address the already existing asymmetry inherent in the economic edifice which should entail a strategy on how to deal with the stock of CHF loans on the households' and corporates' balance sheet. This also gives a final spin on the actual topic of play in this entry.</p> <p>In all probability the dilemma difficulties facing the Hungarian treasury in terms of constructing a viable and solid platform on which to finance its operations is greatly dependent on the issue with the already existing fx denominated loans. If Hungary were to construct a credible and realistic solution to the issue of how to write down/pay off the stock of CHF loans my guess is that the original sin would be a little easier to escape even if not all together.</p> <p> </p> <p>---</p> <p>[1] Who follow the lead of <a href="http://ideas.repec.org/p/nbr/nberwo/7418.html">Eichengreen and Hausmann</a>.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-36841943442279826292009-07-22T09:40:00.006+02:002009-07-23T18:33:44.936+02:00Hungary Struggles To Apply Its Own Unique Version Of "Internal Devaluation"<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSimVz9d0uv_LP1m3ZG7nFtUcg6Kwha-FE1WrtVUVnHPYas6nQCrVJvxpFpm7FhbLb3-z8rxGJdcyKPGZ0oxHduo-JQswmrpg5KY1xANNCMuwVvmc-6Q96PlHL3JaXTPS0ROVLQw/s1600-h/hungary+population.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359146380635611458" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSimVz9d0uv_LP1m3ZG7nFtUcg6Kwha-FE1WrtVUVnHPYas6nQCrVJvxpFpm7FhbLb3-z8rxGJdcyKPGZ0oxHduo-JQswmrpg5KY1xANNCMuwVvmc-6Q96PlHL3JaXTPS0ROVLQw/s400/hungary+population.png" /></a><br /><br />Just what the hell is going on in Hungary? This is the question which even the most cursory inspection of the latest round of data coming out of the country leads me to ask myself. What the hell is going on and just what kind of correction is this the IMF are presiding over here?<br /><br />In May, according to the latest data from the Hungarian statistics office, in the Hungarian private sector real wages were up, and employment was down. Meanwhile in the public sector, real wages were down, but employment was up (contrary to what was supposed to be happening). A recent programme to get workers off the unemployment roles and back to work seems to have had the perverse and contradictory impact of offsetting the fall in private sector employment by giving a sharp boost to public sector employment. So while total employment has remained more or less stable, the balance has shifted, and in the wrong direction. Meanwhile, in an attempt to stem the bloodletting in public finances (the economy remember will probably contract by about 7 percent this year) VAT was raised - by the significant margin of 5 percent (from 20% to 25%) on July 1st, giving consumption, which was already falling sharply, another sharp jolt downwards. Not only that, the Hungararian economy, in order to maintain the value of the forint more or less where it is (all those forex loans) was supposed to be having a major downward correction in wages and prices, yet inflation (which was already at an annual 3.7 percent in June) will surely now be given a hefty kick upwards. So, I ask myself, how does any of this actually make sense, and to who? And meantime the problem of the forex denominated loans remains, and goes jangling around (like any good jailor does) in the background, putting an effective stop on monetary policy just as fiscal policy switches over to complete contracton mode. This is why I talk of "internal devaluation", since the Hungarian authorities (with the agreement of the IMF and the EU Commission) seem to have decided that, rather than resolving the issue of the CHF loans once and for all, they will down the same road that is proving to be so disastrous in Latvia, even though they have their own currency to devalue, should they choose to do so.<br /><br />At the end of the day, the big question which we are all left with is, whether this structural shift in employment, away from the private sector and towards the public sector, and the increase in the consumer price index to be caused by the sharp VAT hike, plus the ongoing rise in real wages, really is the outcome the IMF support programme was intended to achieve?<br /><br /><strong>Wages Up, Employment Down</strong><br /><br />Amazingly, with an economy contracting at at least a 7% annual rate, Hungarian real private sector wages aren't falling, they are still rising. They were up (over and above inflation) by 1.7% in May. Evidently those who are still in employment say, crisis, what crisis?<br /><br /><a href="http://3.bp.blogspot.com/ngczZkrw340/Sl9f6t0LcZI/AAAAAAAAOsE/Fb2a9eRs80I/s1600-h/hungary+real+wages.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 209px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359107543929680274" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjEnOxR3TgWGfGNvW1jbDC33xSoRpFcXcdV-B2M6bTjtqa7kJEi2tjqnlt_DIZdi6YTst261mdni0wINOa8zMUS5tC6p4d-PDOsmY4iIgCBuQVDuLOU9_cTnfxubGv4Bqu4ZNYHcg/s400/hungary+real+wages.png" /></a><br /><br />Unsurprisingly Hungary’s consumer confidence index rose in July for a third month (to minus 63.1) after hitting a record low in April.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhC_YqVwBDsKI6mQnrSaqJ6q41e0K2eutR8PSKkkEBZMpKDBrjJsHAOxHnSU1ig_p25hFO6OnPj-hFdo-bn6p-FwajkBgPniGadfjZccIEHwaWVWBhNzSoaTsoyu_jjWuumnAALpw/s1600-h/hungary+consumer+confidence.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 237px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360511470343923074" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhC_YqVwBDsKI6mQnrSaqJ6q41e0K2eutR8PSKkkEBZMpKDBrjJsHAOxHnSU1ig_p25hFO6OnPj-hFdo-bn6p-FwajkBgPniGadfjZccIEHwaWVWBhNzSoaTsoyu_jjWuumnAALpw/s400/hungary+consumer+confidence.png" /></a><br /><br />“Consumers’ perception of their ability to save in the short-run is what improved the most from June,” GKI said in their statement. Well certainly a 5 point hike in VAT is unlikely to encourage them to spend. In fact, paradoxically, saving is what Hungarians collectively really need to do, to reduce the ballooning government debt and pay down the level of net international indebtedness. But all this simply means is that to get the economic growth necessary to do all the required saving Hungary is going to need to export, and a lot more than it was doing previously, which is why the shift towards public sector employment is so serious.<br /><br />As I say, private sector employment is down in Hungary, by 4.8% y-o-y. While industrial output was down 22.1% in May over a year earlier. Something just doesn't seem to be working as it should be here.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJLW-gdA5muxWuzG0Qn9U2wEjvkBPs84Vt6FjSJupaEQHz8JE0gvE0jWHR1oEc9wALHQUqZvReX2FONFy1BNKayrOh-aAD3nL_2G41VLqfHvqsSrTXibcXYrPqCl9NDbgr-K6gxg/s1600-h/hungary+private+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359126421932508274" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJLW-gdA5muxWuzG0Qn9U2wEjvkBPs84Vt6FjSJupaEQHz8JE0gvE0jWHR1oEc9wALHQUqZvReX2FONFy1BNKayrOh-aAD3nL_2G41VLqfHvqsSrTXibcXYrPqCl9NDbgr-K6gxg/s400/hungary+private+employment.png" /></a><br /><br />On the other hand, public sector employment is on the up and up in Hungary, due to job creation under the short term stimulus programme, courtesy indirectly of the IMF, who have permitted a large than anticipated budget deficit. Don't get me wrong, it's not the stimulus I am quibbling about, it is what it is being used for. The outcomes we are seeing at present don't seem to me to be producing a large structural change in the right direction.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR5dw-ZfMR1lXVgHmpEzjzo2qfrRIDouAjjnramsQbghKVFLzS6aS941CoG-CI7FPnjEVSz4Mc9VSkwO5MdpGiw53YGkiKpYbxG5kkwcp0dEGTEHj_rUKUhg7mh4MOWN9frxouFQ/s1600-h/Hungary+public+sector+employment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359126701178324914" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhR5dw-ZfMR1lXVgHmpEzjzo2qfrRIDouAjjnramsQbghKVFLzS6aS941CoG-CI7FPnjEVSz4Mc9VSkwO5MdpGiw53YGkiKpYbxG5kkwcp0dEGTEHj_rUKUhg7mh4MOWN9frxouFQ/s400/Hungary+public+sector+employment.png" /></a><br /><br />Actually the rise in public sector employment is not a direct result of the increase in the IMF permitted deficit, but rather comes from restructuring funds earlier used to finance social assistance payments. The same ammount of money (at about 100 billion HUF) was used to provide public work opportunities for people who before April were entitled to receive social assistance for staying at home. Now those considered capable of working can only receive benefits if they are registered as public workers and if they are offered a job opportunity by local governent they are compelled to accept it. Thus, like so many things in Hungary, the intention was good even if the execution wasn't.<br /><br /><br />Meanwhile, far from the current recession leading to a significant downward shift in wages and prices, real wages are - as we have seen - still rising, and Hungary's consumer prices were still running year on year at 3.7% in June, down it is true from 3.8% in May, but still far to high to start restorting competitiveness. And of course, the July 1st VAT rise will give consumer prices another stout kick upwards, with some analysts suggesting that year end inflation could be running as high as 6%. If this is anywhere near accurate, and the HUF stays in the region of its current euro parity, then Hungary's agony looks set to continue unabated into 2010.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw92Zu80vgf0nx2FQCJx_GpXj30Qn9E8eGhyphenhyphenRLEvQHs2d5lnl02k_bvkcqBglsU9sAgknAddrVMaiBTXBx154UB4iV3t67P-CeLClnbCybIu4XGfB4NgMrejUs-0LtTa5-icx9HA/s1600-h/hungary+CPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358278327411149410" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiw92Zu80vgf0nx2FQCJx_GpXj30Qn9E8eGhyphenhyphenRLEvQHs2d5lnl02k_bvkcqBglsU9sAgknAddrVMaiBTXBx154UB4iV3t67P-CeLClnbCybIu4XGfB4NgMrejUs-0LtTa5-icx9HA/s400/hungary+CPI.png" /></a><br /><br />And in case you had forgotten, here is what is happening to Hungarian GDP: while wages and prices are rising steadily, GDP is in freefall. Year on year it was down 4.7% in Q1 and Hungary’s government currently expects the economy to contract 6.7 percent this year, the most since 1991. My view is a total policy trap is in operation here, since neither monetary (interest rates are currently 9.5%) or fiscal policy are available, so there is little support to put under the economy at this point. The only way to break the circle in my opinion is to let the forint drop, bring down rates, and restructure the CHF loans.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgooahScLZzETM3OZBhr5iIND0Krs9v_QEPRnTDo1pwUT_lKEC-9NM-bZfwXD9-IcWuZk74oprPCWr4_-KiurZ8Z5OYWWFWs7FI8e0A5LZR12MMivjnrRVNEP-H8wVW504A7S7-PA/s1600-h/hungary+GDP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 198px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5359126977140731298" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgooahScLZzETM3OZBhr5iIND0Krs9v_QEPRnTDo1pwUT_lKEC-9NM-bZfwXD9-IcWuZk74oprPCWr4_-KiurZ8Z5OYWWFWs7FI8e0A5LZR12MMivjnrRVNEP-H8wVW504A7S7-PA/s400/hungary+GDP.png" /></a><br /><br />The result of all this botched policy - Hungary’s unemployment rate rose to the its highest level in at least a decade in May. The rate rose to a seasonally adjusted 10.2 percent, the highest since at least 1996. And the situation is more likely to deteriorate than improve, with the central bank forecasting lay-offs of around 180,000 in 2009-2010, nearly 5% of the total number of employed.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqDoHcCFDGS_pNIhA95t-N2UdmsnHXKZW19krjNOFinHzTgDG6PELWHdXXa0H21lQGt2_lUGuKZs6NrCyhCI0Is6H1LOHbVlILwuoR-n7atFqrmO8gW4UZ17nzZGeSZJSDkslccw/s1600-h/hungary+unemployment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 200px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360624382844588818" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqDoHcCFDGS_pNIhA95t-N2UdmsnHXKZW19krjNOFinHzTgDG6PELWHdXXa0H21lQGt2_lUGuKZs6NrCyhCI0Is6H1LOHbVlILwuoR-n7atFqrmO8gW4UZ17nzZGeSZJSDkslccw/s400/hungary+unemployment.png" /></a><br />One of the important things to grasp about the current situation in Hungary is that this is not a constant size wheel running constantly around the same spindle. The long run outloook is steadily deteriorating as population falls and ages. The same is also true of the working age population, which has now been falling steadily for some years (see chart below).Unsurprisingly therefore the NBH now project that employment will fall by 3.2% this year, followed by a 1.7% contraction in 2010, notably primarily due to layoffs in the private sector.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8jwJAcSWjMl1UYDBBLDd2itbS0bUyQN0qj4-FVviyvk2M2OIRFAoAQ5rp92oc-EyRB3Cima96lro1eAXD4rzt5PrXRkQzs0lembM8Lf9z7xsQYL7MoardbOqNjt8RYORY_xqRUA/s1600-h/hungary+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 205px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5340787387279858098" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8jwJAcSWjMl1UYDBBLDd2itbS0bUyQN0qj4-FVviyvk2M2OIRFAoAQ5rp92oc-EyRB3Cima96lro1eAXD4rzt5PrXRkQzs0lembM8Lf9z7xsQYL7MoardbOqNjt8RYORY_xqRUA/s400/hungary+one.png" /></a><br />Hungary’s industrial output fell at a slower annual pace in May than it did in April as stimulus plans in the European car industry added to demand, but production was still down 22.1 percent on May 2008 (following a 25.3 percent annual decrease in April). Output rose 2.6 percent over the month.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiOoPBA2uAGYldHjf2eIEk5WWyX5q27p2H1MglG8CWo9WFQdouycZiOZPSzFW0nx4P7ZikO9_LIqEOGWAQNxfzbixD1_rMvciyCgoTDg6Lvd1y7Wfb2Be8wOF-hbKeoFI6gA-H8w/s1600-h/industrial+output+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 239px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360655743535417554" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiOoPBA2uAGYldHjf2eIEk5WWyX5q27p2H1MglG8CWo9WFQdouycZiOZPSzFW0nx4P7ZikO9_LIqEOGWAQNxfzbixD1_rMvciyCgoTDg6Lvd1y7Wfb2Be8wOF-hbKeoFI6gA-H8w/s400/industrial+output+one.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiqTWs9PMTNXtfWC2NGDPQFZe0mE96SfGN_7XQm2Qujf-63XckjRixdzETDKKLNsEMV9oXQicX747GL6I5SO8s3ZKBUvRd7N1YHlYIfcuH9IwpyAJPqtZoGcqMG5RISeAIrvDdPA/s1600-h/industrial+output+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360655659214167026" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiqTWs9PMTNXtfWC2NGDPQFZe0mE96SfGN_7XQm2Qujf-63XckjRixdzETDKKLNsEMV9oXQicX747GL6I5SO8s3ZKBUvRd7N1YHlYIfcuH9IwpyAJPqtZoGcqMG5RISeAIrvDdPA/s400/industrial+output+two.png" /></a><br /><br />Hungary's contraction seems to be more or less moving sideways at the moment, and the June PMI came in at 45.8, a slight uptick from 45.4 in May, but hardly a seismic shift. The output improvement was almost all due to the export sector.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv_V8TbYZ3othbM_DW7ygNN0Z5bj-rbufjINRNwHBXm9uQUbjzrGtHafUeoecmMpxG1jaJ4F3AwYUNIYfiIOUiFdf7Xlynpxbt3QIK8DIADyZDnOIx_rnrGHnYEDBNvI_ecso5Mw/s1600-h/hungary+pmi.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 227px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5353421452388718722" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjv_V8TbYZ3othbM_DW7ygNN0Z5bj-rbufjINRNwHBXm9uQUbjzrGtHafUeoecmMpxG1jaJ4F3AwYUNIYfiIOUiFdf7Xlynpxbt3QIK8DIADyZDnOIx_rnrGHnYEDBNvI_ecso5Mw/s400/hungary+pmi.png" /></a><br /><br /><strong>Exports</strong><br /><br />Hungary recorded its fourth monthly trade surplus in May, and came in at 497.7 million euros as compared with 430.3 million euros in April and a deficit of 30.3 million euros in May last year.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEictMNoMFKbtY6XUsCExrJ2HdBT404qD1mhkZ6-LXCKo7A-6XzbzaFeEE8WdnT7kR_BKNQLOAVFqUEl6OuhE08d8p70pvLbfRY2KDUsyz-192OICtgzzdY_htPNZk-UwV4EsBxyrA/s1600-h/hungary+exports+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 219px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360988404232731650" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEictMNoMFKbtY6XUsCExrJ2HdBT404qD1mhkZ6-LXCKo7A-6XzbzaFeEE8WdnT7kR_BKNQLOAVFqUEl6OuhE08d8p70pvLbfRY2KDUsyz-192OICtgzzdY_htPNZk-UwV4EsBxyrA/s400/hungary+exports+one.png" /></a><br /><br />Now good news is always good news, but it is important to understand that this result was almost entirely achieved via a dramatic drop in imports, which plunged 32.3 percent in May (following a 35.4 percent decline in April). It is impossible to talk of any marked improvement in exports, since these fell by an annual 24.1 percent, accelerating from a 29.4 percent drop in April. While in the short term this substantial drop in imports (and hence rise in the trade balance) is GDP positive, it is very negative for living standards in the longer term, and the whole situation needs to be reversed by a large boost in exports leading imports as the eurozone economy eventually recovers. But to be able to achieve this Hungarian industry needs to do more, much more, to achieve competitiveness.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcg4LTaoFxGsHvOcWubQv2LTdpR3xoG25pAaTpiQiZrBe1xiB_1Bbn4H6VPbngQsFfEniPNQUP8n-niJwoULSKm7HjQKIbagG_OR97Sn8i_My7Pi83CsOjfLTWfJDT3qMOxxXa7Q/s1600-h/hungary+exports+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 204px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360988272729237602" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcg4LTaoFxGsHvOcWubQv2LTdpR3xoG25pAaTpiQiZrBe1xiB_1Bbn4H6VPbngQsFfEniPNQUP8n-niJwoULSKm7HjQKIbagG_OR97Sn8i_My7Pi83CsOjfLTWfJDT3qMOxxXa7Q/s400/hungary+exports+two.png" /></a><br /><br /><br /><strong>Investment Activity</strong><br /><br /><br />Hungary is suffering from a generalised drop in demand - domestic, export, government, and investment - for which it is difficult to see any short term remedy. In the first quarter of 2009 investments fell by 7.7% compared to the same period of 2008, while they decreased by 1.1% in comparison with the previous quarter (according to seasonally adjusted volume indices). Within this fall machinery and equipment decreased by 9.9%, while investment in manufacturing industry was down by 6.8%. Evidently the first sign of any real recovery in the Hungarian economy will come when investments stabilise and even start to increase, since that will be a reflection of the expectation of future demand arriving further down the pipeline.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGiY6hpTPFNHahkd0y6tDh3dpFFG_Lcu-LVAfamQslEB0OIHmtFcB2LM9urAfmp0KJc8RluhLglK9hhDq0O4dyYBtPscUMJn4w0XSzY4cCRHy6twpESyN0VtQkBFRN0ViwKyVomA/s1600-h/hungary+investment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 200px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5343114704630711314" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGiY6hpTPFNHahkd0y6tDh3dpFFG_Lcu-LVAfamQslEB0OIHmtFcB2LM9urAfmp0KJc8RluhLglK9hhDq0O4dyYBtPscUMJn4w0XSzY4cCRHy6twpESyN0VtQkBFRN0ViwKyVomA/s400/hungary+investment.png" /></a><br /><br /><strong>Construction</strong><br /><br />Construction activity was down by 10.1% compared to May 2008. In the first five months of the year, output decreased by 6.9%. In comparison with April production decreased by 3.3%. Construction output showed a decreasing trend in connection with the global economic crisis in the past months. In fact there was a significant difference between the performance of the two construction branches, with buildings activity falling by nearly a quarter, while civil engineering works were up by 7.9%. On a seasonally adjusted basis, building activity was 8.6% lower in May over April, while civil engineering was up one percent on the month.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizKmTprEhcTKwsOWU1wnKpgW4irjN_v0yOhAA4lEHF_dKKIuNsyr87SeG4h8CmohXpkoIykFTdm5jfEQM8ThLO4IPtZODpTXnkBOoPGiKaRXb9YRjlrnb7x8onl15ewCW9mei1/s1600-h/hungary+construction+yoy.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 209px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360991828240515330" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizKmTprEhcTKwsOWU1wnKpgW4irjN_v0yOhAA4lEHF_dKKIuNsyr87SeG4h8CmohXpkoIykFTdm5jfEQM8ThLO4IPtZODpTXnkBOoPGiKaRXb9YRjlrnb7x8onl15ewCW9mei1/s400/hungary+construction+yoy.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPwvrOOnaPsNg4hueBTFqiMF6InAFO478mcoVwYuZwUiescOe6JUemiEIps4kb70s2xoZixO83b7uVB_L_z_DVykBLYE6JlmNQIkZgSlIFNJWbc9x4LDBNfE-tpC3DE32vIli1/s1600-h/hungary+construction+index.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360991741017703250" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPwvrOOnaPsNg4hueBTFqiMF6InAFO478mcoVwYuZwUiescOe6JUemiEIps4kb70s2xoZixO83b7uVB_L_z_DVykBLYE6JlmNQIkZgSlIFNJWbc9x4LDBNfE-tpC3DE32vIli1/s400/hungary+construction+index.png" /></a><br /><br /><strong>Retail Trade</strong><br /><br />Retail sales fell 3.4% year-on-year in the first four months of 2009. In April the fall in retail sales accelerated, and the volume index was down 4.1% compared with April 2008. Retail sales decreased by 0.3% over March according to seasonally and calendar adjusted data.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUQ5fwGMWridZpB5UJzG_GhFZ5wab-r-rrM6heNUM5ViWMm2pshAJXxawQTjfVc9qBlkFdhsPFCThbZM1KPacPAwWJE1s8NcZ8vALZ54CrhmqJIUjQjtJ0fYfuSRAElE4l-57p/s1600-h/hungary+retail+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360993835750237890" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjUQ5fwGMWridZpB5UJzG_GhFZ5wab-r-rrM6heNUM5ViWMm2pshAJXxawQTjfVc9qBlkFdhsPFCThbZM1KPacPAwWJE1s8NcZ8vALZ54CrhmqJIUjQjtJ0fYfuSRAElE4l-57p/s400/hungary+retail+one.png" /></a><br /><br />But the real problem is that Hungary's retail sales are now in long term decline, and it is hard to see this situation turning round as the population declines. The peaked in mid 2006, and it has been downhill ever since. This highlights the important point that Hungary's economic difficulties - like Italy's, which bear some resemblance, are not of recent origin, but go back to the adjustment process that started following the mini crisis of June 2006, an adjustment which has never, at the end of the day, achieved the results which were expected of it, and the real question is, why not?<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkJYhuZD-1wJF60QFwyBoIK3f_RWH8Bc00E1bIPYNWhw8ZKvEjIiGlno_aLhkP1SbT67M46dRf2rorBz1vqY2BYJQIfSxJzQKgiDhb78TCLLl6j7kWqfxVimcCVfBdmq8BjkSQ/s1600-h/hungary+retail+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360993761683527282" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgkJYhuZD-1wJF60QFwyBoIK3f_RWH8Bc00E1bIPYNWhw8ZKvEjIiGlno_aLhkP1SbT67M46dRf2rorBz1vqY2BYJQIfSxJzQKgiDhb78TCLLl6j7kWqfxVimcCVfBdmq8BjkSQ/s400/hungary+retail+two.png" /></a><br /><br /><strong>Monetary Policy Trap</strong><br /><br />Back in April, the Hungarian Finance Ministry were expecting a 155 billion forint budget surplus for the second half of this year, but since then the economic outlook has continued to deteriorate, and according to their latest estimate there will actually be a 149.6 billion forint deficit in H2. This anticipated shortfall is the principal reason why the IMF and the European Commission recently agreed to let Hungary raise its deficit target to 3.9% of GDP for 2009 from the 2.9% previously agreed. They did this in response to the larger-than-expected economic recession, thus avoiding the additional fiscal tightening measures which would have been needed to hold the deficit below the Maastricht 3.0% target level. The gap in 2010 is now expected to come in only a tad lower than this year at 3.8% of gross domestic product (although this number is subject to considerable revision given the levels of uncertainty facing the economy and hence government revenue and spending). As a result, the EU Commission in their latest forecast suggest gross government debt to GDP will reach 80.8% in 2009, and 82.3% in 2010, way above the 60% euro adoption level.<br /><br />Nonetheless the Hungarian government is in bullish mood. According to Finance Minister Peter Oszko in a Bloomberg TV interview “Recently there has been a turning point......Financial risks are very quickly decreasing in terms of the whole budget. The Hungarian government is committed to implementing a reform program quite quickly.”<br /><br />Capital Economics' Neil Shearing isn't so convinced:<br /><br /><blockquote>But is this new-found optimism justified? Possibly. The National Bank will certainly take heart from the fact that the bond market is functioning once again following a complete freeze late last year. This adds weight to the case for interest rates to be gradually lowered, with a 50bps cut to later this month looking increasingly likely. But amongst all the euphoria, it is important to keep some sense of perspective. First, while the government managed to complete the bond auction successfully, it came at a price. At 6.79%, the yield on the new bonds is around 90bps higher than what existing 2014 euro-bonds currently trade at.</blockquote>There is indeed a general feeling in the air that monetary easing is coming, and in fact three members of the central bank's Monetary Council voted even at the last meeting to lower the key policy rate by 50 basis points, according to minutes of the 22 June rate setting meeting. The MPC is set to hold its next policy meeting on 27 July, and is widely expected to start a monetary easing cycle. My view: just watch out what happens next.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_RUhUBln04FL1izdDTYLxr4vCzDGF1FeWefddPH98e9-_Jbor5DOsFI6k9uXtxY4DsIHS2ShF51JqS5_eVdZfTZz2JIAmjg0q_SCYrYSFm-cA8p8xgnn54r2kF2tz12nbZ-vWMg/s1600-h/Hungary+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360246788112096386" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj_RUhUBln04FL1izdDTYLxr4vCzDGF1FeWefddPH98e9-_Jbor5DOsFI6k9uXtxY4DsIHS2ShF51JqS5_eVdZfTZz2JIAmjg0q_SCYrYSFm-cA8p8xgnn54r2kF2tz12nbZ-vWMg/s400/Hungary+interest+rates.png" /></a><br /><br />Basically the problem is the value of the forint. My opinion is that the recent recovery in the currency value (see chart below) has been almost entirely driven by yield differentials, and by self-fulfilling expectations (traders expect the currency to rise), rather than by any change in the underlying economic fundamentals, which as we have seen, has not taken place.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY2OjjyxDarn9NqFQlz1R7A69zuasHO0XnACGSWjFvlmbkvwAUXPIMhBOHMOrt4b8q5P1bmMxxreoyDBbea6cmKgri9BXpGrnKiQw9U8obOQU6Ol4VJtYuGur5kgfQIQag42HtXg/s1600-h/five+year+forint+chart.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360597693189000450" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY2OjjyxDarn9NqFQlz1R7A69zuasHO0XnACGSWjFvlmbkvwAUXPIMhBOHMOrt4b8q5P1bmMxxreoyDBbea6cmKgri9BXpGrnKiQw9U8obOQU6Ol4VJtYuGur5kgfQIQag42HtXg/s400/five+year+forint+chart.png" /></a><br /><br />And if you are in any doubt about the extent to which Hungary has lost competitiveness since the start of the century, just take a look at the comparative REERs for Germany and Hungary below (REERs are trade weighted, and take account not only inflation but also movements in unit labour costs, ie productivity).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCYgSrK0MnAfOnXxWCJTn1KexJMoCrL8CM6t58DeIAhZ-HvZgpaQZcq1YZNjLII3ObhHxy0Jy_HKaqH7t-vBarDeDJMb5m96mba1GjO4eU5hs0JGd1kFXioz7-Zw-NWKEOcjV4/s1600-h/Hungary+REER.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 227px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCYgSrK0MnAfOnXxWCJTn1KexJMoCrL8CM6t58DeIAhZ-HvZgpaQZcq1YZNjLII3ObhHxy0Jy_HKaqH7t-vBarDeDJMb5m96mba1GjO4eU5hs0JGd1kFXioz7-Zw-NWKEOcjV4/s400/Hungary+REER.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5361390195733211762" /></a><br /><br />The problem the central bank and the Finance Ministry have to address is the ongoing issue of the mountain of Swiss Franc denominated mortgages (see chart).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq5vFwdhEPZHX4jIg839JxSGig0K94vL6gP-SaIZLFfQkfKrP5YDlG20sNNvSUj6JQN5ZoeIHrS0D7ErYeLvaXQH8MXjkbEQ-xLVUj1blFEJhAyfOAjioQCpzaWTu-BujDT58h/s1600-h/forex+mortgages.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 236px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360994935953181746" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjq5vFwdhEPZHX4jIg839JxSGig0K94vL6gP-SaIZLFfQkfKrP5YDlG20sNNvSUj6JQN5ZoeIHrS0D7ErYeLvaXQH8MXjkbEQ-xLVUj1blFEJhAyfOAjioQCpzaWTu-BujDT58h/s400/forex+mortgages.png" /></a><br /><br />These have stopped increasing in recent times, but still constitute a serious obstacle to any devaluation of the HUF, due to the non performing loans issue this would create for the banking sector. Not only has money been borrowed against homes for to fund house purchases, it has also been loaned for consumption (see chart below), so indeed the fact that even these loans are stagnating hardly bodes well in any way for domestic demand.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOWqfLS6D3OrQfdG4JAyi6T6u9BalJSoFEqB4CYRbLrAGqQZ9YBe6IxyXxcHNYi0Ex9jXDIFbKngd7OEj0fbVyH5TptG8-X_ZVQbm7ahvXLgNNbZ6YZ_fpbwiQSM3kXATljuaw/s1600-h/Hungarian+Refis.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 252px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5360994363361670914" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOWqfLS6D3OrQfdG4JAyi6T6u9BalJSoFEqB4CYRbLrAGqQZ9YBe6IxyXxcHNYi0Ex9jXDIFbKngd7OEj0fbVyH5TptG8-X_ZVQbm7ahvXLgNNbZ6YZ_fpbwiQSM3kXATljuaw/s400/Hungarian+Refis.png" /></a><br /><br />The thing is, as long as the interest rate differential remains as it is, there is no possibility of convincing people to take out HUF denominated mortgages. So domestic rates have to come down, but as they come down the forint will fall, and the number of distressed loans will spiral up. So the authorities are stuck in a real policy trap, where they have to wriggle uncomfortably around, carrying out what can only be described as a weird variant of voluntary internal devaluation, an intenral devaluation which again, as we have seen from the wage and price data, just isn't happening.<br /><br />Obviously the whole idea IMF idea here was some sort of long term "play" - moving the focus of taxation from employment to consumption (addressing the tax wedge issue). Initially this shift was supported by the argument, that, amidst a deflationary backdrop, businesses wouldn't be able to pass the tax increase on to consumers in its entirety. At this point it would seem the Hungarian government has no real room for manouver and are desperate to implement the tax restructuring, therefore they opted for the significant VAT raise.<br /><br />Part of the thinking which lies behind the present approach seems to be some new concept of financial orthodoxy. The IMF put it like this in the Hungary Standby Loan Report <br /><br /><blockquote>In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.<br />IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008</blockquote><br /><br />So from Tallinin, to Riga, to Budapest, to Bucharest, the same sonata on a single note is being played, and the message is a clear one - cut spending and you will expand.<br /><br />But with consumption sinking, government spending falling and exports insufficiently competitive to drive the necessary surplus, the whole thing is now becoming rather a mess, with no clear economic policy objective in the short term (except, of course, maintaining a strong exchange rate) and while in the long term the emphasis is rightly on export. But no one has any idea of how exactly to correct prices sufficiently with the CHF mortgages stuck in the middle.<br /><br />And the new bond issue only makes things worse here, since as Neil Shearing emphasises:<br /><br /><blockquote>it is worth noting that the latest euro-bond issue only adds to the mountain of foreign currency denominated debt that lies at the heart of Hungary’s current woes. With the banking sector still in deep trouble and fiscal policy set to tighten, the recession is likely to intensify over the coming quarters.</blockquote><br /><br />So, with the Hungarian government currently forecasting a GDP contraction of 6.7 percent,this year, and the likelihood being of further contractions next year and possibly even in 2011, something somewhere is going to give here. <br /><br />And among the casualties, well why not Hungary's unborn children, the ones she needs to start turning round that population decline I started this post with.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgthRDacvE16Cm0xlA7rB8_ZuOsZ_hOHS3m5Ht7rGFb7uaAJdtWhlh0V_2TFpI2W7e-MKxg0c3K1KT3ZEiCBgvA9_HRZBI-Y4OeTJZ-M6O8Rp991MeTPZ5yXtNh3rFZMvwBjUwk/s1600-h/hungary+births.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 220px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5361382030214981458" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgthRDacvE16Cm0xlA7rB8_ZuOsZ_hOHS3m5Ht7rGFb7uaAJdtWhlh0V_2TFpI2W7e-MKxg0c3K1KT3ZEiCBgvA9_HRZBI-Y4OeTJZ-M6O8Rp991MeTPZ5yXtNh3rFZMvwBjUwk/s400/hungary+births.png" /></a><br /><br />According to preliminary data from the stats office, in the first five months of 2009 38,964 children were born, 1.9 percent less than in the first five months of 2008. But that isn't all, if you look carefully at the chart you will see that the number of children born fell substantially from about March 2007, just nine months after the first financial shock hit Hungary in June 2006. So here's a nice prediction, if economic conditions do work as a short term influence on fertility, then we should see another sharp drop in Hungarian births starting in from July, just nine months after the last financial crisis hit the Hungarian economy. There, I bet you never imagined that the collapse of Lehman Brothers could have such far reaching consequences, now did you?Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-36596111.post-88788576120525397912009-06-20T11:49:00.000+02:002009-06-20T12:26:25.089+02:00Facebook LinksQuietly clicking my way through Bloomberg last Sunday afternoon, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aC4zbsgMD6x8">I came across this</a>:<br /><br /><br /><blockquote><strong>Facebook Members Register Names at 550 a Second</strong><br /><br />Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.<br /><br />Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name. </blockquote><br /><br />Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:<br /><br /><blockquote>Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.</blockquote>Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't really fit any mould, and I am hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.<br /><br />In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.<br /><br />So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-13056120564203985402009-06-09T19:01:00.001+02:002009-06-09T19:01:49.483+02:00Green Shoots In Germany, Estonia and Hungary?Well, I am busying myself this morning <a href="http://turkeyeconomy.blogspot.com/2009/06/green-sprouts-in-turkey.html">scratching around looking for green shoots in Turkey</a>. But even as I was digging for these I couldn't help notice this coming in over the radar from Germany, <a href="http://www.bloomberg.com/apps/news?pid=20601100&sid=atXNxvbig9wg&refer=germany">courtesy of Bloomberg</a>:<br /><br /><blockquote>German exports fell more than economists forecast in April as the global crisis restrained demand, keeping Europe’s largest economy mired in a recession. Sales abroad, adjusted for working days and seasonal changes, fell 4.8 percent from March, when they rose a revised 0.3 percent, the Federal Statistics Office in Wiesbaden said today. Economists expected a 0.1 percent decline in April, according to the median of 10 estimates in a Bloomberg News survey. </blockquote>So German exports have not touched bottom yet - they are still falling. Since the German economy is export dependent, then this implies the obvious, the German economy is still contracting. I don't think anyone ever doubted this, but looking at the way some of the material has been presented recently, it wasn't always clear.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfjll7BRJbNWOti0XSyJHlWtnTjrfs2Z37ZaFSZYywVbuIn0fpXG3gDH487vNTd9jYO2zZdhkv3aeqCeOSW9_wTLcnLVuuxrOheWTRGHjQRA7n62OlMed8QEuZrZQ8At6L53tbgg/s1600-h/germany+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 214px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345246039702951602" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfjll7BRJbNWOti0XSyJHlWtnTjrfs2Z37ZaFSZYywVbuIn0fpXG3gDH487vNTd9jYO2zZdhkv3aeqCeOSW9_wTLcnLVuuxrOheWTRGHjQRA7n62OlMed8QEuZrZQ8At6L53tbgg/s400/germany+two.png" /></a><br /><br />Indeed year on year, exports fell by 22.9%, the fastest rate so far, although since these annual stats are not working day corrected I wouldn't read too much into that just yet, since you really do need to average across March and April due to the Easter impact.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif5mia55491aKq0nnpKd3mc3Ub_skRQS78xTT2PD9os6jdKaqM-Q3UeI6du49kFxvsZ5ThsT_IG2t4W-GNpgDO8A1JTWA5e5bLrQxcQu2FRpkehUHnKdDWneLWxVdrdElndYN_cg/s1600-h/germany+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 216px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345245970712068994" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEif5mia55491aKq0nnpKd3mc3Ub_skRQS78xTT2PD9os6jdKaqM-Q3UeI6du49kFxvsZ5ThsT_IG2t4W-GNpgDO8A1JTWA5e5bLrQxcQu2FRpkehUHnKdDWneLWxVdrdElndYN_cg/s400/germany+one.png" /></a><br />Another country where rather unsurprisingly we aren't seeing too many green shoots at the moment is Estonia, and only today <a href="http://www.stat.ee/33908"> the statistics office reported</a> that exports decreased by 38% and imports by 41% (year on year) in April.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1yuUZAvp-xVK8MNoMgibiETSsK4kU17rG2y_jrj3Ge7N87lHUtZJlhLWGCwudS6hXlyLO4Kc2WClXyx-NmC4PHHQtOs1Sf2OE_h26azz9nvVgnqI94IwnfCAGmrPzfFzMn_9R-Q/s1600-h/estonia+three.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 211px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345231379594623922" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1yuUZAvp-xVK8MNoMgibiETSsK4kU17rG2y_jrj3Ge7N87lHUtZJlhLWGCwudS6hXlyLO4Kc2WClXyx-NmC4PHHQtOs1Sf2OE_h26azz9nvVgnqI94IwnfCAGmrPzfFzMn_9R-Q/s400/estonia+three.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAVjXeqFltQDWjCSSPvo79v6WZZju63iNwtYzCEmIGEGPK6qM0bxPcvs1ChvC0xayt0sUNC7563tXEjKduFhaU2ecd4hMkAwSf8LNv6oYJeW1Zrwz5B4vcGQUIxofdjSzOz2eH4Q/"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 210px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345231247481198306" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAVjXeqFltQDWjCSSPvo79v6WZZju63iNwtYzCEmIGEGPK6qM0bxPcvs1ChvC0xayt0sUNC7563tXEjKduFhaU2ecd4hMkAwSf8LNv6oYJeW1Zrwz5B4vcGQUIxofdjSzOz2eH4Q/s400/estonia+one.png" /></a><br /><br />As a result the Estonian trade deficit rose for the second month running, and hit 1.8 billion kroons. So what we are seeing here is a distinct move in the <strong>wrong</strong> direction, on both counts.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvyVu7j8aAPpAbxP85_sWqy80gY_tdz5gx9tE7jg1vuwbuoq5onk54pja3spJbmO1USYN-GkS68x5Ms7D193Lm35sg3RbaeOuHoG3EsJaDoROzoqBjOSCDCry-J0ZvHtyd3xByTA/s1600-h/estonia+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 214px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345231315818111250" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvyVu7j8aAPpAbxP85_sWqy80gY_tdz5gx9tE7jg1vuwbuoq5onk54pja3spJbmO1USYN-GkS68x5Ms7D193Lm35sg3RbaeOuHoG3EsJaDoROzoqBjOSCDCry-J0ZvHtyd3xByTA/s400/estonia+two.png" /></a><br /><br />We also learnt <a href="http://www.stat.ee/31162">from the Estonian stats office today</a> that GDP contracted by 15.1% (year on year) in the first three months of this year - a figure which was revised down from the earlier flash estimate of 15.6%.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjUTzlhdGeqXIN25TNM_dLO2pgO5WknUdgQ_AvxseU4JNkygj54GGyrAhG4v-Jnx4FoODxTZTzZu6c3rc3VAjg8102nFEULGJNjeUdySxUqKHFjukrIKdLn3y31nAw1Sq783oSRA/s1600-h/estonia+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 215px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345251009444959922" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjUTzlhdGeqXIN25TNM_dLO2pgO5WknUdgQ_AvxseU4JNkygj54GGyrAhG4v-Jnx4FoODxTZTzZu6c3rc3VAjg8102nFEULGJNjeUdySxUqKHFjukrIKdLn3y31nAw1Sq783oSRA/s400/estonia+one.png" /></a><br /><br />Compared to the 4th quarter of last year, seasonally and working-day adjusted GDP decreased by 6.1% (more on all this in another post).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGvYVHlamghz0xJQROL9QzrMcDPyxFHUk7S4q9oFL_IA4H6fo7DDk6RX3NiNJy0bXwmA3qLg0lIsxG3uJOz3vmEmwjaORt84bK-tCEQXBd1coEg2wtB9qm5_8z_4xMG9dF_q32-A/s1600-h/estonia+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 228px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5345250953214321186" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGvYVHlamghz0xJQROL9QzrMcDPyxFHUk7S4q9oFL_IA4H6fo7DDk6RX3NiNJy0bXwmA3qLg0lIsxG3uJOz3vmEmwjaORt84bK-tCEQXBd1coEg2wtB9qm5_8z_4xMG9dF_q32-A/s400/estonia+two.png" /></a><br /><br /><br />Finally on the green shoots front for today, we could note that Hungary's industrial production plummeted in April by 25.3% (year on year) according to working day adjusted data released by the stats office. This compares with a year on year contraction of 19.6% in March.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYOolctixmpzPPm9kD5xjymBR6RFBPZ1o_ETGCvXMeXcUdSsz-6u07d6jJouBSSefrILMPmCJrlHOH2q3uhxxuSOU3eXNHFQuBg-xX0aPN3c9CfHIuS9xAetD_WbWcbLpkZeNzlA/s1600-h/hungary+IP+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 238px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5343928238423531826" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhYOolctixmpzPPm9kD5xjymBR6RFBPZ1o_ETGCvXMeXcUdSsz-6u07d6jJouBSSefrILMPmCJrlHOH2q3uhxxuSOU3eXNHFQuBg-xX0aPN3c9CfHIuS9xAetD_WbWcbLpkZeNzlA/s400/hungary+IP+one.png" /></a><br /><br />Month on month there was seasonally and working day adjusted drop of 5.1% in April, following 4.5% growth in March. So again, output is still falling, and no bottom has been reached.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMpvybNnmriaQtC3xwHcXCjXjEhVSBGZ2frjN92GbyNNugLBwvfJtjZizN9Hwi4zRevIgyAa33vY-Tof8nKZRKwbF9cJAi-d46PJsnunMHq_G7-AiHcqKysEypalOEuf_nE7P5cw/s1600-h/hungary+IP+two.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5343928336027072258" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMpvybNnmriaQtC3xwHcXCjXjEhVSBGZ2frjN92GbyNNugLBwvfJtjZizN9Hwi4zRevIgyAa33vY-Tof8nKZRKwbF9cJAi-d46PJsnunMHq_G7-AiHcqKysEypalOEuf_nE7P5cw/s400/hungary+IP+two.png" /></a><br /><br />This latest Hungarian data is particularly unpalatable following a number of reports which had been left open the possibility that the downturn in the Hungarian economy had ground to a halt, or at least staretd to decelerate. If industrial output shows similar weakness in other East European countries then this does not augur well for future German and eurozone output, since Hungary plays a significant role in the early stages of the European manufacturing production chain.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-40786613482679304882009-05-26T15:29:00.002+02:002009-05-26T15:35:23.211+02:00The New Orthodoxy Is Upon UsWe seem to be witnessing the arrival of some kind of new financial orthodoxy. The IMF put it like this in the Hungary Standby Loan Report (which by chance I was reading last night):<br /><br /><blockquote>In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.<br />IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008</blockquote><br /><br />So from Tallinin, to Riga, to Budapest, to Bucharest, the same sonata on a single note is being played, and the message is cut spending and you will expand. Funny how people are not very convinced about this idea in Berlin, London, or Washington.<a name='more'></a> <br /><br />Sounds like <a href="http://krugman.blogs.nytimes.com/2009/02/03/paradox-of-thrift/">they haven't heard about the paradox of thrift either</a>.<br /><br /><blockquote>Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can’t do this accurately until the Federal Reserve’s flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.</blockquote><br /><br /><br />And today we learn that <a href="http://www.ft.com/cms/s/0/acd93144-4944-11de-9e19-00144feabdc0.html">Dmitry Medevdevis is getting the gospel</a> (via the evangelist Alexei Kudrin)and planning his own package of "expansionary" fiscal cuts for 2010.<br /><br /><blockquote>Dmitry Medevdev, Russia’s president, on Monday ordered the government to prepare for a continuation of the economic crisis into 2010, delivering a markedly pessimistic view of the country’s economy and mandating wide-ranging budget cuts until now put on hold.<br /><br />In an address to top government officials on the budget priorities until 2012, the president sided with the fiscal conservatives in an economic debate that has been raging within the Russian government since last autumn, over how much to cut spending in the face of the crisis.<br /> <br />One of the 10 priorities he announced was “transfer to a strict regime of saving budget resources”. This year Russia will run its first budget deficit in the decade, projected at 7.4 per cent of GDP, which is to be funded almost entirely out of official reserves. Monday’s forecasts, which assume a price of oil of $50 per barrel in 2010, put the budget deficit of 5 per cent of GDP in 2010, falling to 3 per cent in 2011.<br /><br />Mr Medvedev’s remarks indicate the consensus view on the economy has been getting more bearish, in line with that of Alexei Kudrin, finance minister, who sees the crisis lasting longer than initial forecasts, which saw growth returning by the end of 2009.<br /><br />Mr Kudrin said lower budgets deficits could only be achieved if the whole system of budget spending was reviewed. “A review of spending, a transition to targeted spending and saving – these are the key words in the next three years,” he said.<br /><br />Aleksander Auzan, an economist and director of the Social Contract Institute in Moscow, said the projections delivered by Mr Medvedev meant that the fiscal conservatives such as Mr Kudrin had won the debate for now.</blockquote><br /><br />Of course, as Krugman points out, the paradox of thrift normally operates in circumstances where monetary policy has been eased so far that interest rates are starting to get stuck around the zero bound, while Bank Rossii has been busy promoting ruble liquidity by pushing interest rates steadily up, although they have been eased slightly of late to 12%, still offering a yield which is very attractive in comparative terms and drawing in a growing crowd of <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKGuAETVHRoc">carry traders who are systematically pushing the ruble to ever higher levels</a> and weakening the export potential of Russia's non-oil manufacturing sector in the process.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrtpnZKuUh2Px2sTazzcnC07RiT6FPmXpu81MC5shAQG_pTTSvkGOgDme2U4jySP7P-AWiFEoNS5lyNbtBGtn1CByN7tMTdk3m5N488DDzEoQ7tPfyP7VcBqaUucOl1PwVP5GwiA/s1600-h/russia+interest+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 229px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjrtpnZKuUh2Px2sTazzcnC07RiT6FPmXpu81MC5shAQG_pTTSvkGOgDme2U4jySP7P-AWiFEoNS5lyNbtBGtn1CByN7tMTdk3m5N488DDzEoQ7tPfyP7VcBqaUucOl1PwVP5GwiA/s400/russia+interest+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5340043959539456194" /></a><br /><br /><blockquote>Russia’s ruble climbed to a four- month high against the dollar, headed for its longest run of weekly gains in almost two years, as surging oil prices and higher interest rates lured investors to the country. <br /><br />The ruble jumped to as strong as 31.1607 per dollar today, the most since Jan. 14, and is poised for a 2.8 percent gain in the week, its sixth weekly advance and the longest rally since September 2007. The central bank bought the most foreign currency on the market in almost a year this week as it sought to control the advance, said Mikhail Galkin, head of fixed- income and credit research at Moscow’s MDM Bank. <br /><br />The ruble has climbed 16 percent since the end of January amid a 39 percent jump in Urals crude, the country’s chief export blend, and central bank efforts to deter bets against the managed currency. The ruble depreciated 35 percent in the six months to Jan. 31, spurred by Urals crude’s more than $100 slump from a record high and the worst global financial crisis since the Great Depression.<br /><br />Bank Rossii, has been buying foreign currency on the market in a bid to limit the ruble’s volatility, the central bank’s First Deputy Chairman Alexei Ulyukayev said in an interview last week. </blockquote><br /><br />Deustche Bank last week specifically recommended buying Hungarian forint denominated assets - according to the bank the Russian ruble, the Hungarian forint and the Turkish lira are among the most interesting trades at present. At the start of April Goldman Sachs also recommended investors to take advantage of the unique opportunity and use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and Russia rubles. <br /><br />But we need to be careful here. Kudrin is undoubtedly right, Russia does need to dig herself in for a longish winter. There may well be no global 'V' shaped recovery, and the Russian economy may well have to learn to cut its coat according to its cloth in order to live with oil at prices below the critical levels for Russian stability. But please, oh please, don't let's start fooling ourselves into thinking that applying fiscal and monetary tightening is expansionary!<br /><br />As for those part of Eastern Europe who are EU members, <a href="http://fistfulofeuros.net/afoe/economics-and-demography/the-eu-bonds-story-rumbles-on/">we need EU Bonds and we need them now</a>. We are all one family, and this policy of sitting back and watching one government after another feeding their voracious contraction by desperately cutting spending is simply shameful - not to mention counterproductive, as one west european company after another readies the lay off slips, and <a href="http://www.bloomberg.com/apps/news?pid=20601101&sid=aABOCVqStb3s&refer=japan">the banks prepare more bailout applications</a>. Of course we need longer term structural reforms in countries like Hungary. But they will not work miracles in the short term. The condition for expectations and credibility support should be longer term and deep structural reform, not short term budgetary pressure. The kind of support we are seeing now is only a venture in moral hazard, as it underwrites short term financial stability, and thus guarantess short carry trade bets, while locking the government in so tight it will have trouble carrying the population with it over the longer haul. This is why kinds said that, you know, in the long run we are all dead thing, since we need policies that work in the long run, while in the short run we also need palliatives to make sure there is a long run.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-36596111.post-69292876331244167312009-05-24T21:45:00.023+02:002009-05-25T23:12:24.478+02:00Hungary's Trend Growth And Debt SustainabilityMy previous post is very long, pretty technical, and probably over-theoretical for a weblog post, and for this I apologise to readers. However, abstract as it may seem, taking a view - on one side or the other - over the argument which lies at the heart of the post is central at this points for all those discussions which are taking place about the sustainability (or otherwise) of the path the Hungarian economy is set on. For my part, I established this blog in late 2006, since I was pretty sure even back then that all of what we are now seeing (not in the details, of course) was more or less bound to happen. It was bound to happen, since the kind of adjustment process Hungary has been engaged in since mid 2006 simply will not work without addressing the underlying issue, and the underlying issue is the way in which Hungary's population is being allowed to reduce, and the median population age to rise, in far too rapid a fashion. In brief, it is this process, the very low number of annual live births, and the ever growing percentage of the population which is over 60 that this leads to which conditions the proportional weight of the financial obligations which fall on the state AND the growth rate which is attainable with which to shoulder the burden (hence the significance of the previous post).<br /><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjO4psv3moXMrG4_Y97EGBk7mgQY1QdxTCo4g_c13auQ3JuSvuYJsjghLVl4DoQFTKtqWGifMVb7ryQuDKWR7JZJd_fowfMOXhisjK87tCx1Tb-7XfVX0RG8qSbhWY8zA7JEI6HdA/s1600-h/hungary+population.png"><img id="BLOGGER_PHOTO_ID_5339800888345969506" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 219px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjO4psv3moXMrG4_Y97EGBk7mgQY1QdxTCo4g_c13auQ3JuSvuYJsjghLVl4DoQFTKtqWGifMVb7ryQuDKWR7JZJd_fowfMOXhisjK87tCx1Tb-7XfVX0RG8qSbhWY8zA7JEI6HdA/s400/hungary+population.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq5F5EQ4s26Z9sY-pYmPprW-YVQ28VL3lESJhrKXWy0eDErqODWmyouQY8gyXyBXCQXEmcDcQ12gCQ-hi1JG9_aq44PcuSJsZu7j-j3ANKRn1L6yAS1Fo6owR-Ug8ngosoO3Wwaw/s1600-h/hungary+median+age.png"><img id="BLOGGER_PHOTO_ID_5339801643991065634" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 227px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiq5F5EQ4s26Z9sY-pYmPprW-YVQ28VL3lESJhrKXWy0eDErqODWmyouQY8gyXyBXCQXEmcDcQ12gCQ-hi1JG9_aq44PcuSJsZu7j-j3ANKRn1L6yAS1Fo6owR-Ug8ngosoO3Wwaw/s400/hungary+median+age.png" border="0" /></a><br /><br />The basic question which economists need to address I would argue, is not why government debt got out of hand in 2005/06, but why domestic consumption weakened in a way which lead to the sudden growth in government spending to support the economy. If this view is right, the core of the issue is demand side, and not supply side, and thus the supply side recipes being offered, positive as many of them are, simply won't work on their own.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMdiJFjPOSxvyqV9vZJOxl-3kcIe8Pq2OW4yDSqyXKzV1-3jtXLWtdLC5hVbwWzm3FRpvqd2XDgYLZvqjBOLF9ND85ycWWi6PlxWqATe3xarwQi47hKIbQ-OaS4eBA3FheIdo-Rw/s1600-h/hungary+hoousehold+consumption.png"><img id="BLOGGER_PHOTO_ID_5339481159157482882" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 234px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMdiJFjPOSxvyqV9vZJOxl-3kcIe8Pq2OW4yDSqyXKzV1-3jtXLWtdLC5hVbwWzm3FRpvqd2XDgYLZvqjBOLF9ND85ycWWi6PlxWqATe3xarwQi47hKIbQ-OaS4eBA3FheIdo-Rw/s400/hungary+hoousehold+consumption.png" border="0" /></a><br /><br />The real question is why Hungarian domestic consumption did not surge in 2004 following the collapse in late 2003. Why did EU membership not produce a large consumer driven boom such as we have seen in many other East European economies, the Baltics for example? The forex lending at cheap interest rates was, after all, available. The thing is, I have seen this sort of pattern before. In Portugal for example - <a href="http://globaleconomydoesmatter.blogspot.com/2009/01/portugal-sustains.html">see this entire post</a> if you are interested in understanding a bit better what happened in Portugal.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheyarErI9MpDDyBczxVWhIsm1zEKk0FnapJ-kg3FFpYzbqPPbdgoVbdgpQQ0oxqmi8yCAkl8dHTQ9lLfDtfkX00tfiD-8krPB30zEbQj3rMHToevfLaeLtSFS7IjXbO-VTx8r0Eg/s1600-h/portugal.png"><img id="BLOGGER_PHOTO_ID_5339493589968170690" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 193px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheyarErI9MpDDyBczxVWhIsm1zEKk0FnapJ-kg3FFpYzbqPPbdgoVbdgpQQ0oxqmi8yCAkl8dHTQ9lLfDtfkX00tfiD-8krPB30zEbQj3rMHToevfLaeLtSFS7IjXbO-VTx8r0Eg/s400/portugal.png" border="0" /></a><br /><br /><br />And my feeling is that the root cause is always the same: structural shifts in demography.</p><p>Now this is a bit more than a theoretical game, since it does have a practical endpoint, and that endpoint has a name: national bankruptcy. And really, I am sure we would all like to avoid that if we can. Lajos Deli, who co-authored with Zsuzsa Mosolygó the recent National Debt Agency study <a href="http://hungaryeconomywatch.blogspot.com/2009/05/is-hungary-set-to-become-new-iceland.html">I refered to in an earlier post</a> (you can find the whole study - entitled Hungarian Central Government Debt Ratio May Decline After 2009 - <a href="http://akkadmin.ivyportal.com//kepek/upload/2009/Hungarian_debt_ratio_may_decline_after_2009_english.pdf">here</a>) was kind enough to send in some comments on my argument. In particular:</p><blockquote>In addition, I would like to add that it is not the economic growth that determines life and death about debt paths, though it is an important factor. And it is not the best to calculate an average 1.8 per cent economic growth between 2000 and 2010 for Hungary and to derive from this a bad growth outlook for the next decade. In 2008-2010 we are just experiencing a huge world recession not seen long-long ago and there hardly were structural reforms in Hungary in this decade… Economic growth, however, was around 3-4 per cent before authority measures in 2006-2007. In Hungary everyone would argue that this decade was pretty good for us… Just take a look at Slovakia, for example, where Dzurinda-reforms made the economy grow like hell until the crisis.<br /><br />All in all, debt path is not unsustainable even with 1 per cent growth in the next decade. One should take a look at the USA or UK since it is fiscal deficit that makes debt unsustainable and Hungary performs in the next few years one of the best in Europe and in the world. That is what counts and what should be monitored and enforced. Now IMF terms and conditions helps to carry out a responsible fiscal policy in the following years and this positive fact should be underlined, I think.</blockquote><p>In part, the answer one gives to the sort of questions Deli is asking depends on whether or not you think economies are path dependent entities. This is important, since it conditions whether or not you believe there is some variant or other of steady state growth to which to which economies tend to revert in the long run. Deli's argument, at least in some loose informal sense, seems to depend on such a view. If not, it is hard to see the relevance of reference to the US and the UK in comparative terms, since what are we comparing, apples and pears, or two entities which are inherently comparable? In the latter case, economies would not seem to be path dependent.<br /><br />Since beyond the fact that they are all economies there are such vast differences between the UK and the US economies between themselves, and between the two of them and Hungary that I find it hard to see where we are.<br /><br />I have serious difficulties with any view that ignores path dependence. I think economies do depend with some degree of sensitivity on their previous time path, and in this sense I find what is happening to the current value of the forint rather disturbing, as it may condition the evolution of several other key variables for some time to come. The presence of all those CHF loan’s is another factor through which recent economic decision making may come back and hit the future with a vengence - indeed I see the resolution of this forex loans issue as the key to progress, since if Hungary is to be an export driven economy then you need an exchange rate well below 280 to the euro, unless of course the decision is to go for drastic wage deflation, but this has many, many attendent difficulties, and to boot there is little recent evidence of this in the earnings data.<br /><br />Frankly I find the whole idea of convergence to a theoretical steady state to be completely metaphysical, like the Holy Trinity (you know, god is three, and god is one) you either believe in it or you don’t.<br /></p><p>However, since I am a great admirer of one well known Hungarian thinker - Imre Lakatos - and his version of Popper’s falsification process, I would simply ask Deli: what would it take for you to change your view that the longer term growth potential of the Hungarian economy is as you believe it to be - other than by waiting till 2020 and checking of course, since by that time the horse will be well gone and bolted (at least if I am right, and economies are path dependent entitities)? In my opinion this is the only way we can get a serious rational debate started.<br /><br />In the second place I don’t accept that Solow’s original “plausible assumption” that population change was exogenous to economic growth is as plausible as it seemed to him to be, once you start scratching around below the surface and dig into some facts - as I try to illustrate in the previous post.<br /><br />Now just because the neo-classical version of growth theory seems to be not without problems doesn’t mean we have to thow all the procedures of neo classical economics straight out of the window. The marginal idea seems to me to be a good one, which is why I am not sure how people have become so convinced that drawing marginal labour into the labour force is going to revolutionise Hungarian economic growth.<br /><br />Don’t get me wrong, I am more or less in sure the measures the Bajnai administration is introducing to reduce the tax wedge are positive, its just that having studied this process in some depth (in relation to ageing population) in Germany, I’m not sure Hungary is going to get the bang per forint everyone is expecting. But the pensions situation, and the implicit obligations to an ever higher proportion of the population make all future calculations very precarious. </p><blockquote>Hungary, a nation of 10 million, has three million pensioners. Besides writing checks for regular retirees, the government gives special benefits to accident victims, the disabled, military and police veterans, mayors, widows, farmers, miners and "excellent and recognized" artists. The average Hungarian retires at 58, and just 14% of Hungarians between 60 and 64 are working, compared with more than half of Americans.Hungary's pension obligations are helping to remake the country's politics.<br />Hungary has run fiscal deficits for years to pay for social programs, and its annual tab for pensions now surpasses 10% of its gross domestic product. </blockquote>There is no easy answer here. Hungarian's retire much earlier than most of their West European counterparts, but Hungarian men also live on average around ten years less. So making them work as long as say, Germans, do is going to be difficult. Also, while bringing prematurely retired workers back into employment (and off the state payments system) is surely beneficial, it is only one half of the short term solution being offered for ageing and declining workforces (the long term answer is of course to attack those ultra low fertility levels).<br /><br />The other half of the policy reponse is to promote immigration - as outlined in the World Bank report “From Red To Grey” - and I find the almost complete absence of any plan to stem the rate of inversion in the population pyramid in the whole rescue programme pretty pre-occupying. If the root of Hungarian debt unsustainability is the drop in population, and its relative ageing, then it would seem, to be convincing, that this topic at least needs to be addressed.<br /><br />The bottom line is that the whole current programme of IMF CEE rescue’s worries me, and I suspect we are going to see a presence from the fund in the region for a long long time to come. Deli says “And it is not the best to calculate an avergae 1.8 per cent economic growth between 2000 and 2010 for Hungary and to derive from this a bad growth outlook for the next decade.” Now I have thought quite carefully about this. Of course we are in the midst of a huge crisis, so you cannot give undue importance to this year and next year's growth rates. But this is precisely why I take ten year moving averages, since to some extent this irons out these ups and down.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0VJ8jWzX91m6IjC4yAnpEnQOM_dW4-557AE7xKr_TRi15Pf-SiKBifslMOySWuHAGJokM6D14kWCVh21KR9DHDNKBPyZAUkZkjsBuMqtZoujCNTfNTtB3SRal_Uqh8qkEYdfB7Q/s1600-h/hungary+gdp+one.png"><img id="BLOGGER_PHOTO_ID_5329736768113372242" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 225px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0VJ8jWzX91m6IjC4yAnpEnQOM_dW4-557AE7xKr_TRi15Pf-SiKBifslMOySWuHAGJokM6D14kWCVh21KR9DHDNKBPyZAUkZkjsBuMqtZoujCNTfNTtB3SRal_Uqh8qkEYdfB7Q/s400/hungary+gdp+one.png" border="0" /></a><br /><br />What I mean is that as well as the crisis you need to take the excesses which preceded it (everywhere) into account. Prior to 2007, Hungary had an artificially high growth rate, boosted by current account and fiscal deficits. So to some extent the sharp contraction is logical (on the steady state way of looking at things), and it is what it is (on the path dependent approach). In either case it exists, and the ten year average gives us an idea of just how fast Hungary was capable of growing.<br /><br />Also, look at the long term chart (above) . Before the 1990s there was a clear decline. Of course you can argue this was artificially low (due to state planned economy etc), and I would agree weith you. But what we have between 1990 and 2010 is a lot of “noise” in the data, a huge down and a surge up. I doubt we can extrapolate anything meaningful from that. So I look at other ageing societies, and I find a similar pattern of losing momentum (see the charts in the previous post for Germany, Japan, and Italy).<br /><br />The tragedy is (from my perspective) that the most societies in the CEE are currently going through a huge metamorphosis (nice Kafkerian expression this one, and more appropriate in this context than the simple expression "transition"), from having consumer driven to export driven economies. The driving force behind this transition is rising population median ages, yet almost no one in Eastern Europe seems to notice (or even care it seems).<br /><br />Deli also says “it is fiscal deficit that makes debt unsustainable and Hungary performs in the next few years one of the best in Europe and in the world”<br /><br />I think that he is not taking sufficient account here of the danger of self perpetuating (via deflation) contractions. Obviously he is right in the evident sense that if you don’t run growth plus low enough deficits/primary surpluses, you can’t reduce debt to GDP. But if you apply a very rigid fiscal objective, tight monetary policy and provoke ongoing deflation, then with falling nominal GDP values the tendency is towards higher debt to GDP levels. This is a point that Edgar Savisaar, Mayor of Tallinn, <a href="http://www.baltic-course.com/eng/analytics/?doc=14082">seems to have grasped in the Estonian context</a>:</p><blockquote>"The fact is that it is not a miracle cure that removes all our problems. You<br />can join the euro zone only if you have a strong and sustainable economy,"<br />Savisaar said."My question is whether transition to euro is realistic or is it<br />only a pretext to justify budget cuts?" Savisaar asked. "If the budget is cut,<br />consumption is affected. This in turn will bring less revenue in the budget that<br />causes a new need to cut the budget. So it's a vicious never-ending circle that<br />Ansip (Estonia's Prime Minister) is in,"</blockquote><p></p>At the start of their paper,Lajos Deli and Zsuzsa Mosolygó say:<br /><br />"The path of the government debt ratio can easily be studied considering a simple economic model with variables including real interest rate, primary budget balance ratio and economic growth."<br /><br />I agree completely, which is why forecasts of future economic growth are so important, especially since, in part, the fiscal stance of the government influences the rate of economic growth. If you run a deficit this boosts growth, and if you run a surplus it constrains it (all other things being equal). The point is - as Hungary has to its pain discovered - if you run a fiscal deficit in order to boost growth which is deficient due to weak domestic demand and weak exports eventually your debt becomes unsustainable. This is why you can't run deficits indefinitely.<br /><br />They also say:<br /><br /><br /><blockquote>"One should also note that the macro parameters in the model fully determine the path of the government debt ratio."<br /><br />"Which is again why GDP growth is so important since it is the key variable. Applying the above equation (the one the authors use) it is easy to understand that if one calculates with persistent high real interest rates and low economic growth, the debt to GDP ratio will necessarily explode unless a favourable primary balance ratio counterbalances the effects of the other two parameters. The task of economic policy is, however, to prevent such a debt spiral. Macro modelling indicates that the room for fiscal policy to stop undesirable processes is rather large."</blockquote><p>So this is what the argument is about really. With high real interest rates and low economic growth debt spirals out of control. The issue, quite simply is, does fiscal policy alone - ie running a primary surplus - have the power to reverse the process in the way they assume, or might it not, in the conditions Hungary finds itself in, simply lead to a negative lose-lose dynamic in GDP performance, and hence revenue. </p><blockquote>In emerging market countries with debt overhangs, the “Keynesian” effect of<br />fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related<br />to expectations and credibility. Non- Keynesian effects have to do with the<br />offsetting response of private saving to policy-related changes in public<br />saving. In particular, if fiscal adjustment credibly signals improved public<br />sector solvency, a fiscal contraction could turn out to be expansionary, as<br />private consumption rises based on the view that future tax hikes will be<br />smaller than previously envisaged.<br />IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008</blockquote><p>Hungarian retail sales dropped another 0.6% in March as compared with February, and the slales index (see chart below) is now back down at the 2005 level, and is rapidly falling towards 2004. With a 6.7% GDP contraction forecast by the government for this year (and more downside risk) plus a VAT hike on the horizon it is hard to see this trend reversing, and indeed given the underlying population dynamics you have to ask whether the sales index will ever be up again. Adjusted for calendar effects, sales were down 3.6% year on year in March, following a 3.3% decline in February. On an annual basis sales were down for their 26th consecutive month in March.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzypdy0XKPojKV_SJmBCrl-inaqbNfV4L8ztcIB8s7ucT7SKjoi1eRbA-4y4bvhw-M-ra9AfCYt6f9eHt5ZJG-jhQStIPd8IlEedszVMwPYa3WlB5hMGUrbp3FJoa5lJokT7uLvA/s1600-h/hungary+rs+two.png"><img id="BLOGGER_PHOTO_ID_5339779709910842386" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 230px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzypdy0XKPojKV_SJmBCrl-inaqbNfV4L8ztcIB8s7ucT7SKjoi1eRbA-4y4bvhw-M-ra9AfCYt6f9eHt5ZJG-jhQStIPd8IlEedszVMwPYa3WlB5hMGUrbp3FJoa5lJokT7uLvA/s400/hungary+rs+two.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEZGyCaXK9695fjuV5Fp1OxUzsK-LWH3P9qGiJJJqHoXNDwb8avnO0X7lwYambA4EFg5_8c3xIvRgG_5VFbA-8f1allH4Wqv5QUH0-mvCdAXlkYJGRw42jRV9cE6jLxyo4KrIsMw/s1600-h/hungary+rs+one.png"><img id="BLOGGER_PHOTO_ID_5339779636094236562" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEZGyCaXK9695fjuV5Fp1OxUzsK-LWH3P9qGiJJJqHoXNDwb8avnO0X7lwYambA4EFg5_8c3xIvRgG_5VFbA-8f1allH4Wqv5QUH0-mvCdAXlkYJGRw42jRV9cE6jLxyo4KrIsMw/s400/hungary+rs+one.png" border="0" /></a><br /><br />As I say, Hungary now will get negative momentum from government spending and negative momentum from domestic consumption. The only possible driver of GDP growth is exports, and investment demand to produce them. But if you want to export, you need to be competitive, so exchange rates matter. And if you want to be competitive you have one benchmark to work against: Germany (and especially since around 30% of all Hungarian exports are destined there). And if we look at the chart below, we will see the extent of the competitveness gap which has opened up between Germany and Hungary post 1999. Now Reel Effective Exchange Rates (REERs) are a nice measure of competitiveness, since REERs attempt to assess a country's price or cost competitiveness relative to its principal competitors in international markets. Since changes in cost and price competitiveness depend not only on exchange rate movements but also on cost and price trends the specific REERs used by Eurostat for its Sustainable Development Indicators have been deflated by nominal unit labour costs (total economy) against a panel of 36 countries (= EU27 + 9 other industrial countries: Australia, Canada, United States, Japan, Norway, New Zealand, Mexico, Switzerland, and Turkey). Double export weights are used to calculate REERs, reflecting not only competition in the home markets of the various competitors, but also competition in export markets elsewhere. A rise in the index means a loss of competitiveness, and as we can see Hungary's index has risen sharply against Germany's in recent years, which is why a value of the forint of 275 to the euro, or thereabouts, is way, way too high.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjCbVjkRlWxXVBpD23B9by7ALRDSOt-cER1VurrhjByR7o7IPsWecH8u8iXT5Uw0HjQ-uh3Rk421p5m4G1o04rS6PBZ8vdlB88qEBV-AfO3QTslsINJJ8Tk8eW_uvTs49nFGWh0w/s1600-h/hungary+reer.png"><img id="BLOGGER_PHOTO_ID_5339640534625672546" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 228px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjCbVjkRlWxXVBpD23B9by7ALRDSOt-cER1VurrhjByR7o7IPsWecH8u8iXT5Uw0HjQ-uh3Rk421p5m4G1o04rS6PBZ8vdlB88qEBV-AfO3QTslsINJJ8Tk8eW_uvTs49nFGWh0w/s400/hungary+reer.png" border="0" /></a><br />Unsurprisingly Hungary’s central bank kept its benchmark interest rate unchanged for a fourth month on Monday (25 May). The Magyar Nemzeti Bank left the two-week deposit rate at 9.5 percent today, the European Union’s highest along with Romania. The forint lost 38 percent against the euro between July and March 6, when it fell to 317.22, its weakest ever. The currency has since strengthened 12 percent and was trading around 280 this afternoon.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzCa3e4G3cL7ULoQ-2hOoGc4uuqA4Hcpg4F52HH3HTeZC9b7AyR6W5-mW1xzrtUR2zVLyhlgf6_iz9FmN1InmTqbXp0TWQ94zSKmDnMhHOsl0Q6tmoVSO9hyvA17VRxlZONBCW7A/s1600-h/hungary+interest+rates.png"><img id="BLOGGER_PHOTO_ID_5339776115278555666" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgzCa3e4G3cL7ULoQ-2hOoGc4uuqA4Hcpg4F52HH3HTeZC9b7AyR6W5-mW1xzrtUR2zVLyhlgf6_iz9FmN1InmTqbXp0TWQ94zSKmDnMhHOsl0Q6tmoVSO9hyvA17VRxlZONBCW7A/s400/hungary+interest+rates.png" border="0" /></a><br /><br />The rally in emerging markets and accompanying revival of the carry trade can be seen clearly in the Hungarian Forint, which can now claim the distinction of being of the world’s best performing currencies of late.<br /></p><p>But why, then, is the Forint rallying? The answer is simple: high interest rates. With the benchmark interest rate stuch up there at 9.5% HUF instruments look pretty attractive. While other Central Banks busy lowering rates to try to boost economic growth the Monetary Council of the central bank keep voting unanimously to keep rates on hold. Given the precarious economic and financial situation, policymakers are forced to sit back and watch the population soak up the pain for fear that a drop in interest rates could precipitate capital flight and a currency crisis, which in turn would produce immediate "distress" among all those who hold non HUF denominated loans. Monetary policy is stuck. It can neither move forward, nor can it move back, unlike fiscal policy, which as Mosolygó and Deli point out can move backwards and backwards. In both cases, the economy winds its way down and down.<br /><br />As exasperated Julia Kiraly -Deputy Governor at the NBH - recently explained to reporters, “As long as Hungary is considered such a vulnerable country, our interest rates cannot be lower than South Africa’s or Turkey’s; it’s not the Czech Republic, Slovakia or Poland you should compare us to.”<br /><br />Meantime its "carry on up the Danube" time, with Deutsche Bank analysts earlier this month recommending investors to sell the euro against the forint on bets the rate difference will help the Hungarian currency gain 10 percent to 260 per euro in two to three months "from 286.55 today.” Well, its only gone as far as 280 at the moment, so they had better cross their fingers, just in case the bet turns bad on them. Frankly all of this would be comical, if it weren't so damn serious, and so tragic.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-36596111.post-25174597699746125842009-05-24T21:44:00.001+02:002009-05-26T18:15:14.076+02:00Taking Solow Seriously - Does Neoclassical Steady State Growth Really Exist?<blockquote>Discussions of the population problem have always had the capacity to stir up public sentiment much more than most other problems....In fact, the discussion of the population problem seems at all times and in all places to be more strongly dominated by the volitional elements of political ideals and interests than any other part of the established body of social and economic thinking. Here, as in perhaps no other branch of social theorizing, the wish is very often father to the thought.<br />Gunnar Myrdal, <a href="http://edwardhughtoo.blogspot.com/2006/01/gunnar-myrdal-and-effects-of-population.html">The Godkin Lectures</a>, 1939.<br /><br /><br /></blockquote><blockquote>All theory depends on assumptions which are not quite true. That is what makes it theory. The art of successful theorizing is to make the inevitable simplifying assumptions in such a way that the final results are not very sensitive.' A "crucial" assumption is one on which the conclusions do depend sensitively, and it is important that crucial assumptions be reasonably realistic. When the results of a theory seem to flow specifically from a special crucial assumption, then if the assumption is dubious, the results are suspect.<br />Robert Solow, A Contribution To the Theory of Economic Growth, 1956</blockquote><p><br /><br /><strong>What is Neo-Classical Growth?</strong><br /><br />As everyone who has ever thought about economic processes and social development is only too well aware, the last two centuries have been characterised above all by extremely rapid increases in living standards in a number of countries (generally known as the developed, or "advanced" economies), and this phenomenon, which is more or lest unprecedented in the whole of human history has given rise to extensive debate, together with a most voluminous quantity of literature, about what exactly the factors are which lie behind what this modern growth phenomenon. The objective of what follows is not to offer a general evaluation or even an overview of the corpus of work which has come to be collectively known as "growth theory", but rather to attempt go straight to the heart of the issue, and following in the most venerable footsteps of Federal Reserve Chairman Ben Bernanke, try to take Solow seriously, or at least try to take one of his crucial assumptions (one of the ones which intuition suggests might be plausible if "not quite" true) in order to examine just to what extent this assumption still appears "reasonable" in terms of fitting the facts as we now know them (rather than the facts as Solow could, in his day, see them), or if you prefer, to try to see if what may have been nearly "true" at the time Solow wrote his pathbreaking paper still remains so, on any reasonable interpretation of the meaning of the word "true". What we will here investigate is whether or not it is a reasonable starting point for growth theory to postulate ( in order, as it were, to start the ball of analysis rolling) that modern economies may move towards some sort of steady state growth rate (even if only as a theoretical construct), and whether indeed such and idea forms a useful concept with which to try to explore and model the growth process which characterises modern "mature" economies. We will investigate this assumption, in good Popperian fashion by examining the assumption in terms of the validity of what is conventionally considered to be one of the key predictions which may be extracted from its use of this in neoclassical growth models of the Solow type.</p><p><strong>Ready, Steady, Go.....</strong></p><p></p><p>But before going any farther, what exactly is steady-state growth? If we are to decide whether such a crucial assumption is indeed realistic or not, we first need to get a handle on what it is, since reading through the literature which surrounds the topic, you might be forgiven for saying that it wasn't exactly clear. In order to help us ease us into the problem, one useful place to start might be start with an examination some of what Nicolas Kaldor would have termed the "stylised facts" of the situation. </p><p>As is well known, on any generally accepted measure the process of wealth creation in the developed world has been a massive and extensive one over the last couple of centuries. According to most estimates GDP per capita in the United states is at least ten times higher today than it was 125 years ago, and if we allow for a growth mismeasurement (underestimate) of only one percentage point per year, the factor in question could easily be more than thirtyfold (Brad DeLong, 1998, see reference at foot of this post). Equally remarkable is the relatively brief time span (when compared with the entirety of human history) during which this rapid growth has occurred. Since we normally assume humans to have been distinguishable from other primates for at least a million years, it is possibly surprising to find that it was not until the agricultural revolution - some 10,000 or so years ago - that the long march to the modern era really beagan, and even more to the point, that it has only been during the last two hundred years or so that we have been able to find that steady and continuous increase in economic growth which so characterises our era and which we so tend to take for granted. </p><p>In fact the average GDP per capita growth rate in the United States has been estimated at something in the region of 1.8 percent per year since the start of the 19th century. However such growth has been far from uniform, and it normally used to be thought that (aside from some special periods like the 1930's, or the Solow "computers everywhere except in the productivity numbers" 1970s and 1980s) as the years have passed there has been a general acceleration in growth capacity. Perhaps the most recent, and most famous, exposition of this view is to be found in the 1990's sustainable growth acceleration postulated by Sir Alan Greenspan, and perhaps the most noteworthy questioning of this view has come from Paul Krugman who asks the not entirely unreasonable question about, if what we have had in the United States since the late 1990s has been a "twin" internet and construction bubble, how much of that "accelerated" growth was real, and how much was simply the product of unsustainably bringing forward consumption (Krugman, 2008). Evidently this is an empirical question for later growth accounting researchers, but we might like to note in passing that the present crisis does at least leave open the possibility that the "growth acceleration" which has followed the Solow slowdown may not be quite the acceleration we used to think it was. </p><p>However, even allowing for the volatile periods, and the exaggerations, there is considerable evidence to support the existence of some sort of ongoing long term acceleration in US growth, at least during large parts of the twentieth century. Using data taken from Angus Maddison (1995), Charles Jones (2002) estimated that the growth rate of the US economy between 1950 to 1994 was an annual 1.95 percent, which was slightly higher than the rate he derived for 1870 to 1929, which was 1.75 percent. Even these these highly aggregated numbers conceal a considerable degree of variance, since the growth rate registered in the 1950’s and 1960’s - 2.20 percent - was considerably higher than that found during the Solow productivity slowdown of the 1970s and 80s, which was a "mere" 1.74 percent.</p><p>Be all this as it may, the existence of such aparent stability in U.S. growth rates over such a long period of time has given considerable support to the "common sense" and conventionally view accepted view that the U.S. economy is, and has been, running at close to what is considered to be some sort of long-run steady-state (or balanced growth) path, as can be seen in the charts below. GDP growth is of course always volatile, but when you strip out some of the volatility the smoothness of the US path really is quite remarkable, making it hardly surprising that many US economists have found the idea of steady state growth a fairly plausible one.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvWF8QXlqxPINqruo37aPUO2QTna0GUSQ1UjhZnwmqvjj2C571MIGKoERYRMsqEwApNneGcngXrHl0hMkvpyMTjxCs_T8SlH2QtgUoB-_r_3ve3YFLPgbTOuYj5mmzNRbn645JDw/s1600-h/us+gdp.png"><img id="BLOGGER_PHOTO_ID_5327970128211180946" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 217px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjvWF8QXlqxPINqruo37aPUO2QTna0GUSQ1UjhZnwmqvjj2C571MIGKoERYRMsqEwApNneGcngXrHl0hMkvpyMTjxCs_T8SlH2QtgUoB-_r_3ve3YFLPgbTOuYj5mmzNRbn645JDw/s400/us+gdp.png" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOKKHKXhLoNlust65_7ZzEwzp-pks62Bpk32kTzL-wJ2nbU1rZbUtRkEb4CP5U3ezNnCUQThi_06BgYR18mPUFEH0gFnO7CXxeRFHI7FvjAoPnkRWUGr6LOt8lm2mcRxm8W5Lv_g/s1600-h/US+GDP.png"><img id="BLOGGER_PHOTO_ID_5326327384209554034" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 215px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOKKHKXhLoNlust65_7ZzEwzp-pks62Bpk32kTzL-wJ2nbU1rZbUtRkEb4CP5U3ezNnCUQThi_06BgYR18mPUFEH0gFnO7CXxeRFHI7FvjAoPnkRWUGr6LOt8lm2mcRxm8W5Lv_g/s400/US+GDP.png" border="0" /></a><br /><br />This traditional view of the modern growth phenomenon is often supported by reference to a number of what have come to be termed growth "constants" - one of which would be the absence of trend movement in the U.S. capital-output ratio - constants which were emphasized most notably by Nicholas Kaldor (1961), who proposed a series of stylized facts about economic growth which have, over the years, been fairly influential in casting the debate. Kaldor's " facts" went as follows:<br /><br />1. Per capita output grows over time, and its growth rate does not tend to diminish.<br />2. Physical capital per worker grows over time.<br />3. The rate of return to capital is nearly constant.<br />4. The ratio of physical capital to output is nearly constant.<br />5. The shares of labor and physical capital in national income are nearly constant.<br />6. The growth rate of output per worker differs substantially across countries.<br /><br />Now it is not my intention here to examine each of the above "facts"in turn, but rather address a much more specific question, one which essentially focuses on the first presumed constant on the list. What I wish to examine is whether it is indeed the case that per capita output grows continuously over time, and further, that its growth rate does not tend to diminish.</p><p>To be more explicit, I do not wish in any way to question the view that US economic growth has been not only constant, and even possibly accelerating slightly, rather what I would like to do is ask whether this characteristic is shared by all (or even a majority of) the advanced economies, and if it is not, to move on to ask why it may be that this seeming property of US growth is not a shared one, and indeed what the implication is for a theory whuch takes the existence of such a state as one of its critical assumptions. </p><p>In order to carry out this rather straightforward exercise I would like to return to the founding father of modern neoclassical growth theory (Solow) and ask one very simple question: is Solow's "critical" steady state growth assumption "realistic", or put another way, does it appear as realistic today (given what we now know) as it did at the time he made it. And if it isn't, I would like to ask what the implications of coming to realise this are for how we think about modern growth. </p><p>The core of the problem here lies in the decision Solow took in setting up his model to consider both rates of saving and population growth as exogenous variables (ones which are determined outside his model). The rate of growth of any economy in the longer run is simply determined by the rates of growth of the labour and capital inputs which are themselves assumed to grow at a constant rate. And once that steady state growth rate is achieved any external perturbation which sends the economy off its growth path will only have a temporary (or transitional) impact before the homeostatic mechanisms which are assumed to be at work send the economy back on course. In more conventional language, once the equilibrium growth rate is achieved, it should be stable, since regardless the initial value of the capital-labor ratio, the system will develop toward a state of balanced growth at the steady state rate. The system can adjust to any given rate of growth of the labor force, and eventually approach a state of steady proportional expansion.</p><p>At one point in his paper Solow does examine whether the model could be applied to a case where population movement was endogenous rather than exogenous. His conclusion was that it could, but the explanation he offers is indeed interesting.</p><blockquote><p>Instead of treating the relative rate of population increase as a constant, we can more classically make it an endogenous variable of the system. Suppose, for example, that for very low levels of income per head or the real wage population tends to decrease; for higher levels of income it begins to increase; and that for still higher levels of income the rate of population growth levels off and starts to decline.</p></blockquote><p>What Solow postulates here is a kind of U shaped function, part of which roughly corresponds to what we could call the "Malthusian era" when population levels fluctuated as real wages (or income per head fluctuated), and part of which offers a first approximation to the modern growth era, in the sense that fertility (and hence population levels) tends to decline as income rises. But between these two fertility "regimes" there would seem to be a clear break, since what has not been observed (anywhere) is that as incomes fall back subsequent to the transition from one regime to another then fertility rises. Normally we find (in post Malthusian population environments) that as living standards fall, even in the longer run fertility also itself tends to fall. Eastern Europe following the end of communism would be one clear example of this.</p><p>The point here, however, is not to enter into any kind of extended discussion of the factors which influence fertility (and thus population movements), but rather to point out that they do not seem to follow the kind of straightforward function which Solow imagined, and that this difficulty will confront any kind of growth model (whether population is exogenous or endogenous) which postulates the idea of steady state growth, since the kind of homeostatic corrective mechanisms (which would lead an economy back to some kind of equilibrium growth rate) to not appear to be in operation.</p><p>Returning however to the substantive issue, what I would like to ask is whether in fact the assumptions of exogenous savings and population growth, and constant steady state growth are as plausible as they seemed to Solow? What if both population growth and saving rates were both more plausibly to be considered as endogenous variables (ones which are influenced by the working of the process itself), what would this do to the foundations of neo-classical growth theory? And indeed if movements in population size and age structure are found to exert a significant and non-stochastic influence on key growth variables (that is are found not to be mere random shocks) then what really is the current serviceability of a model that assumed them to be so? This is a question we should at least be prepared to ask ourselves, and in particular we need to ask it since most our contemporary forecasting models (and indeed even the core of real business cycle theory on which many of them are based) are constructed on at least some sort of loose assumption that neoclassical growth theory is itself a well-grounded and solid edifice.</p><p>Of course, and touching for a moment some of my conclusions before I even present them, there could be a number of reasons why Kaldor's first "fact" may not be a fact, and one of these, evidently, could be that the modern growth epoch is just that, modern (rather than post-modern) and an epoch. That is, the period Kaldor was referring to may be a historically bounded one, with a begining and an end, and Kaldor's facts may fit the empirical reality which typified that particular period (when per capita output grew at a constant of even increasing rate), but not the period which it now seems might be the posterior one, the post modern-growth era, when per capita output grows at a declining (and even possibly negative) rate. If this were to be the case it would, of course, fit quite well with the pessimistic mindset of many pre-Solow growth theorists, who although they held assumptions which were in many ways similar to Solow, felt that a process of diminishing returns would eventually grind down output growth (see, for example, Jones, 2001).</p><p>What both Solow and his immediate predecessors (Harrod, Domar etc) had in common was the assumption of stable and growing populations, with more or less constant age structures (the demographic transition in age structures being thought to have belonged to the pre modern-growth period), and what we now know (that they didn't) is that such assumptions are unrealistic as we move forward across a century where populations will start to age and decline in one country after another, with radical implications not just for labour force size, but also for age structure and the shape of the population pyramid.</p><p></p><p>So to put all this another way, what I seek to do here is ask one very simple question, and this is whether there are <strong>still</strong> sufficiently good empirical reasons for continuing to believe that there is such a thing as a long term steady state trend growth rate for economies whose population size and structure is changing rapidly and constantly. This state of affairs is already a current reality for a number of limit societies (Japan, Germany and Italy would be the obvious "stylised" examples, but many East European countries are already hazardously near the point of entering the group) while for most other advanced economies it still remains only a theoretical possibility, although it is one which, given the demographic data and forecasts we have to hand, we can hardly afford to ignore. So instead of making the kind of assumptions about population change and economic growth which form the basis of the Solow neo classical theory, is it more "reasonable" to assume that growth rates tend to fluctuate over time following a more or less orderly pattern of rise and decline, and - putting the issue even more stridently - should we not be asking ourselves whether it may it not in fact be the case that growth rates fluctuate as the age structure of a population steadily moves across the whole sweep of the demographic transition - from a state of ultra-high to one of ultra-low fertility. Or, if you prefer, could all of this simply be a non-linear process in the classic and most straightforward sense of the term?</p><p><strong>Steady State Growth?</strong></p><p>In attempting to assess the validity of the "crucial assumptions" which underlie neo-classical growth theory we would do well to keep Kaldor's stylised facts in the forefront of our minds, and in particular ask ourselves how it could possibly be that - in those societies where fertility has now fallen to well below replacement level and labour forces look set to decline and decline - the shares of labour and capital in gross national output could be expected to remain more or less constant. After all, doesn't standard theory tell us that as labour supply comes under greater pressure, wages should rise and technical change should occur? But - and I offer this as simply a throw-away point a this juncture - in the most affected economies like Japan and Germany this does not seem to be what has been happening, since due to recent labour market reforms labour force growth has resumed (after stagnating or falling back) as more and more people in the older age groups have either been reabsorbed or have continued to work, but the value added by the additional work performed does seem to have tended to decline. Put another way, even as employment levels have risen and labour markets tightened in these two countries, the level of real wages has not budged, and on some readings may even have fallen.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgm1LkR9hqicRMjdbcwgIIMuazcG7AyEUvSo4M2qPmyBgXkvh9p2ttXkLCPpdKAI9KYowwJk0rw2AnTQT0mN82w7vmoGfy878eEhK0S8I93Hr-CoLJT8awaJLjbdN04VxMOjnPHOg/s1600-h/german+wage+costs.png"><img id="BLOGGER_PHOTO_ID_5326492163935224978" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 239px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgm1LkR9hqicRMjdbcwgIIMuazcG7AyEUvSo4M2qPmyBgXkvh9p2ttXkLCPpdKAI9KYowwJk0rw2AnTQT0mN82w7vmoGfy878eEhK0S8I93Hr-CoLJT8awaJLjbdN04VxMOjnPHOg/s400/german+wage+costs.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqUqGdemww4hP0W0pdzvmV57e8s-Uc8r8QVAqlPjxuXBWbfj64af9X_ecAWNAHokKFtuCZ-dNcqBbV_ebZZJmefi8dJVpuh0Qk98YmwQa_A2NsOkqtt01MXIiYh5EH4VdbbwoWig/s1600-h/japan+real+disposable+income.png"><img id="BLOGGER_PHOTO_ID_5326511367956621554" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 243px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqUqGdemww4hP0W0pdzvmV57e8s-Uc8r8QVAqlPjxuXBWbfj64af9X_ecAWNAHokKFtuCZ-dNcqBbV_ebZZJmefi8dJVpuh0Qk98YmwQa_A2NsOkqtt01MXIiYh5EH4VdbbwoWig/s400/japan+real+disposable+income.png" border="0" /></a> </p><p><strong>Balanced Growth Or Transitional Dynamics?<br /></strong><br />As Charles Jones points out something funny is evidently going on here, since even in the best case scenario socities growth rates have not performed as Kaldor would have lead us to expect. Even in the case of the US economy some of the core processes we have been observing for some 50 years or more now seem to contradict what we would expect to happen on the conventional account.</p><p>For example, time spent accumulating skills through formal education - which we could think of as some form or other of human-capital investment - has increased substantially over the last half century. In 1940, less than 25 percent of adults in the United States had completed high school, while only about 5 percent had completed four or more years of college education. By 1993, more than 80 percent had completed high school, and more than 20 percent had completed at least four years of college. </p><p>In the second place, the search for new ideas has intensified, and as a result an increasing fraction of the United States workforce - and indeed of workforces throughout the OECD - is now composed of scientists and engineers engaged in research and development. In 1950 the fraction of the US labour force engaged in such work was in the region of 0.25 percent. By 1993, this fraction had increased threefold to more than 0.75 percent. </p><p>Now the point here is, as Jones is only too willing to point out, on the assumptions of virtually any of the standard growth models, <strong>both</strong> these changes should lead to long-run increases in <strong>rates</strong> of per capita GDP growth, yet (despite the "acceleration" debate) such anticipated increases have not been observed.</p><p>Under standard neoclassical models, changes like the ones Jones mentions should generate what are known transition dynamics in the short run and “level effects” in the long run. Put simply the growth rate of an economy should rise temporarily (during the transition, the "transition" effects) and then return to its original (steady state) value, while the income level of the population should remain permanently higher as a result (the "level effect"). On the other hand, under assumptions which are typical of endogenous (new) growth models, such changes should lead to permanent increases in the growth rate itself. However, as we have noted above, the growth rate of U.S. per capita GDP has been surprisingly stable over the last 125 years with the level of per capita GDP being reasonably well represented by a simple time trend. So what is going on here?<br /><br />One distinction which may help get address the problem is the one Jones himself makes between a <strong>constant</strong> and a <strong>balanced</strong> growth path. Along both such paths, growth rates remain constant over an extended period of time, but in the former case constant growth is simply the (coincidental) by-product of a process which is effectively driven by series of transition dynamics while in the latter what is involved is stable and self correcting since what we have is a steady state. </p><blockquote>A balanced growth path is normally defined as a situation in which all variables grow at constant geometric rates (possibly zero). (Jones, 2002 ) </blockquote><p>Now one possibility (discussed by Jones) is that the apparent steady state growth exhibited by the US economy over so many decades has been associated with a very complex set of transitional dynamics, dynamics which "just happen" to have produced this particular outcome. But if this were the case then one very natural question arises. If a large part of U.S. growth in recent years has been associated with transition dynamics, then why do we not see the traditional signature of a transition path, e.g., a gradual decline in growth rates to their steady-state level? Why is it that U.S. growth rates over the last century or more appear to be so stable?<br /><br />So we might like to consider one further possibility at this point. Could it be that the "as a matter of empirical fact" transition dynamics associated with the various factors of production in the United States have worked in some strange way to precisely offset one another, and in so doing leave the growth rate of output per worker fairly constant? We will return to this issue below, but since it is an explanation which may not be so easy to discount as many may imagine it to be at first glance, we now need to make a short detour and - in order to examine one of the factors which may be involved - take a more general look at some empirical data concerning the interaction between population dynamics and economic growth.<br /><br /><strong>Demographic Components in Growth</strong><br /><br />Now obviously national economies differ from one another in a large number of ways, but one of these is the population structure and its underlying dynamic. One reasonably concrete starting point for addressing the issue of population age structure and whether it has an impact on economic performance could be via a comparison of GDP growth rates and population change in a number of the countries most immediately affected by ageing population dynamics. It is interesting to examine the dynamics of more "elderly" societies (in terms of population median ages) since the growth process in "younger" ones (ie those in earlier stages of their demographic transition) have been reasonably well studied under the rubric of what has come to be known as the "demographic dividend" (Bloom et al, 2003). </p><p>Simply put the demographic dividend idea suggests that as birth rates decline from previous high levels of fertility, and the age structure of a population changes so that a higher proportion are to be found in the working ages, economies experience a "growth spurt", or a period of what is often termed catch-up growth. This pattern, under the neo-classical view would constitute some form or other of transition dynamic. So the presence of a transition is not in doubt, what is really in question is whether the process settles down in to some form of ultimate steady state.</p><p>Now, as we have already noted, it is a key postulate of neo-classical growth theory that each economy has its own long run steady state growth rate. One of the consequences of making this sort of initial assumption (albeit as a purely hypothetical and theoretical one) is not in fact that hard to see, since the steady state assumption would seem to imply that as the demographic transition which produced those earlier "transitional dynamics" is left steadily behind (the demographic transition remember is associated with large fluctuations in levels and growth rates of population) then a steady growth rate in the labour force (achieved in part via institutional efficiencies in the labour market) and a supply of savings regulated by effective monetary and interest rate policy, should mean that any given economy would have its own given balanced growth rate, irrespective of key population variables like fertility rates and life expectancy.</p><p>This neo-classical long run steady state growth rate needs, of course, to be understood as a theoretical postulate, a sort of ideal limit case, but nevertheless the concept continues to orient and inform a good deal of conventional economic thinking about economic growth. It also informs the way most people conceptualise and approach the present global economic crisis, since underlying one rescue and stimulus package after another is the idea that there is a long term trend growth rate out there somewhere, just waiting to be "recovered".</p><p>So the idea of "trend growth" far deeper roots than are normally taken into account in the simple Solow-derived offshoots of neo-classical theory, and indeed seems to form part of some kind of collective "ideal type" folk wisdom which are deeply embedded in the mindset when it comes to thinking about business cycles and growth prospects (in some form or another such assumptions normally enter the thinking of the Real Business Cycle tradition, to name but one example) . Thus the growth rate which people normally anticipate will be "recovered" following a recession is normally derived from a model based on some version or other of a long run steady state (or constant equilibrium path). The question we are left with though is really, does the idea of convergence to steady state growth constitute one of those suppositions which are assumed - in Solow's words - to be nearly true, and what are the consequences for the theoretical edifice of modern macro economics if the idea turns out to be not quite as "nearly true" as was previously thought to be the case.</p><p><strong>Linear Or Non-linear Growth Patterns?</strong></p><p>The idea of steady state growth is also often closely associated with the idea of that changes in the long run rate of growth are largely determined exogenously to the economic system, and this idea is typically associated with the Solow model of economic growth, since here long-run economic growth is seen as being determined by such exogenous factors as technical change, aggregate saving rates, schooling rates, and the rate of growth of the labor force. Indeed this is the issue which largely attracted the attention of the new (or endogenous) growth theorists, since it seemed to run against certain basic economic intuitions that this should be the case, although, as Solow argued in his reply to some of the critics, things are by no means as simple as they seem in this context, and most of the newer generation of models have run into what seem to be insoluable difficulties due to certain key, "knife edge" assumptions they need to make (Solow, 1994).<br /><br />It was in some sense with this kind of issue in mind that Mankiw, Romer and Weil wrote what has since become a highly influential paper - A Contribution To the Empirics of Economic Growth (see bibliography below) - since they clearly felt the need to try to put neo classical theory onto a somewhat more stable footing. In their paper the authors outline what they see as the core of the Solow thesis using following words: </p><br /><blockquote>This paper takes Robert Solow seriously. In his classic 1956 article Solow proposed that we begin the study of economic growth by assuming a standard neoclassical production function with decreasing returns to capital. Taking the rates of saving and population growth as exogenous, he showed that these two variables determine the steady-state level of income per capita. Because saving and population growth rates vary across countries, different countries reach different steady states. Solow's model gives simple testable predictions about how these variables influence the steady-state level of income. The higher the rate of saving, the richer the country. The higher the rate of population growth, the poorer the country.</blockquote><br />The first thing to notice about the argument is that the Solow model clearly predicts two pretty straightforward and neatly linear relations: more population-less growth, and more saving-more growth. Now, we are immediately presented with an important difficulty here since, as we will see below, there is now a considerable and accumulating body of empirical evidence which seems to suggest that among "mature" developed economies, those who have the fastest rates of population growth are also those who experience the highest rates of per capita income growth (the United States is the most obvious example, but as we will see this is also the case of France and the United Kingdom), while in those countries where population momentum has slowed, even to the point where their populations may now decline (Italy, Japan, Germany, for example) do not seem able to achieve their former high rates of economic growth, and, even worse, seem to be losing ground in per capita income terms with those economies whose populations continue to grow reasonably rapidly. Now I do not seek here to explore this question in all its intricate detail, I simply wish to make one clear and central point, and that is that the relations involved between population growth and per capita income growth do not seem to be simple linear ones, and arguably it is this property which has thrown many previous researchers off track since in running growth correlations they have normally tended to treat them as if they were.<br /><br />Indeed the whole idea that economies tend to converge towards some sort of balanced growth path is a highly questionable one which, with the notable exception (as I suggest above) of the US, seems to enjoy fairly limited empirical support over the longer term. Economic performance, it seems, tends to fluctuate, but the big question we have in front of us is: do such fluctuations conform to any kind of identifiable pattern?<br /><br />Arguably they do. To start with one very simple example, let's take a look at the Japanese case. Below you will find a graph of Japanese economic growth from 1955 to the present prepared using statistics made available by the Japanese statistics office.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWFcJ2eQw9CB4vECu1RPiyQ-kpH5cRY8pz1sktznJWgUVSEd69UveLaGg_fAFcFJ_JaUU8Sn62cRlsqpFk_VgSQoz_4nmrmHO4nE-4d6whmEIYn3ivKY3GFSt05D0QtDNQDUIelA/s1600-h/japan+annual+GDP.png"><img id="BLOGGER_PHOTO_ID_5326319796944990098" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 198px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWFcJ2eQw9CB4vECu1RPiyQ-kpH5cRY8pz1sktznJWgUVSEd69UveLaGg_fAFcFJ_JaUU8Sn62cRlsqpFk_VgSQoz_4nmrmHO4nE-4d6whmEIYn3ivKY3GFSt05D0QtDNQDUIelA/s400/japan+annual+GDP.png" border="0" /></a><br /><br />What is obvious from looking at this profile is that Japanese growth has been far from uniform over the last 50 years or so. And indeed far from converging to a steady state growth rate, Japans growth seems to have peaked in the 50s and 60s, and have been steadily reducing ever since. Arguably, after peaking, there may be a trend there, but this trend would seem to be towards ever lower annual rates of economic growth. And there is no evidence at this point to justify the supposition of a steady state rate - or hypothetical "homeostatic fulcrum" - around which Japanese growth would stabilise and fluctuate. As far as can be seen at present the process of decline is secular and ongoing. To be clear, the argument is not that Japanese GDP growth does not exhibit some sort of trend, arguably it does, the argument is that this trend does not conform to our current conception of a balanced growth path, and indeed is not homeostatic, in the sense that there is no self correcting mechanism, hence the trend may well be one of gradually declining (and eventually negative) growth with no end point in sight. Put like this the prospect is evidently rather alarming, but I can see no other reasonable and responsible way of putting it.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjx79vXGL2NslPJMh4RkBSFmXF3sssEvwVEqihuU1BAbBK3M326puO-yQEwYx-lpCxevPUOginxiI2yb5608p4gSVorj-OaKn5XXxQTsC3nhNXPwgVxmwGr7ULQvUkCDLXpfCjENg/s1600-h/japan+annual+two.png"><img id="BLOGGER_PHOTO_ID_5326319891539021058" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 197px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjx79vXGL2NslPJMh4RkBSFmXF3sssEvwVEqihuU1BAbBK3M326puO-yQEwYx-lpCxevPUOginxiI2yb5608p4gSVorj-OaKn5XXxQTsC3nhNXPwgVxmwGr7ULQvUkCDLXpfCjENg/s400/japan+annual+two.png" border="0" /></a><br /><p>Nor is Japan a unique case, a reasonably similar pattern can be observed if we come to look at long term growth rates for the Italian economy.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW-Qc3MF4nKZezs6TjZbM_1zN64sb84eFNYj3orkf3JLe4hJDnvqaJVhKVGwYYJoihsVBjivvmYU19Px6H1jJ6gRPzs9bbkX0y99H5yPigowkNvyuQnipPtGce_l8Ye_OH3ANcNg/s1600-h/italy+gdp+two.png"><img id="BLOGGER_PHOTO_ID_5326328827826112386" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 197px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiW-Qc3MF4nKZezs6TjZbM_1zN64sb84eFNYj3orkf3JLe4hJDnvqaJVhKVGwYYJoihsVBjivvmYU19Px6H1jJ6gRPzs9bbkX0y99H5yPigowkNvyuQnipPtGce_l8Ye_OH3ANcNg/s400/italy+gdp+two.png" border="0" /></a><br /><br />Again, Italian growth seems to have peaked, and then entered decline. In Italy's case the peak seems to have been in the 1970s (but it may have been earlier, since I don't at this point have data for the pre 1970 period), and indeed since 1990 Italian GDP growth has only managed an average of something like 1.4% growth per annum, while as far as we can see at the present time, over the decade from 2001 to 2010 it may well turn out (depending on the depth and duration of the present recession) that Italian GDP may well have been nearly stationary.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhU7GgHg9yh1I-Va1zafQcyIQ8FT1geBJNYNNB80fB0RILbDca8yDy2V9dOWrAYo1_qfr5tcP0yQC05jAluJYXBLJDgdQbefe5zeg9IYYftxBEEgYRgGdNPAmaeLYWxjAbpqUfO2Q/s1600-h/italy+GDP.png"><img id="BLOGGER_PHOTO_ID_5326319714177870162" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 198px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhU7GgHg9yh1I-Va1zafQcyIQ8FT1geBJNYNNB80fB0RILbDca8yDy2V9dOWrAYo1_qfr5tcP0yQC05jAluJYXBLJDgdQbefe5zeg9IYYftxBEEgYRgGdNPAmaeLYWxjAbpqUfO2Q/s400/italy+GDP.png" border="0" /></a><br /><br /><br /><strong>Age Structure and Productivity</strong><br /><blockquote><p>Curiously enough, in this neoclassical speculation on population the factor of age distribution was for a long time not studied, and it was never studied intensively as to its economic implications. It is remarkable, because this factor could to a large extent be taken care of in a stationary model of theory. When a certain trend of the population development is maintained for such a long period that a stable age distribution has been reached, the difference between a progressive, a stationary, and a regressive population -- apart from a different development of population numbers -- is that in the first more than in the second, and in the second more than in the third, the number of children is relatively large and the number of old people relatively small. A corresponding difference rules even within each major age group taken by itself. If we thus compare a regressive population with a stationary one, we find that in the first young children are relatively fewer than older ones and that the center of gravity is also higher in middle age as well as in old age.Now people in different ages are productive in different degrees, and -- within a given standard of living -- their consumptive demands, their cost of living, also differ. Here intensive empirical studies ought to set in...........to ascertain the average productivity and the cost of living in different age groups.<br />Gunnar Myrdal, Godkin Lectures, <a href="http://edwardhughtoo.blogspot.com/2006/01/gunnar-myrdal-and-effects-of-population.html">Lecture Six</a>, 1939.</p></blockquote><br /><p></p><p>So why exactly is it that national growth rates rise to a peak, and then seemingly steadily peter-out again. Well the explanation - while it may prove to be a little disagreeable - should not actually be so surprising if we start to think about economic theory a little. In fact I am far from being the first researcher to have raised this issue, since as early as the 1930s the Swedish Economics Nobel Gunnar Myrdal was raising what are essentially similar issues, and was struggling, just as I am now, to make sense of the neo-classical growth assumptions in just the same way as I am now. What Myrdal argued so cogently (see quote above), in a series of lectures which have unfortunately been long neglected, was that existing neo-classical theory appears to be severely limited when it comes to its capacity either to explain the ongoing changes in age structure which have now become so evident, or to incorporate the impact of such changes into its general theoretical structure.</p><p>Essentially, on whichever type of growth model you use, the key to the problem of long term movements in levels of GDP per capita is no great mystery, it is a function of two parameters: a)the proportions of the total population who are working, and; b) the kinds of activities they are engaged in. If we look, for example, at the early section of the above graphs showing GDP for Japan and Italy it is not hard to see that these economies exhibited very high growth rates during their "take off" point (a phenomenon which we can also find today in emerging economies like China and India ). Such "strong" growth rates are basically the result of two factors, a rapid increase in the proportion of the total population who become involved in economically productive activity, and the process of technological 'catching up' which takes place as these economies move ever closer to the "state of the art" technological frontier and thus engage in activities with ever higher components of value added. Since emerging economies start at some considerable distance from this frontier then evidently the growth rates they achieve can be extremely rapid as they close the gap, and this would almost certainly be one form of what is known as "conditional convergence", as techological levels and institutional structures become more uniform.<br /><br />But there is another dimension to growth, and in this sense societies almost certainly do not converge (except possibly over the very, very long term, where we might postulate that all societies could converge to a similar - and very high - median age, although even this theoretical idea would need to be treated with some caution, since so many features of this situation may ultimately turn out to be "path dependent"). This second dimesion revolves around age structure related productivity and consumption patterns. </p><br /><p>The thinking behind the idea I am presenting here would run as follows. In a first moment, emerging economies take off due to a rapid process of input accumulation (Krugman, Asian Tigers), and the resulting growth is simply a result of "more" rather than of "more productivity", as ever higher proportions of the population are economically active in support of total output. I take it as self evident that under such circumstances growth in output per capita has a natural tendency to rise. However, with the passage of time, this intial "input accumulation" driven growth wave starts to slow. Fortunately, under "normal" circumstances this loss of momentum is largely offset as emerging economies move up the value chain (sectoral shifts). These sectoral shifts are also accompanied by a steady upward movement through the median age brackets as the impact of lower fertility and higher life expectancy makes its presence felt. Not only do these movements produce more workers, they also produce more experienced and better educated ones - as the impact of learning by doing and increased investments in education come to be noted. </p><p>Also we see a rising proportion of what have come to be known as 'prime age workers' active in the economy. The exact definition of who exactly such prime age workers are may be something of a moveable feast, and in any event the variable needs to be empirically determined for any given society at any moment in time. Essentially prime age workers are those whose productive activity is at its lifetime maximum. Evidently the higher proportion of such workers who are present in any given economy the higher the aggregate output of that society is likely to be, and in this sense there must be a maximum point here. But the essential idea being advanced here is that this maximum is not attained and then sustained, but rather reaches a peak, before the proportion subsequently starts to decline. This phenomenon should be one of the principal reasons why we might consider the idea of "steady state growth" to be, prima facie, a rather implausible one.</p><p>The prime age wage/productivity effect can be seen in the chart below which shows how the age related earnings structure has altered in Japan over the years between 1970 and 1997 (the chart was prepared by Wolfgang Lutz, see Lutz et al 2005). </p><p><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLAJts4obkPDv90qmfoSJuA_DsYwoV6TzRgXY6Pd98YWuoSvxC6cWFDEsR0xRaRa-pzRPkeojv9Q00D_NtMAMMAm0n3Ot0r1l9tOmjXS4I2cIXYviztWXeJpl3pCl-zjonwo7VcA/s1600-h/japan+earnings+aa.jpg"><img id="BLOGGER_PHOTO_ID_5140095708815638162" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLAJts4obkPDv90qmfoSJuA_DsYwoV6TzRgXY6Pd98YWuoSvxC6cWFDEsR0xRaRa-pzRPkeojv9Q00D_NtMAMMAm0n3Ot0r1l9tOmjXS4I2cIXYviztWXeJpl3pCl-zjonwo7VcA/s400/japan+earnings+aa.jpg" border="0" /></a><br /><br />Now one very significant and revealing detail to be noted above, is the fact that while the shape of the hump has changed slightly over the years there has been little noticeable drift to the right, which is what we would expect to see were the extension of life expectancy to be associated with an upward movement in peak performance ages. The absence of such drift should alert us to the possible existence of an age-related productivity problem in high population median age societies and again constitutes some sort of prima facie evidence that there is at least a phenomenon here worthy of investigation, even for those working in the ethereal world of neo-classical tradition where there is no good reason why long term growth rates should be subject to such fluctuations. </p><p>Of course, I making here the generally accepted assumption that wage levels bear some statistically significant relation to productive output levels (ie wages can serve us here as a proxy for something, if they can't, and in the longer run, then it would be hard to see why we are talking about neo-classical economics at all). What can be easily seen from the chart is that Japanese wages generally peak somewhere in the 50-54 age range, even though many workers in Japan currently continue to work to 75, while multilateral organisations like the OECD and the World Bank (see "From Red To Grey", for example) continue to rather simplistically offer higher participation rates in the over 55 age groups (and extended working lives generally) as a sufficient condition to offset the inevitable decline in numbers in the traditional working age groups. Far from wishing to claim that such a policy will not help, I merely wish to draw attention to the possibility that things may be more complex than many assume, and also to highlight the theoretical implications of this undoubted empirical reality. </p><p>A good deal of the argumentation in this essay is based on the experience of only three countries: Germany, Japan and Italy. This is not simply a coincidence, or a question of random selection, since these three are the highest median age societies on the planet at the present time. In this sense, if we wish to advance conjectures about what the impact of population ageing may be on growth the three of them do offer us a somewhat special opportunity. As we have seen, in both the cases of Japan and Italy, growth has tended to rise to a peak and then steadily decline as the population has aged. Japan has, through very strong export competitiveness maintained some degree of positive economic resilience up to this point - although the 2009 economic collapse has to raise serious issues about the longer term sustainability of such a high level of export dependence. The same cannot be said of Italy, which due to its much weaker competitiveness profile cannot expect the export vibrance that a Japan (or a Germany) can attain.<br /><br />Turning now to the German case, what we find is that whilst it is significantly better than the Italian one, the growth characteristics are not fundamentally different. According <a href="http://www.destatis.de/presse/englisch/pm2002/p2560121.htm">to the Federal Statistics Office</a>:<br /><br /><span style="FONT-STYLE: italic">Measured in terms of gross domestic product changes at 1995 prices, the rates of economic growth in the former territory of the Federal Republic of Germany and - since 1991 - in Germany have continuously declined since 1970. While the average annual change was 2.8% between 1970 and 1980, it amounted to 2.6% between 1980 and 1991 and to 1.5% between 1991 and 2001.</span><br /><br />Since 2001 the performance of the German economy has in fact been worse rather than better, much to the consternation of those who hoped that many years of sacrifice in the form of wage deflation and structural reform would lead to a rebirth of the country's former economic prowess. In reality the German economy shrank (0.2%) in 2003, and grew by only around 1% in both 2004 and 2005. And while the German economy picked up notably in 2006 and 2007 (with growth rates of 3.2% and 2.6% respectively) and many talking in terms of such grandiose notions as global uncoupling and "Goldilocks" type sustainable recoveries, the most striking feature of the recent German dynamic has been the way that internal demand failed to respond to the externally driven export stimulus. Of course, all the speculation came to an abrupt end in 2008 when the German economy once more entered recession as world trade expansion slowed and exports collapsed (with GDP only growing by 1% over the year), while 2009 looks set to be a lot worse (with the IMF currently forecasting a contraction somewhere in the region of 5%, and forecasts of up to minus 7% not seeming exaggerated).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTyNsL60z-YKnLYRce9LN56JTXewtE7bFx0fW00UhU78FaRTnW6OHLdzz6S3DOMyMhyphenhyphenAX26fpOOVBmsceNOgp_sVnm1VyzDoFBha_1aDKyb8Dmwo-ejbaF1_DQ8dWrCzbr2xbOLg/s1600-h/german+gdp+and+consumption.png"><img id="BLOGGER_PHOTO_ID_5326373551882902338" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 250px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhTyNsL60z-YKnLYRce9LN56JTXewtE7bFx0fW00UhU78FaRTnW6OHLdzz6S3DOMyMhyphenhyphenAX26fpOOVBmsceNOgp_sVnm1VyzDoFBha_1aDKyb8Dmwo-ejbaF1_DQ8dWrCzbr2xbOLg/s400/german+gdp+and+consumption.png" border="0" /></a><br />So some part of the traditional mechanism of economic transmission seems to have been broken, a phenomenon which has lead Claus Vistesen (using rather traditional Keynesian terminology) <a href="http://japanjapan.blogspot.com/2009/03/japan-engine-failure.html">to talk about "engine failure" rather than mere magneto problems</a> (Vistesen, 2009). Long term GDP growth rates in the German economy are clearly falling, and the decline looks clearly set to continue.</p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiVQO4XUPkjlHPIuh5_fQoAupIHS4C-apwY93nnrZIzqiJMPNXJNZOfJCqWHkWhgAbs3Kg10ywc11282RhmYLESGm_g4hTsBSV0-64zpaDxw4WWffu6OCU20H69A09e9J_L_uQUQ/s1600-h/german+gdp+one.png"><img id="BLOGGER_PHOTO_ID_5326321208552418498" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 236px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiVQO4XUPkjlHPIuh5_fQoAupIHS4C-apwY93nnrZIzqiJMPNXJNZOfJCqWHkWhgAbs3Kg10ywc11282RhmYLESGm_g4hTsBSV0-64zpaDxw4WWffu6OCU20H69A09e9J_L_uQUQ/s400/german+gdp+one.png" border="0" /></a><br /><strong>Population Growth and Economic Growth</strong><br /><br /><br />But let us return now to our central concern here, which is Solow's critical expectation that as population growth rates decline economic growth rates should increase. And in order to do this let us look at some more charts. This time the charts are based on data prepared by Eurostat, and show the volume index of <strong>GDP per capita</strong> as expressed in Purchasing Power Standards (PPS) (with the European Union - EU-27 - average set at 100). A reading on the index of a country over 100 implies that the country's level of GDP per head is higher than the EU average and vice versa, and relative movements in the indexes imply that the rates of change in GDP per capita are either improving more or less rapidly than the EU average. The basic data behind the charts is expressed in PPS which effectively become a common currency eliminating differences in price levels between countries making possible meaningful volume comparisons of relative GDP per capita. Since the index is calculated using PPS figures and expressed with respect to EU27 = 100, it is only valid for cross-country comparison purposes and not for individual country inter-temporal comparisons, nonetheless these charts are extraordinarily revealing.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIKaVoRBX02lOcwOVmI1C6v4OVOJ2kLQr65mGHFXoVNwE4xpi7Wx_k8XKQy5wvS9TJCYaQA6Oxt3QXRgRhyIwX3h0Ebpdr-Pc9B05LXzWyCdpyYZWSkaMdfBk4-T0GWOdWuPF11A/s1600-h/GDP+PPS.jpg"><img id="BLOGGER_PHOTO_ID_5157619329506922050" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIKaVoRBX02lOcwOVmI1C6v4OVOJ2kLQr65mGHFXoVNwE4xpi7Wx_k8XKQy5wvS9TJCYaQA6Oxt3QXRgRhyIwX3h0Ebpdr-Pc9B05LXzWyCdpyYZWSkaMdfBk4-T0GWOdWuPF11A/s400/GDP+PPS.jpg" border="0" /></a> <p>As can be seen in the above chart for the period 1995 to 2006, comparative US PPS per capita GDP, after correcting somewhat post 2000, as the value of the dollar fell vis-a-vis the euro and the pound sterling, maintained a reasonably steady path, while UK comparative per capita GDP rose, and the French dropped (in both cases comparatively slightly). When we come to look at Italy, Germany and Japan, a very different profile is evident.</p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiowkVYWNg2H9aOoTpjVS-VH00qmov3wO8kAmU0MhCQJ45dJOSiKoPtVHJD59Thx9JW9P5ZXB4QZ6ko6dQZTqfuOsNAsdETFlEHqAp7ety9ppOeoaOz2HsssiwjIyLWQhURzxMqpg/s1600-h/GDP+Italy+etc.jpg"><img id="BLOGGER_PHOTO_ID_5150262664709193410" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiowkVYWNg2H9aOoTpjVS-VH00qmov3wO8kAmU0MhCQJ45dJOSiKoPtVHJD59Thx9JW9P5ZXB4QZ6ko6dQZTqfuOsNAsdETFlEHqAp7ety9ppOeoaOz2HsssiwjIyLWQhURzxMqpg/s400/GDP+Italy+etc.jpg" border="0" /></a><br /><br />All three have steadily been losing ground vis a vis the EU 27 average benchmark. Now evidently the classification process I have used here is far from being an arbitrary one. The first chart shows a relatively high-population-growth (near replacement fertility) group of countries, while the second shows a low-to-declining-population growth (lowest-low fertility) group. In each case the economies in question are developed ones, and, as it happens, all are members of the G7. As we can see, in PER CAPITA income growth terms all three of the former hold their comparative position much better than all (or any) of the latter three. </p><p>When we come to look at population growth (see the three comparative charts below, which are only classified for visual convenience according to population size), we find that in all three members of the former group of countries (the US, the UK and France) population is rising, and sharply so, while in the latter group (Germany, Japan and Italy) population levels are virtually stationary (with the slight uptick in Italian population in the 2004 - 2006 period being entirely due to the rapid regularisation of a large irregular migrant population). Prime facie then, all of this is in conflict with what Solow would have expected, but then Solow never started to think about movements in age structure, and rising median population ages, which is hardly surprising since he was thinking about the problem as he saw it over half a century ago.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgX4-BZxQZeU9onIl1bLLGOxAuWfaDmH5rV5o_ooje0_v1DZwm261eFI5re2J0eV7Ow6JvHhKEvYwCj0NLGZeT_ts0b1r2pkE6OyjmpSqor3pHRRC-zfAnmuHkwj_pEPOZ-p0DlIA/s1600-h/population+one.jpg"><img id="BLOGGER_PHOTO_ID_5150546836925366066" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgX4-BZxQZeU9onIl1bLLGOxAuWfaDmH5rV5o_ooje0_v1DZwm261eFI5re2J0eV7Ow6JvHhKEvYwCj0NLGZeT_ts0b1r2pkE6OyjmpSqor3pHRRC-zfAnmuHkwj_pEPOZ-p0DlIA/s400/population+one.jpg" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjEjczbrg8_CgKpb-Kf3LsgHe5ZIjvT7Qboz6ADRtUk-fCoEQBFzh9wsfxzz3WPmtuqPTYw8x0EaFrOrGriYqDRfRniwTxwXXRP1ubOkrDMiqQ9jTSfxqhDlVB6lQesu5R7UenIg/s1600-h/population+two.jpg"><img id="BLOGGER_PHOTO_ID_5150547068853600066" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjEjczbrg8_CgKpb-Kf3LsgHe5ZIjvT7Qboz6ADRtUk-fCoEQBFzh9wsfxzz3WPmtuqPTYw8x0EaFrOrGriYqDRfRniwTxwXXRP1ubOkrDMiqQ9jTSfxqhDlVB6lQesu5R7UenIg/s400/population+two.jpg" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZk-RDv6P3MGiYwJvaQ1O9uB73fxam8w6UYsV0BRLRvXe02dsyciCrAB_Q6jTjt2i8em-GdKjc7I409YokLmTGmlGKVrATKFYGk9eKgH2x_nQeorxnxuhvd75By3_2C8ws0-2aag/s1600-h/population+three.jpg"><img id="BLOGGER_PHOTO_ID_5150547360911376210" style="DISPLAY: block; MARGIN: 0px auto 10px; CURSOR: hand; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZk-RDv6P3MGiYwJvaQ1O9uB73fxam8w6UYsV0BRLRvXe02dsyciCrAB_Q6jTjt2i8em-GdKjc7I409YokLmTGmlGKVrATKFYGk9eKgH2x_nQeorxnxuhvd75By3_2C8ws0-2aag/s400/population+three.jpg" border="0" /></a><br />The reason why we should be seeing this difference is not that hard to get at, given all that has been said above, since the UK, France and the US are all ageing much less rapidly than Germany, Japan and Italy. This comparative measure is interesting, I would argue, since while - for the sort of catch-up growth reasons I touched on earlier - it is hardly surprising that developed economies should lose their relative standing vis-a-vis some key emerging ones (conditional convergence), it should raise more than the occassional eyebrow to find that one group of countries among the more established economies should be losing impetus in comparison with another group, and all the more so if we are prepared to entertain the possibility that this difference is reasonably correlated with both population growth and rates of ageing in a way which seems to go right to the heart of some of the most basic predictions of traditional (consensus) neo classical growth theory.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBJX5fUjO8rY-bRcqgMed1D7FVwlZYN3MS36KpTwJ0K1ejChGxIqoiAhGr6s6vOP2CCK5m8MXWriHYKTJtzir2vXoYsR1ZytHI6kInNItOWBBpBlo0FNz6ttRcCjtMSfW77Y8o4g/s1600-h/japan+median+age.png"><img id="BLOGGER_PHOTO_ID_5326391182989772114" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 229px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBJX5fUjO8rY-bRcqgMed1D7FVwlZYN3MS36KpTwJ0K1ejChGxIqoiAhGr6s6vOP2CCK5m8MXWriHYKTJtzir2vXoYsR1ZytHI6kInNItOWBBpBlo0FNz6ttRcCjtMSfW77Y8o4g/s400/japan+median+age.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSP8JDf7vT3kxVTAlUrCmZE6QnBaD2rb_jx3po28pxjXpT3EpUigHYhiROyqYBrl8usal3fQD3QzEH5yzpN3ecw9OwNhonddslasZVzvN73SP0q1zXSf81i7rDT13J2re8zB5-bw/s1600-h/italy+median+age.png"><img id="BLOGGER_PHOTO_ID_5326391980413908066" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSP8JDf7vT3kxVTAlUrCmZE6QnBaD2rb_jx3po28pxjXpT3EpUigHYhiROyqYBrl8usal3fQD3QzEH5yzpN3ecw9OwNhonddslasZVzvN73SP0q1zXSf81i7rDT13J2re8zB5-bw/s400/italy+median+age.png" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLwy7CoyJ3Cdv8wEmkAa3LMRnhCSBcyHdqsPuGVhrCerTPSjpDS9r_9ctEjZ0I4JXTm2E1V2576hFU04FsDL2o9wtO_8c8jn6mVsr8gs8wJy0ED0ES0iOuFBkmb-6jR_YDlUpkUQ/s1600-h/germany+median.png"><img id="BLOGGER_PHOTO_ID_5326392729298323682" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 230px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhLwy7CoyJ3Cdv8wEmkAa3LMRnhCSBcyHdqsPuGVhrCerTPSjpDS9r_9ctEjZ0I4JXTm2E1V2576hFU04FsDL2o9wtO_8c8jn6mVsr8gs8wJy0ED0ES0iOuFBkmb-6jR_YDlUpkUQ/s400/germany+median.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUL0pPEDPSMwKa-9Exc3j4VNf2Rkd0CMyIa5tlq8yLFeEYgcIVDfwkS2wSIul-J49tIYLil4GYJXNJw4rGKSq1rPDXVS7LKyzyYgk7PB719XizVr0MgTFWClA3MVNRtlrRebU0YA/s1600-h/france+median+age.png"><img id="BLOGGER_PHOTO_ID_5326394957771927602" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUL0pPEDPSMwKa-9Exc3j4VNf2Rkd0CMyIa5tlq8yLFeEYgcIVDfwkS2wSIul-J49tIYLil4GYJXNJw4rGKSq1rPDXVS7LKyzyYgk7PB719XizVr0MgTFWClA3MVNRtlrRebU0YA/s400/france+median+age.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYM3xuB2XtfCqInC968k6uARwinhkTP6N95S0rkxwyeqmpHxJlJg7bbcznhMWrXPCn0XUlq_stx4VyETx4iPcyUPdNFrI-5fKw31TVSMhyzJAb6QfdXP5tbwrbfXv32UYaEyY7uA/s1600-h/uk+median+age.png"><img id="BLOGGER_PHOTO_ID_5326468591742182594" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYM3xuB2XtfCqInC968k6uARwinhkTP6N95S0rkxwyeqmpHxJlJg7bbcznhMWrXPCn0XUlq_stx4VyETx4iPcyUPdNFrI-5fKw31TVSMhyzJAb6QfdXP5tbwrbfXv32UYaEyY7uA/s400/uk+median+age.png" border="0" /></a><br /><br /></p><p><strong>Conclusion - What I Hope (And What I Cannot Hope) To Have Achieved Here</strong></p><p>Basically, simple visual inspection of some basic charts hardly counts as strong evidence for anything, especially when we are talking about accepting or rejecting some of the most highly prized (and most generally common sense accepted) core components of our modern economic edifice. But as has so often been found to be the case in the history of scientific thinking, common sense expectation and securely grounded scientific reality are surely not necessarily co-extensive, and when a few easily produced charts can apparently throw so much sand into the highly tuned and greased works of mainstream growth theory, then there should at least be cause for thought, reflection and further research.</p><p>On a first pass interpretation I think I would wish to claim to have made some sort of case that population median age does seem to matter, and, even worse for the predictions of standard neo-classical theory, rising population is not necessarily a negative factor for economic growth. As already mentioned, at the present time Germany, Japan and Italy leading the global rising median age charge, but many more countries are soon destined to move up along the trail they are blazing. By median age the next in line are basically Finland (41), Slovenia (41), Sweden (41), Austria (41), Belgium (41), Bulgaria (41) Greece (41), Croatia (41) and Switzerland (40). And the presence of names like Slovenia, Bulgaria and Croatia should really be ringing alarm bells here, since these three belong to a group of countries who have been marked by a very special political and social history, and as such have experienced a very special economic and demographic transition, one which means, if the kind of rising-median-age loss-of-economic-thrust case presented here has any validity, then we may be facing a the first batch of what may becoming a growing band of countries who share the common feature that they grow old before they grow rich.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHZZLBeIrVnXF9qA-sD6tdiBs29p5wjdPjtMQqTytKo4uJRoqqhwlgxeuFMwjls8cMoCto6dMtlMLi4xF5Rz9iGKUugg1Sar_KEcfl3JfqZaFa4513pBiRwwpLsy8AVeto4ckZFg/s1600-h/US+population+median.png"><img id="BLOGGER_PHOTO_ID_5326389930745609874" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHZZLBeIrVnXF9qA-sD6tdiBs29p5wjdPjtMQqTytKo4uJRoqqhwlgxeuFMwjls8cMoCto6dMtlMLi4xF5Rz9iGKUugg1Sar_KEcfl3JfqZaFa4513pBiRwwpLsy8AVeto4ckZFg/s400/US+population+median.png" border="0" /></a><br /><br />Now, and going back to where we started, Mankiw, Romer, and Weil (MRW, 1992) carried out an empirical evaluation of a textbook Solow growth model using a multicountry data set for the years 1960-1985 and found support for the Solow model's predictions that, in the long-run steady state, the level of real output per worker by country should be positively correlated with the saving rate and negatively correlated with the rate of labor-force growth. Interestingly Bernanke and Gurkaynak (in their examination of their work) suggest that MRW's basic estimation framework is broadly consistent with almost any growth model that admits a balanced growth path, and adds that this category includes virtually all extant growth models in the literature. In which case, one could argue argue that MRW do not only address the Solow model, in the sense of distinguishing it from possible alternative models of economic growth, but addresses the whole corpus of growth literature, since it almost without exception assumes the potential property of a balanced growth path.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgi8Ug3dgR1dNk9mQoDVkY4x1J_PU9ojv-OgDcAsCx_qo2GUsaJ6hkvNzC_7v_Vo7L8eP6h8jlCWpkxa50DI4MyZ4fNvWZXRCvTAUYqVaRB8a3H08yjbxTA6uordeP2n2bzFzuxFw/s1600-h/france+GDP.png"><img id="BLOGGER_PHOTO_ID_5327978074068688946" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 225px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgi8Ug3dgR1dNk9mQoDVkY4x1J_PU9ojv-OgDcAsCx_qo2GUsaJ6hkvNzC_7v_Vo7L8eP6h8jlCWpkxa50DI4MyZ4fNvWZXRCvTAUYqVaRB8a3H08yjbxTA6uordeP2n2bzFzuxFw/s400/france+GDP.png" border="0" /></a><br />As Bernanke and Gurkaynak say, there are two and only two possibilities here: either the long-run growth rate is the same for all countries (that is, g(i) = g for all i), as maintained (following Solow) by MRW, or it isn't. Even more to the point, "explaining" growth by assuming that growth rates differ exogenously (or for factors which lie outside the model) across countries is not particularly helpful, especially since such changes in the growth rate seem to be systematic and not incidental. Once it is allowed that long-run growth rates not only differ across countries, but that growth processes in individual countries often do not exhibit properties which are normally associated with a balanced growth path ( that all variables do not grow at constant geometric rates, for example) then we are naturally pushed to consider explanations for these differences, and towards a fresh approach in our models. Making evident the need for this consideration is all I can reasonably hope to have achieved in this short essay. As someone once said, at least knowing what it is you don't know is one step beyond knowing nothing.</p><p><br /><strong>Bibliography</strong><br /><br />Bernanke Ben S. and Refet S. Gurkaynak, "Is Growth Exogenous? Taking Mankiw, Romer, and Weil Seriously," NBER Macroeconomics Annual, Vol. 16. (2001), pp. 11-57.</p><p>Bloom, David, David Canning and Jaypee Sevilla, "The Demographic Dividend, A New Perspective on the Economic Consequences of Population Change", Rand, 2003.</p><p>DeLong, J. Bradford, “Estimating World GDP, One Million B.C. - Present,” December 1998. U.C. Berkeley mimeo.<br /><br />Jones, Charles I, "Was an Industrial Revolution Inevitable? Economic Growth Over the Very Long Run" Advances in Macroeconomics (2001) Volume 1, Number 2, Article 1.<br /><br />Jones, Charles I, "Sources of U.S. Economic Growth in a World of Ideas", American Economic Review, March 2002, Vol. 92 (1), pp. 220-239<br /><br />Kaldor, Nicholas, “Capital Accumulation and Economic Growth,” in F.A. Lutz and D.C. Hague, eds., The Theory of Capital, St. Martins Press, 1961.<br /><br />Krugman, Paul, "The Return Of Depression Economics And The Crisis Of 2008", W. W. Norton, 2008.<br /><br />Krugman, Paul, "The Myth Of Asia's Miracle", Foreign Affairs, November 1994<br /><br />Lutz, Wolfgang, Vegard Skirbekk and Rosa Maria Testa, "<a href="http://www.oeaw.ac.at/vid/download/pce/dec01/pm/Low_Fertility_Trap_01_12.pdf">The Low fertility trap hypothesis</a>", presentation at the Postponement of Childbearing in Europe Conference, held at the Vienna Institute of Demography, December 2005.<br /><br />Mankiw, N. Gregory, David Romer, and David N. Weil, “A Contribution to the Empirics of Economic Growth”, Quarterly Journal of Economics, 107, May 1992, 407-37.<br /><br />Solow, R. M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics 70(February):65-94.<br /><br />Solow, Robert M. (1994). Perspectives on growth theory. Journal of Economic Perspectives, Winter 1994, 45-54.<br /><br />Vistesen, Claus, Japan - Engine Failure? Japan Economy Watch Blog, March 2009.</p><p>World Bank, From Red to Gray - The "Third Transition" of Aging Populations in Eastern Europe and the Former Soviet Union, 2008.</p><p>Young, Alwyn, "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," Quarterly Journal of Economics, 110, August 1995, 641-80.</p><p><strong>Appendix: Some Extracts From Solow's Original Paper</strong></p><blockquote><p>One way to close the system would be to add a demand-for-labor equation: marginal physical productivity of labor equals real wage rate; and a supply-of-labor equation. The latter could take the general form of making labor supply a function of the real wage, or more classically of putting the real wage equal to a conventional subsistence level. In any case there would be three equations in the three unknowns K, L, real wage. Instead we proceed more in the spirit of the Harrod model. As a result of exogenous population growth the labor force increases at a constant relative rate n. In the absence of technological change n is Harrod's natural rate of growth. (Solow, 1956).</p><p>Once we know the time path of capital stock and that of the labor force, we can compute from the production function the corresponding time path of real output.</p><p>If the capital-labor ratio r* should ever be established, it will be maintained, and capital and labor will grow thenceforward in proportion.......Thus the equilibrium value r* is stable. Whatever the initial value of the capital-labor ratio, the system will develop toward a state of balanced growth at the natural rate.</p><p>If the initial capital stock is below the equilibrium ratio, capital and output will grow at a faster pace than the labor force until the equilibrium ratio is approached. If the initial ratio is above the equilibrium value, capital and output will grow more slowly than the labor force. The growth of output is always intermediate between those of labor and capital.</p><p>The basic conclusion of this analysis is that, when production takes place under the usual neoclassical conditions of variable proportions and constant returns to scale, no simple opposition between natural and warranted rates of growth is possible. There may not be -in fact in the case of the Cobb-Douglas function there never can be -any knife-edge. The system can adjust to any given rate of growth of the labor force, and eventually approach a state of steady proportional expansion.</p><p>In general one would want to make the supply of labor a function of the real wage rate and time (since the labor force is growing). We have made the special assumption that L = Lo, i.e., that the labor-supply curve is completely inelastic with respect to the real wage and shifts to the right with the size of the labor force. We could generalize this somewhat by assuming that whatever the size of the labor force the proportion offered depends on the real wage.<br /></p><p>Up to now, whatever else has been happening in the model there has always been growth of both labor force and capital stock. The growth of the labor force was exogenously given, while growth in the capital stock was inevitable because the savings ratio was taken as an absolute constant. As long as real inc.ome was positive, positive net capital formation must result. This rules out the possibility of a Ricardo-Mill stationary state, and suggests the experiment of letting the rate of saving depend on the yield of capital. If savings can fall to zero when income is positive, it becomes possible for net investment to cease and for the capital stock, at least, to become stationary. There will still be growth of the labor force, however; it would take us too far afield to go wholly classical with a theory of popu1:ition growth and a fixed supply of land.</p><p><br />Instead of treating the relative rate of population increase as a constant, we can more classically make it an endogenous variable of the system. Suppose, for example, that for very low levels of income per head or the real wage population tends to decrease; for higher levels of income it begins to increase; and that for still higher levels of income the rate of population growth levels off and starts to decline.</p></blockquote>Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-36596111.post-15069671869012180542009-05-20T03:21:00.005+02:002009-05-20T18:53:25.507+02:00Is Hungary Set To Become The New Iceland?Iceland, why on earth Iceland? Well, the issue I have in mind concerns the independence and viability of central bank monetary policy (especially in a small open economy like Hungary's) and the role interest rates, and investor sentiment, and yield differentials, and oh yes, I almost forgot, that notorious vehicle so beloved by investors the "carry trade" in producing a situation where financial dynamics get really out of hand.<br /><br />In a visionary paper given at the International Conference of Commercial Bank Economists (held in Madrid, July 2007) - entitled <a href="http://danskeresearch.danskebank.com/link/Creditaccelerator2007final/$file/Creditaccelerator2007_final.pdf">The Global Financial Accelerator and the role of International Credit Agencies</a> - the Danish economist Carsten Valgreen argued the following:<br /><blockquote>The choice major countries have made in the classical trilemma: ie, Free movements of capital and floating exchange rates – has left room for independent monetary policy. But will it continue to be so? This is not as obvious as it may seem. Legally central banks have monopolies on the issuance of money in a territory. However, as international capital flows are freed, as assets are becoming easier to use as collateral for creating new money and as money is inherently intangible, monetary transactions with important implications for the real economy in a territory can increasingly take place beyond the control of the central bank. This implies that central banks are losing control over monetary conditions in a broad sense. The new thing – this paper will argue – is that we are increasingly starting to see the loss of monetary control in economies with stable non-inflationary monetary policies. This is especially the case in small open advanced – or semi-advanced – economies. And it is happening in fixed exchange rate regimes and floating regimes alike.</blockquote>Interestingly enough, Valgreen chose as his paradigmatic examples of central bank loss of control over monetary policy the cases of Iceland and Latvia. Equally today we could add the name of Hungary to our list. As Valgreen argued (and this remember, before the sub prime blow-out):<br /><blockquote>It is no accident that the two examples are small open economies with liberalised financial markets. Being small makes the global financial markets matter more. A country such as Iceland will be the first to notice that the agenda for monetary policy has changed, as the current and capital accounts are naturally very large and important for the economy. However, this is more of a reason to study its experiences carefully, as they might show something of what is in store for larger economies over the next decade.</blockquote>So the issue really is, does the Hungarian National Bank continue to control monetary policy in any meaningful sense, or is it reduced to responding to events elsewhere? And does the Hungarian government have any effective tool left with which to fight this crisis? But getting ahead of ourselves and going too far into all this, let's step back a bit, and take a longer look at the Hungarian economy, just to set the scene.<br /><br /><strong>The IMF and the EU Agree To A Larger Deficit</strong><br /><br />The International Monetary Fund and the European Union has now approved Hungary's request for a larger budget deficit this year, thus giving the government marginally more room for manoeuvre in the face of the very severe contraction in GDP. The government is now going to be authorised to aim for a 3.9 percent of gross domestic product shortfall, as compared with the earlier 2.9 percent objective, according to Finance Minister Peter Oszko. The government have also revised their forecasts, and expects the Hungarian economy to shrink by 6.7 percent this year, the most since 1991, a revision from the earlier 6 percent forecast. Hungary was the first EU member to arrange a 20 billion IMF-led bailout last year, lining up 20 billion euros in a bid to avert a default after investment and credit to eastern Europe dried up. The country then pledged to keep its budget deficit under control to qualify for the loan.<br /><br />The question is, is this good news or bad news? Evidently the decision not to strangle the government budget is welcome (we are in danger of a contraction that feed on itself here, since with external demand at very low levels, applying 9.5% interest rates and fiscal tightening means the economy can simply fall into a downward spiral). But in the braoder context the news is not good. The IMF and the EU have cut Hungary some more slack simply because the ferocity of the slump in output is worse then any previously imagined, and things are now going to get worse, not better. Which made it rather strange <a href="http://www.bloomberg.com/apps/news?pid=20601095&sid=a15EMiKvnU8Y&refer=east_europe">to read in Bloomberg this morning</a> that Finance Minister Peter Oszko has announced the government is to consider selling foreign-currency denominated bonds this year in order to take advantage of rising investor confidence. We are on very dangerous gound indeed here gentlemen! I mean, whatever happened to once bitten twice shy. According to Bloomberg:<br /><blockquote>Foreign-currency borrowing, along with slower growth, a wider budget deficit and higher government debt than elsewhere in eastern Europeraised concern about Hungary’s ability to repay its debt lastyear......IMF and EU officials this week approved Hungary’s plan torun a wider budget deficit this year and next than earlier targeted....</blockquote>So what exactly has changed? According to the latest data growth is now even slower than before (or rather the contraction is sharper), the budget deficit and gross government debt are both pointing up again, and the only (vaguely) "good" news is that living standards are falling so fast that the trade balance is improving, and with it the current account deficit. But the government debt dynamics are not the same as the external trade one, and things are getting worse, not better, which makes you wonder what all the optimisim is about? In their recent stress testing exercise the Hungarian Government Debt Management Agency suggested the debt path was sustainable (see much more below on this), but in order to offer this assurance they assumed an average growth rate of GDP of 3% 2013 - 2020 even in their worst case scenario! . My estimate is a much more sobre one, and that is, with declining and ageing population to think about - the Hungarian ecenomy will be lucky to average 1% growth over the above time horizon (more justification on this below). So as far as I can see Hungary's public debt dynamics are still set on a clearly unsustainable path.<br /><br />Then you need to take into account how you have a 9.5% central bank benchmark interest rate going into a 6% percent plus GDPcontraction (with inflation around 3%), so what are people thinking about? This policy mix doesn't work, and it won't. If you lower the interest rates to support the economy, the forint crashes, and with it the balance sheet of all those households still holding CHF denominated mortgages in their portfolio. Hungary is clearly caught between the proverbial rock and the hard place.<br /><br />And what's more, this policy mix is leading to all sorts of distortions. Hence the reference in the title of this post to Iceland, since Iceland's problems precisely got out of hand, due to the "juiciness" of the trade their domestic interest rate yield differential offered. Viz<a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a.AMaJIc3VDo&refer=home"> a recent Deustche Bank report</a> which specifically recommended buying HUF denominated assets, due to the yield differential.<br /><blockquote>Currency deals that profit from the difference in interest rates globally are returning to favor on speculation the worst of the creditcrisis may be over, spurring investors to buy eastern European assets,Deutsche Bank AG said.The Russian ruble, Hungarian forint and Turkish lira offer investorsthe best returns in the next two to three months thanks to the highestrates in the region, said Angus Halkett, a strategist at Deutsche Bankin London.The so-called carry trade, in which investors borrow in currencieswith low interest rates to buy higher-yielding assets, helped theforint and lira surge to record highs last year before the collapse of Lehman Brothers Holdings Inc. prompted investors to sell riskier assets.</blockquote>Perhaps people should reflect a little more on the significance of those final few words: "before the collapse of Lehman Brothers Holdings Inc. prompted investors to sell riskier assets".<br /><br />This is what is known as the "carry" trade, and it works like this. Stimulus plans and near-zero interest rates in developed economies boost investor confidence in emerging markets and commodity-rich nations with interest rates which are often in double figures.Using dollars, euros and yen these investors then buy instruments denominated in currencies from countries like Brazil, Hungary,Indonesia, South Africa, New Zealand and Australia which collectively rosee around 8% from March 20 to April 10, the biggest three-week gain since atleast 1999 for such carry trades, according to data compiled by Bloomberg . A straightforward carry-trade transaction would be to borrow U.S. dollars at the three-month London interbank offered rate of 1.13% and use the proceeds to buy Brazilian real and earn Brazil’s three-month deposit rate of 10.51%. That would net anannualized 9.38% - as long as both currencies remain stable, but the real, of course, is appreciating. Now all of this can present a big problem for a number of CEE economies, because:<br /><br /><br /><blockquote><p>Turkey’s key interest rate is 9.25 percent, Hungary’s is 9.5 percent and Russia’s 12 percent. The cost of borrowing in euros overnightbetween banks reached 0.56 percent yesterday from 3.05 percent sixmonths ago as the European Central Bank began cutting interest rates and pledges of international aid allayed concern the global slowdownwould worsen. The London interbank offered rate, or Libor, forovernight loans in dollars fell to 0.22 percent from 0.4 percent inNovember as the U.S. government and the Federal Reserve spent, lentorcommitted $12.8 trillion to stem the longest recession since the1930s.</p></blockquote>So basically, "Big Ben's" US bailout is fuelling specualtion on Hungarian debt!<br /><br />And don't miss this point from the Bloomberg article:<br /><blockquote>Deutsche Bank recommends investors sell the euro against the forint on bets the rate difference will help the Hungarian currency gain 10 percent to 260 per euro in two to three months from 286.55 today. Investors should also sell the dollar against the lira and buy the ruble against the dollar-euro basket, the bank said.</blockquote>And it isn't only Deutsche Bank, Goldman Sachs recommended on April 3 that investors use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and Russia rubles.<br /><br />We can see some of this impact in the German ZEW investor sentiment index. As can be seen, something interesting is happening somewhere, even if it is not immediately evident where. As Solow would have said, "I can see evidence for improved investor sentiment everywhere, except in the real economies".<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLOeDNkElkC-7AKoJdPk3Bzc_uAN-itDxD2b9DD4MBtc9fWt5_p8b2e3rtVkj0DfhaIM5WcCbIZNUA3o10-sirxMvN5hzA9ltdahMFDLX7cpj3HU9b3NV3dBFzXjL7l-tKbYhjkA/s1600-h/zew+economic+sentiment+indicator.png"><img id="BLOGGER_PHOTO_ID_5337943263284459906" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 211px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgLOeDNkElkC-7AKoJdPk3Bzc_uAN-itDxD2b9DD4MBtc9fWt5_p8b2e3rtVkj0DfhaIM5WcCbIZNUA3o10-sirxMvN5hzA9ltdahMFDLX7cpj3HU9b3NV3dBFzXjL7l-tKbYhjkA/s400/zew+economic+sentiment+indicator.png" border="0" /></a><br /><br />So, come on everyone, off you go to Monte Carlo, and place your bets. But meanwhile, remember, in Hungary at least, the most notable phenomena are the growing unemployment and the way <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aRrRAwjq2DOc">the bad loans pile up</a>, even as the Hungarian economy tanks! Basically, the all the evidence now points to the fact that IMF and the EU urgently need a rethink about how they are going about things, but this is beyond the scope of the present post.<br /><br /><blockquote>"Hungarian lenders face an increase in non-performing loans, which will contribute to “substantially deteriorating” profits for the country’s financial system, central bank Vice President Julia Kiraly said. The whole banking system, which is stable with adequate liquidity, may end up with “negative profit” this year and some lenders need to strengthen their capacity to resist shocks, Kiraly said at a conference in Budapest today."</blockquote><br /><br /><strong>The Fundamentals, All The Fundamentals, And Only The Fundamentals </strong><br /><br /><strong>Horrid GDP Data</strong><br /><br />The decision to widen the deficit allowance slightly is not that surprising when you take into account that Hungary's gross domestic product dropped by 5.8% year on year in the first quarter of 2009. The figure was announced by the statistics office last Friday and followed a decline of 2.6% in the last three months of 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEia3jCJF1WN8wjvF3gfTPyE38_FeWGs-OVFBCLu8TfND1hETGf-c1TDFanYTLVbtrSQ7sFVjfTQ0dlJcidyrPWIzy5ULwNQADOj6pXKJcoSMvvYYaVjj4WICX_qO7hrLy2tHai1Ww/s1600-h/hungary+gdp+one.png"><img id="BLOGGER_PHOTO_ID_5336513217868277410" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 233px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEia3jCJF1WN8wjvF3gfTPyE38_FeWGs-OVFBCLu8TfND1hETGf-c1TDFanYTLVbtrSQ7sFVjfTQ0dlJcidyrPWIzy5ULwNQADOj6pXKJcoSMvvYYaVjj4WICX_qO7hrLy2tHai1Ww/s400/hungary+gdp+one.png" border="0" /></a><br /><br />Quarter on quarter there was a 2.3% GDP decline, (down from 1.5% contraction in the fourth quarter) which means the economy was shrinking at a 9.2 percent annualised rate, quite sharp, but far from being one of the worst cases in the EU. What makes the Hungarian recession rather different is the way it has been lingering in the air since the initial "correction" in 2006, and is now becoming protracted since this was the fourth consecutive quarter when quarter on quarter growth was negative, and it is hardly likely to be the last.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEja_w-dX26humYrklXiFVzZ_Znw0c_m1QGLCVqUYz1pam6DqpbBH0gE7_UD22KSA2OBkrEjNKEkI4WTrj0U78YPc7YZl7bixXz6cwW2YiEanWAxJXxOtVO5ZxVHkTv3iKUD97k6UA/s1600-h/hungary+gdp+2.png"><img id="BLOGGER_PHOTO_ID_5336513139804135538" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 199px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEja_w-dX26humYrklXiFVzZ_Znw0c_m1QGLCVqUYz1pam6DqpbBH0gE7_UD22KSA2OBkrEjNKEkI4WTrj0U78YPc7YZl7bixXz6cwW2YiEanWAxJXxOtVO5ZxVHkTv3iKUD97k6UA/s400/hungary+gdp+2.png" border="0" /></a><br /><br />Household consumption is in continuos decline (see retail sales data below), real wages are falling, and the lack of internal and external demand growth means that investment remains weak. Further, this dynamic is not likely to change rapidly. Exports have plunged - even though since imports have slumped even further we have the ironic detail that net trade is still mildly positive for GDP. However, with interest rates at such a high level and fiscal policy being continually tightened there is little chance of a 'V' shaped recovery in Hungary, and the recession has all the hallmarks of becoming an 'L' shaped" one.<br /><br />Even the agricultural sector due to the high base effect of last years bumper harvest. So basically, it's back and back in time we go at the moment.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDpyPSHPuDi-5U75eBiHDyFKMcZTnifG2nVlvXME4-QAuoDkG6ro7EwbizOfQuXizLhMMbPhsJj8DIeTRp16PF06iFec1Ei-SDzY1mw5J5MFtzug5vwDl-wMszNPhBuIFp4i3z_w/s1600-h/hungary+gdp+3.png"><img id="BLOGGER_PHOTO_ID_5336513071170831602" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 219px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDpyPSHPuDi-5U75eBiHDyFKMcZTnifG2nVlvXME4-QAuoDkG6ro7EwbizOfQuXizLhMMbPhsJj8DIeTRp16PF06iFec1Ei-SDzY1mw5J5MFtzug5vwDl-wMszNPhBuIFp4i3z_w/s400/hungary+gdp+3.png" border="0" /></a><br /><br /><strong>Retail Sales In Continuous Decline</strong><br /><br />Hungarian retail sales fell for the 25th consecutive month in February as rising unemployment falling wages and a generally deepening recession sapped consumer spending. Retail sales were down an annual 3.2 percent following a 2.8 percent decline in January, according to national statistics office data. Prime Minister Gordon Bajnai, who replaced Ferenc Gyurcsany last month as differences over how to handle the recession boiled over, has indicated he plans to raise the value-added tax as the recession cuts into budget revenue. This will surely push sales down even lower, and household consumption is now expected to decline by as much as 8 percent this year, according to the most recent government estimates.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghsZxlzudQ9JgYaTfNsD3AVU0FR7y5M2I0y_QuBmVpwCBC32gac9RJW3DSsLAvWvbvY7BC8XlgOvZoQCbpm3k1SCJCmQ-q2ymoWpK7wOTZk3b9ZnjeSizg5_XiZkAcfVUzAP-dyw/s1600-h/hungary+retail+yoy.png"><img id="BLOGGER_PHOTO_ID_5327885109298068114" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEghsZxlzudQ9JgYaTfNsD3AVU0FR7y5M2I0y_QuBmVpwCBC32gac9RJW3DSsLAvWvbvY7BC8XlgOvZoQCbpm3k1SCJCmQ-q2ymoWpK7wOTZk3b9ZnjeSizg5_XiZkAcfVUzAP-dyw/s400/hungary+retail+yoy.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjh6uEdmgFiRfXa-GimClED7iHNmpBjcy3xKwTCb0JzQ1cRHG4-e2vx84I4pGRhkVfyi6SbaKIFLw7f9143-zchMXhgcHddAS_8rJlrTsKq2LcbFmoRxndk-xWwi1sTEYcWoBol3A/s1600-h/hungary+retail+index.png"><img id="BLOGGER_PHOTO_ID_5327885023346425122" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 230px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjh6uEdmgFiRfXa-GimClED7iHNmpBjcy3xKwTCb0JzQ1cRHG4-e2vx84I4pGRhkVfyi6SbaKIFLw7f9143-zchMXhgcHddAS_8rJlrTsKq2LcbFmoRxndk-xWwi1sTEYcWoBol3A/s400/hungary+retail+index.png" border="0" /></a><br /><br />Consumers started finding themselves with less to spend following the introduction of the government austerity programme in 2006 which raised taxes and utility prices.<br /><br /><br /><strong>Unemployment On the Up and Up</strong><br /><br />Hungary's jobless rate rose to 9.7% in March, up sharply from the 8% level recorded in December. Hungary's unemployment rate has been howevering continuously in the 7%-8% range for more or les 4 years now, so the current spike (with the prospect of more to come) suggests something important has changed. Between Q4 2008 and Q1 2009, unemployment claims rose by 66,000.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjJQNI-HgPM-miqBRNqm4thinjI3y7wT7ufoy1EzXsuQuGqk-9mib8HYCHitFdBnB940YdbcBEfKayRaxZHu2YZm5E5AXz_JhyphenhyphenwydaU8RXcZOWTW2s49mXcu8XazTtZDODWzLA5g/s1600-h/hungary+two.png"><img id="BLOGGER_PHOTO_ID_5329738599738235474" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 201px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjJQNI-HgPM-miqBRNqm4thinjI3y7wT7ufoy1EzXsuQuGqk-9mib8HYCHitFdBnB940YdbcBEfKayRaxZHu2YZm5E5AXz_JhyphenhyphenwydaU8RXcZOWTW2s49mXcu8XazTtZDODWzLA5g/s400/hungary+two.png" border="0" /></a> Of the country’s 402,800 registered unemployed, 42.5 percent have been out of work for at least a year, now. The number of Hungarians employed averaged 3.76 million in the first quarter, compared with 3.88 million in the previous three months. It is hard to see a resurgence in the number of Hungarian's employed, even after this recession is past and forgotten, since the working age population is falling steadily, and has been for some time now.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi92S0j8i_i2OG-jY1CHleiBI8MGbNHj_Xifk-qkoeN6GU4Lik6W5stcjnhW7RnjTybaPHHfUgoBEFVYPy8v1YZ8hR0QPZAc8V46p5BjLkUhymqrj7hBOJjqYXOhE3TJQOLH8E6aA/s1600-h/hungary+three.png"><img id="BLOGGER_PHOTO_ID_5329738711605889858" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 207px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi92S0j8i_i2OG-jY1CHleiBI8MGbNHj_Xifk-qkoeN6GU4Lik6W5stcjnhW7RnjTybaPHHfUgoBEFVYPy8v1YZ8hR0QPZAc8V46p5BjLkUhymqrj7hBOJjqYXOhE3TJQOLH8E6aA/s400/hungary+three.png" border="0" /></a><br /><br />Alongside the increase in unemployment the activity rate has declined even more rapidly. Of the 117,000 laid off during the last quarter some 40,000 chose to remain inactive rather than looking for employment elsewhere. Hungary's already languishing job market received a major blow from the global economic crisis in the form of layoffs and bankruptcies, meanwhile, companies may have been more cautious in hiring new staffers. These job market trends were only to be expected, however downsizing is on a higher scale compared with forecasts. Hungary's economy is in a state of deep recession, with predictable consequences for employment, real wages, and demand.<br /><br />One consequence of the sharpnesss of the recession has been that Hungarian aggregate wages are falling much more rapidly than anticipated, and this, in turn, has put a major dent in the new government's fiscal adjustment plans. The Finance Ministry had originally anticipated an additional HUF 50 billion in tax revenue. However, the new unemployment figures suggest that the decrease in wage costs may surpass the government's most recent 2% forecast. In a worst-case scenario, the drop in aggregate earnings may be as high as 4%, with a HUF 100 billion-HUF 150 billion negative impact on the budget. <p></p><br /><p><strong>Exports Continue To Fall<br /></strong><br />Hungary posted a foreign trade surplus of EUR 492.8 million in March, the largest in the past decade, according to the Central Statistics Office (KSH). Still exports were down by nearly 20% year on year, and the improved balance was the result of imports falling even more - by over 23%. <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqBGwOMpi8td9oUlEWahDedUScSd3M4TiEaHCbKFZ7Rbb6TERkHqaTIfrgsvXl-193g_P8xTCipauIkCySoRlGPXHUlS0COmpJLLJGXKB7TsBOlZcxgzOHIgY3uJK9gtUqi66ivg/s1600-h/hungary+exports+yoy.png"></p></a><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqBGwOMpi8td9oUlEWahDedUScSd3M4TiEaHCbKFZ7Rbb6TERkHqaTIfrgsvXl-193g_P8xTCipauIkCySoRlGPXHUlS0COmpJLLJGXKB7TsBOlZcxgzOHIgY3uJK9gtUqi66ivg/s1600-h/hungary+exports+yoy.png"><p><img id="BLOGGER_PHOTO_ID_5333178060460925506" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 218px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqBGwOMpi8td9oUlEWahDedUScSd3M4TiEaHCbKFZ7Rbb6TERkHqaTIfrgsvXl-193g_P8xTCipauIkCySoRlGPXHUlS0COmpJLLJGXKB7TsBOlZcxgzOHIgY3uJK9gtUqi66ivg/s400/hungary+exports+yoy.png" border="0" /></a></p><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhioRC8bDbBAZd1bWA9De3vUT501al-ZqB2MgGqnZNJvmhgY8Rfj8tj492sr1k_5enzzmT5CSTKhW0rA7V_YpobQgup0TqVqqHUfyRTml9-h0NY34ds7kErY4eORpaKGpamqZuYMQ/s1600-h/hungary+exports.png"><img id="BLOGGER_PHOTO_ID_5333181482016880994" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 205px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhioRC8bDbBAZd1bWA9De3vUT501al-ZqB2MgGqnZNJvmhgY8Rfj8tj492sr1k_5enzzmT5CSTKhW0rA7V_YpobQgup0TqVqqHUfyRTml9-h0NY34ds7kErY4eORpaKGpamqZuYMQ/s400/hungary+exports.png" border="0" /></a><br /><br /><br />In fact Hungary's exports came in at EUR 5,173 million in March - an 18.2% year on year decline, a considerably slower rate of decline than that registered a month ago (-29.7%). Imports came in at EUR 4,680 million , a staggering 23.4% drop, following a plunge of 32.3% in February. <p>The gap between export and import growth (5.2 percentage points) has not been as wide as this this wide September 2007 (5.9 percentage points). The March balance shows a record high, a surplus of EUR 492.8 million, which compares with a surplus of EUR 213.9 million in March last year. Exports in the first quarter as a whole amounted to EUR 13,843 million, a decline of 26.3% in annual terms. Imports in Q1 amounted to EUR 13,233 million, down 28.5% year on year. Hungary's Q1 foreign trade balance showed a surplus of EUR 609.3 million, another record, which compares with a surplus of EUR 282.1 million for the same period of 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdtpoCjy8BtUTemekHPPOdBBPx0P3f5owFyznmWlhWgh2K8KjOeYbt2uNjR_HgKSmzLa5Dy6EuJD15WecpnvtDG8Dl_TbKPH5pOG7o8HcWzhyphenhyphen80yQm-p9aCUUfuyfH1qdSVe86fA/s1600-h/hungary+trade+balance.png"><img id="BLOGGER_PHOTO_ID_5333181858362986802" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 203px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdtpoCjy8BtUTemekHPPOdBBPx0P3f5owFyznmWlhWgh2K8KjOeYbt2uNjR_HgKSmzLa5Dy6EuJD15WecpnvtDG8Dl_TbKPH5pOG7o8HcWzhyphenhyphen80yQm-p9aCUUfuyfH1qdSVe86fA/s400/hungary+trade+balance.png" border="0" /></a><br /><strong>And Industrial Output Slumps<br /></strong><br />With exports slumping in this way it is not surprising to find that Hungary's industrial production dropped by 19.6% in March, according to working day adjusted data. Over the first quarter Hungarian industrial output declined by 22.3% year on year, but - although it rose 4.3% month on month, according to data adjusted for calender and working day changes. </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrpGXyxThOcnDckEVvVrtmu7TqdBhQmZWus1bVsh5_w1Dos8I0U3V_wemAuIz9X7v5fWBUzTSsdWU3lJ8q0c0gITEgB5uVcwq29Pk-MsyFEmU5bGZMA9a6Q9Pg_PPcJhhGYfbPMg/s1600-h/hungary+ip+yoy.png"><img id="BLOGGER_PHOTO_ID_5333182283431720162" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 239px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrpGXyxThOcnDckEVvVrtmu7TqdBhQmZWus1bVsh5_w1Dos8I0U3V_wemAuIz9X7v5fWBUzTSsdWU3lJ8q0c0gITEgB5uVcwq29Pk-MsyFEmU5bGZMA9a6Q9Pg_PPcJhhGYfbPMg/s400/hungary+ip+yoy.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjm9N4dW6p-RZoXBY-mDUCmrzpqdeOeqoD_k42qGouuBdmD2LC4piOyHK13ulvTRbUMUh0oh_n52EOKpM343wvX9nUIKALXHicfB4QE1VV-mPkua_FP8DtOXU3X_-17j9Akex-pg/s1600-h/hungary+IP+two.png"><img id="BLOGGER_PHOTO_ID_5337945149451857762" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 241px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjm9N4dW6p-RZoXBY-mDUCmrzpqdeOeqoD_k42qGouuBdmD2LC4piOyHK13ulvTRbUMUh0oh_n52EOKpM343wvX9nUIKALXHicfB4QE1VV-mPkua_FP8DtOXU3X_-17j9Akex-pg/s400/hungary+IP+two.png" border="0" /></a><br /><br />And activity in Hungary's manufacturing sector continued to contract in April according to the PMI reading, although the pace of contraction is now down slightly from January's all-time low.<br /><br />The headline manufacturing PMI stood at a seasonally adjusted 40.4 in April, up slightly from the 39.5 registered in March, according to the release from the Hungarian association of logistics. This was the seventh consecutive month of contraction, following the all-time low of 38.5 hit in January. The Hungarian government currently forecasts that GDP will contract by as much as 6% this year as the German economy, Hungary's chief export market, also faces a similar decline in GDP. Hungarian manufacturing output contracted even more in April than in March, to 37.1 from 37.6. The export index showed a further decline to 35.6 from 36.5 in March. The only positive development came from the new orders index which showed a marginal increase to 37.5 from a reading of 35.0 in March.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEpC_6sT24hN6Dz84gzhwDo4r0VwYdqu9unSilgEfb8YOfmpDBL4Nfsoxt2orLRZ58o2R58VOxeBp8UQC-oeH0vsLlH6TEdc1m9T-cKGD4XeDf6hNUrYNXQNVk-zJq3JTvGb96Og/s1600-h/hungary+PMI.png"><img id="BLOGGER_PHOTO_ID_5331933686247761522" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 227px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEpC_6sT24hN6Dz84gzhwDo4r0VwYdqu9unSilgEfb8YOfmpDBL4Nfsoxt2orLRZ58o2R58VOxeBp8UQC-oeH0vsLlH6TEdc1m9T-cKGD4XeDf6hNUrYNXQNVk-zJq3JTvGb96Og/s400/hungary+PMI.png" border="0" /></a><br /><br /><br /><br /></p><p><strong>Only Inflation Rebounds<br /></strong><br />Hungary’s inflation rate unexpectedly rose in April for the first time in 11 months, after a weaker forint made imports more expensive, with prices of fuel, medicine, clothing and new cars leading the rise. The annual rate was 3.4 percent, rising from 2.9 percent in March to what is its highest level so far this year. Core inflation, which filters out food and energy prices, was 3.2 percent on the year and 0.5 percent on the month. The annual rate had returned to the central bank’s 3 percent target in February for the first time in more than two years.<br /></p><p>The prices of consumer durables, including cars, rose 1.4 percent in a month, while fuel costs climbed 2.9 percent and medicines by 1.9 percent. The price of clothing increased 3.7 percent, the statistics office said. With Hungary’s recession damping demand, consumer prices are set to increase “only moderately,” according to the central bank. Policy makers now expect the inflation rate to average 3.7 percent this year and 2.8 percent next year. The bank raised its estimate from an earlier forecast of between 3.1 percent and 3.4 percent for 2009 and 1.5 to 1.9 percent for 2010.<br /><br />One factor which will influence future inflation is the new government's decision to raise the main value-added tax rate to 25 percent from 20 percent, as of July 1 in an attempt to offset declines in state revenue and narrow the budget gap. Raising the rate of consumption tax is deeply problematic in the sort of double-bind situation which Hungary faces. Germany raised VAT by 3 percentage points on 1st January 2007, and look what happened to consumption (see chart below) in December 2006, and then subsequently. This is doubly relevant to the Hungarian case since the Hungarian economy is more than likely set on the German path of becoming an export dependent economy. Weakening domestic consumption further could well prove to be a "lethal dose". </p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ1XdQkpE3L9TvH5zjclsh8SY9fWXXNLhwY-qJzCoe0EyJLe7Jdr5vaeL53WnbNGKLYoxUdsVbtvfZrn0joHx5_H33k5XZf8lSMa2bgCx2X3oJamYsfChPfLRNxhqXnTxQ40CrMA/s1600-h/german+VAT.png"><img id="BLOGGER_PHOTO_ID_5337830469422151906" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 248px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJ1XdQkpE3L9TvH5zjclsh8SY9fWXXNLhwY-qJzCoe0EyJLe7Jdr5vaeL53WnbNGKLYoxUdsVbtvfZrn0joHx5_H33k5XZf8lSMa2bgCx2X3oJamYsfChPfLRNxhqXnTxQ40CrMA/s400/german+VAT.png" border="0" /></a><br /><br />Magyar Nemzeti Bank policy makers expect the annual inflation rate to be “near” their 3 percent goal “on the monetary policy horizon” of five to eight months, they said on May 8.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLFxOB8ltVH8h4RGPNF6H73XJMMcDTNYfVI_DU0HGJ0sUUt9vtMnyGLmDnFP0zcJOvzWdfzpH13bM_LGyMUETOqrVqrcn9J87adgyK2QC5nIfOHF2KJjlq804zTrr60KS6hGHfyw/s1600-h/hungary+CPI.png"><img id="BLOGGER_PHOTO_ID_5334844208713056786" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 230px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLFxOB8ltVH8h4RGPNF6H73XJMMcDTNYfVI_DU0HGJ0sUUt9vtMnyGLmDnFP0zcJOvzWdfzpH13bM_LGyMUETOqrVqrcn9J87adgyK2QC5nIfOHF2KJjlq804zTrr60KS6hGHfyw/s400/hungary+CPI.png" border="0" /></a> <blockquote>“The NBH would clearly like to cut interest rates, which at 9.5% look far to high for an economy that will contract by 5-6% this year, but this is more dependent on global financial stability and declining risk aversion than the latest CPI release." Nigel Rendell, Royal Bank of Canada</blockquote><p><strong>And So The NBH Keeps Rates On Hold<br /></strong><br />Hungarian monetary policy makers left the benchmark interest rate unchanged at their April meeting for a third month as concern over the forint’s decline outweighed the outlook for slowing inflation and growth. The Magyar Nemzeti Bank kept the two-week deposit rate at 9.5 percent.<br />Policy makers didn’t consider cutting the interest rate in March based on stability concerns (according to the minutes) and even rejected a proposal, backed by Governor Andreas Simor and his two deputies, to raise the key rate to 10.5 percent. In April the rate-setting Monetary Council considered the recession, the outlook for inflation and economic stability when setting the key rate. The annual inflation rate may be near the bank’s 3 percent target on the 18-month monetary policy horizon, according to the statement.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3dARQtMe-1rA4D291OSNWkeCp2nUtq1HdHZeT6AWdTk9GLk7QvL_JYc4NGMHvCSUcmYtQgPSpaCshxsVxEn6qcwPb8jPDcJCk05LBZ81JzMjDDIKl_YcAiPl8BYWeKosl4hKGLQ/s1600-h/hungary+interest+rates.png"><img id="BLOGGER_PHOTO_ID_5337819219776165698" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3dARQtMe-1rA4D291OSNWkeCp2nUtq1HdHZeT6AWdTk9GLk7QvL_JYc4NGMHvCSUcmYtQgPSpaCshxsVxEn6qcwPb8jPDcJCk05LBZ81JzMjDDIKl_YcAiPl8BYWeKosl4hKGLQ/s400/hungary+interest+rates.png" border="0" /></a><br /><br /><br /><strong>Much Ado About Debt</strong><br /><br /><br />Zsuzsa Mosolygó and Lajos Deli, of the Hungarian Government Debt Management Agency recently published what they call " a first a simple model to analyze the impact of the international credit line on debt ratio trends as well as to demonstrate the importance of calibrating reasonable values for decisive macroeconomic parameters". </p><p>Read stress tests.<br /><br />Below you will find the chart showing their basic assumptions, and giving the outcomes for the various scenarios. The whole idea of the process was to show that Hungarian debt to GDP will not necessarily rise in the future as some analysts had been predicting. I don't want to go into all of this in too much, but if you click on the chart and take a look at the assmptions for GDP growth (which is actually the key parameter), you will find that on both the basic and the pessimistic scenarios average growth of 3% is assumed (this is impossible to attain on my view), while the "optimistic" scenario even assumes 4% (incredible). Remember these are average growth rates and over seven years (2013 - 2020). This is like selling Spanish property pre 2007 with a splendid photo of the sun and the beach.<br /><br />And this comes from two apparently serious analysts, analysts who are supposed to be committed to taking a serious stab at putting the country's longer term finances on a stable footing. All they actually acheive is offering a confirmation of the worst fears of those of us who feel that the debt dynamics in Hungary are totally unstable in the mid term, and illustrate just how out of balance most of Eastern Europe now is as we move forward.<br /></p><p>They justify their decision in the following way:</p><blockquote>Market analysts tend to assume in their debt models a 2% economic growth for the<br />Hungarian economy. The National Bank of Hungary estimates currently a 2%<br />potential GDP growth rate, however, it does not mean necessarily the long-term<br />economic growth. A few years ago the estimates were higher and it seems to be<br />possible that adequate reforms to encourage employment would result in a 3-4% or<br />even higher potential GDP growth rate. </blockquote><p>(Please Click On Image For Better Viewing)<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisATfEMY6ijvTjMeEZPFxh-1B1pfPLLdjvyvnhFctGNS_JGKZqLMcjvdbsst60cjpZdv5-tbwZWiqVGGsVJGiviV2Q9IXywIZIMh411V87zMD7wruxr_AjVnciUl9TAlpy1oAEgg/s1600-h/hungary+macro+assumptions.png"><img id="BLOGGER_PHOTO_ID_5327878450595209474" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 276px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEisATfEMY6ijvTjMeEZPFxh-1B1pfPLLdjvyvnhFctGNS_JGKZqLMcjvdbsst60cjpZdv5-tbwZWiqVGGsVJGiviV2Q9IXywIZIMh411V87zMD7wruxr_AjVnciUl9TAlpy1oAEgg/s400/hungary+macro+assumptions.png" border="0" /></a> </p><p>In fact the objective of the study was not to seriously stress test Hungarian debt dynamics, but to try to argue that those analysts arguing for unsustainable dynamics have it wrong. The end product isn't very convincing. Not surprsingly the debt to GDP ratio diminishes gradually after 2009 both in the “optimistic" and “basic" version. The authors even underline that debt development does not appear to be unsustainable under very pessimistic macroeconomic conditions, either. In the “pessimistic" scenario debt ratio peaks at about 80% in 2020 and descends slowly afterwards (which is due to the assumed 6% interest rates). Of course, "pessimistic" here means Hungarian GDP rising by 3% a year every year from 2013 to 2020. To put this in perspective, using current Hungarian government forecasts average GDP in the ten years up to 2010 is something like 1.8% per annum. And this has been a pretty good decade by Hungarian standards (see chart for long term growth).<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0VJ8jWzX91m6IjC4yAnpEnQOM_dW4-557AE7xKr_TRi15Pf-SiKBifslMOySWuHAGJokM6D14kWCVh21KR9DHDNKBPyZAUkZkjsBuMqtZoujCNTfNTtB3SRal_Uqh8qkEYdfB7Q/s1600-h/hungary+gdp+one.png"><img id="BLOGGER_PHOTO_ID_5329736768113372242" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 225px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi0VJ8jWzX91m6IjC4yAnpEnQOM_dW4-557AE7xKr_TRi15Pf-SiKBifslMOySWuHAGJokM6D14kWCVh21KR9DHDNKBPyZAUkZkjsBuMqtZoujCNTfNTtB3SRal_Uqh8qkEYdfB7Q/s400/hungary+gdp+one.png" border="0" /></a><br />In fact, with a declining and ageing workforce, together with decline domestic consumption (see retail sales chart above), even a 1% per annum growth rate may be optimistic. In any event we won't see 3%, and nothing produced by the Hungarian government to date substantiates the claim that longer term debt is NOT on an unsustainable path. "To sleep, perchance to dream-ay, there's the rub."</p>Unknownnoreply@blogger.com6tag:blogger.com,1999:blog-36596111.post-46474431946610397972009-04-09T08:03:00.002+02:002009-04-09T10:24:58.960+02:00Hungary's Exports And Industrial Output Fall Again SharplyHungary posted a foreign trade surplus of EUR 279.2 million in February. As a result the balance for the first two months has turned positive (EUR 85.1 m). That is the good news. The bad news is that the surplus is entirely due to the fact that imports fell more rapidly than exports, which collapsed by 30% year on year. Hungary's exports totalled EUR 4,471 m in February, which marks a shocking 29.7% fall from the year before. Imports also crashed : at EUR 4,192 m they were down by a staggering 32.3% from February 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqfFnVbAf2D9JE51b8Uca0woaoEnevSQpUr1vUGaIKzgzjqMeZAw8-DhBeRyHn8Kseo78d_iUOUk6HoaAC_OaB2aB7JKa6jlmD1b0y8aPb5ok8tampGwWxM6nIKLmhnHp6YiR5SQ/s1600-h/hungary+exports+one.png"><img id="BLOGGER_PHOTO_ID_5322590982691146642" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 220px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgqfFnVbAf2D9JE51b8Uca0woaoEnevSQpUr1vUGaIKzgzjqMeZAw8-DhBeRyHn8Kseo78d_iUOUk6HoaAC_OaB2aB7JKa6jlmD1b0y8aPb5ok8tampGwWxM6nIKLmhnHp6YiR5SQ/s400/hungary+exports+one.png" border="0" /></a><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKtzpqaA8ab-cffazoqd25m7W7tz9k6mFGVIRe9t9Fo1YR8K_8_1Dm_VUbxGQsBOuIX_mGBKbxNN3_pgBwE-z0pPtkHKCGz3aMemwwuqDehtai5fiI5WzB29w3qAAtgObCEJ8Stw/s1600-h/hungary+exports+2.png"><img id="BLOGGER_PHOTO_ID_5322590912648059858" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 203px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKtzpqaA8ab-cffazoqd25m7W7tz9k6mFGVIRe9t9Fo1YR8K_8_1Dm_VUbxGQsBOuIX_mGBKbxNN3_pgBwE-z0pPtkHKCGz3aMemwwuqDehtai5fiI5WzB29w3qAAtgObCEJ8Stw/s400/hungary+exports+2.png" border="0" /></a><br /><strong>Industrial Production Follows Suit<br /></strong><br /><br />As Hungary is now an export dependent economy, it is not surprising to see that Hungary's industrial production also plunged on the drop in export demand. Output was down 28.9% year on year in February, according to unadjusted figures, while on a working-day-adjusted basis there was a 25.4% decline, sharper even than the 21% drop seen in January. The statistics office has changed its methodology since the early 1990s so a direct comparison with earlier figures is not really possible, but the office said the February drop is probably the largest monthly fall since the collapse of Communism at the end of the 1980s.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJc9HSe3xDLNfSyvZc64xhClZ0DwnehYcJTEb-l57T1xizUPOulZoOMzajxfROX4Zlh1Rys9d3m35o864aUKeAa_Oc2OhUaXvHtTnQvOWBDHK1wlvIrl4EpStCuvut5lSHAAXsOg/s1600-h/hungary+IP2.png"><img id="BLOGGER_PHOTO_ID_5322435910554322018" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 237px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJc9HSe3xDLNfSyvZc64xhClZ0DwnehYcJTEb-l57T1xizUPOulZoOMzajxfROX4Zlh1Rys9d3m35o864aUKeAa_Oc2OhUaXvHtTnQvOWBDHK1wlvIrl4EpStCuvut5lSHAAXsOg/s400/hungary+IP2.png" border="0" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyOo_8hKz6ig_wMKE4pVfwUGoFDOb4PNTb6tPWJGyCwQlnSeOaRpKsbvr8ztFuy_u9x3cbXustVRjbGavN4W0SHByIbKk1qVYfc_5Oz-QKzC4KSsxzPa9WwWbhcB9pU-_Raozv-A/s1600-h/hungary+IP+one.png"><img id="BLOGGER_PHOTO_ID_5322435833013074418" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 239px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyOo_8hKz6ig_wMKE4pVfwUGoFDOb4PNTb6tPWJGyCwQlnSeOaRpKsbvr8ztFuy_u9x3cbXustVRjbGavN4W0SHByIbKk1qVYfc_5Oz-QKzC4KSsxzPa9WwWbhcB9pU-_Raozv-A/s400/hungary+IP+one.png" border="0" /></a><br /><br /><br /><strong>Loan Defaults The Main Threat Now As The Forint Weakens</strong><br /><br /><br />According to the latest financial stability report regularly published by the Hungarian central bank on condition the economy performs in line with mainstream expectations and contracts by 3.5 per cent this year, with the exchange rate stable at aound 290 forints to the euro, banks would be able keep their capital ratios above 10 per cent of total assets. This is, in theory, comfortably higher than the international regulators’ 8 per cent minimum. But under a “stress scenario”, whereby gross domestic product falls 10.5 per cent and the forint slides by 15 per cent, capital adequacy would reach the 8 per cent level, and banks accounting for nearly half the total assets would fall below the minimum.<br /><br />The latest IP and export data confirm that the Hungarian economy is indeed deteriorating faster than expected. The forint is currently trading about 6 per cent below the central bank’s baseline forecast, while GDP forecasts of minus 5 per cent or worse are now commonplace. And even this is not the complete story, since as the central bank’s report says: “The calculations described above are characterised by considerable uncertainty . . . [making] credit risk forecasts very uncertain.” <br /><br />Among the most evident points of uncertainty is the rate of household and corporate loan default. HSBC Holdings Plc, Europe’s biggest bank, expects loan delinquencies to reach 23 percent in Russia before the crisis is over, making the level Europe’s highest rate after, guess who, Hungary where they anticipate bad loans will reach 25 percent of the total.Unknownnoreply@blogger.com4