Hungary Balance of Payments Q1 2008

Hungary's current account deficit came in at EUR 1,160 million in the first quarter of 2008, according to preliminary figures. This was up from a slightly downward adjusted EUR 1,094 m in Q4 2007, according to data from the National Bank of Hungary (NBH). The seasonally adjusted EUR 1,274 m current account gap is down from the 1.3billion euro deficit recorded in the fourth quarter of last year.

In Q1 2008 Hungary’s net external financing requirement (i.e. the balance on its combined current and capital accounts), fell compared with the last quarter. Hungary needed 367 million euros (92 billion HUF) and 729 million euros, or 2.2% of GDP, (after adjusting for seasonal effects) compared with 4.6% of GDP in Q1 2007. The net financing requirement, derived as the combined current and capital account balance using the bottom-up approach, amounted to EUR 1,375 million (equal to HUF 353 billion).




Current account

In Q1 2008, the current account deficit was 1,160 million euros (1,274 million euros seasonally adjusted). The seasonally adjusted deficit continued to fall compared with the previous quarter. Improvements in the combined balance on the income and transfer accounts accounted for most of this fall, and these were, in turn, mainly explained by an increase in funds from the EU. In terms of the real (rather than the financial) economy, the goods trade remained in surplus, at 681 million euro seasonally adjusted (and at 744 million euro unadjusted. The surplus on services was 269 million euros, seasonally adjusted, (and 139 million euros, unadjusted). Compared with the previous quarter, the trade balance improved and the surplus on services increased on a seasonally adjusted basis.

In terms of services themselves, the seasonally adjusted travel surplus was 294 million, while other services registered a seasonally adjusted 71 million euros deficit.

Looking at the balance on the income and transfer accounts, the seasonally adjusted deficit on income on debt amounted to 684 million euros, and negative income on equity was 1,452 million euros. The deficit on income on debt continued to rise, while the deficit income on equity fell slightly compared with 2007 Q4. A significant surplus was registered on compensation of employees, due largely to the introduction of a new methodology. I would say one of the structural difficulties with the Hungarian balance of payments is the growing detach we can see in the chart below between the growing surplus on the goods and services side and the increasing deficit on the income side.




Looking at fourth-quarter transactions with the European Union, the balance of current transfers was a deficit of 52 million euros, while capital transfers were in 795 million euro surplus. The balance of capital transfers to and from EU institutions was in a surplus of 743 million euros.

Financing

There was a net inflow of 1,699 million euros in inward and outward non-debt capital transactions. The value of outward direct investment transactions in equity capital by Hungarian residents was 84 million euros and reinvested earnings amounted to 342 million euros. Inward transactions by non-residents amounted to 292 million euros and reinvested earnings amounted to 1,366 million euros. Portfolio investment transactions in equity securities showed a net inflow of 468 million euros. Purchases of shares abroad by Hungarian residents amounted to 521 million euros (outflow) and purchases of Hungarian shares by non-residents amounted to 989 million euros (inflow). The balance of debt generating financing was 324 million euros. For other FDI – included in foreign direct investment flows – related to direct investment by Hungarian residents there was an inflow of 82 million euros and other FDI related to direct investment by nonresidents in Hungary showed an outflow of 864 million euros.

Reserves and debt

Central bank foreign exchange reserves were 16.8 billion at end-March 2000. Whole-economy gross foreign debt was up`3.8 billion euros over the opening stock reported for 2008. Gross foreign debt, including other investment capital recorded within direct investment, rose by 3.6 billion euros. Hungary’s net foreign debt rose by 1.0 billion euros, and by 0.2 billion euros including other FDI capital recorded within direct investment. Non residents’ holdings of forint-denominated government securities amounted to 11.7 billion euros at the end of Q1, down 0.9 billion euros on the opening stock for 2008.


Whole-economy net debt, excluding other capital recorded within direct investment, was 47.8 billion euros at end-March 2008 (46.8% of Hungarian GDP). Including other investment capital recorded within direct investment, Hungary’s net foreign debt amounted to 49.0 billion euros (48.0% of GDP). Compared with the opening stock calculated using the new methodology, the net debt of general government and the MNB was down 1.3 billion down at the end of Q1 2008.

Consolidated Balance Sheet of MFIs May 2008

The rate of bank lending seems to be decidedly slowing in Hungary at the present time, presumebaly in part at least as a result of the monetary tightening. Short-term loans, at HUF 2,742.0 billion, were down HUF 32.9 billion in May. Loans with a maturity of over one year fell by HUF 113.3 billion to HUF 4,679.6 billion. Within longer-term term loans, loans with a maturity of up to five years fell by HUF 41.2 billion to HUF 1,944.5 billion and loans with a maturity of over five years by HUF 72.0 billion to HUF 2,735.1 billion. Short-term loans and loans with a maturity of over five years both accounted for 36.9% of total loans. The percentage share of loans with a maturity of up to five years remained unchanged at 26.2%.



The stock of forint loans rose by HUF 8.6 billion to HUF 244.8 billion and that of foreign currency fell by HUF 90.1 billion to HUF 1,583.4 billion. Exchange rate changes reduced the value of foreign currency loans by HUF 94.2 billion and transactions increased it by HUF 4.1 billion.

The percentage share of foreign currency loans with a maturity of up to one year fell from 32.5% to 28.2%, that of loans with a maturity of over one year and up to five years from 56.0% to 53.1% and that of loans with a maturity of over five years from 70.8% to 68.3%. The total stock of foreign currency loans, at HUF 3,674.8 billion, was HUF 328.7 billion lower than in April. Here, exchange rate changes and transactions accounted for HUF 203.4 billion and HUF 125.3 billion, respectively, of the fall in the value of loans.




Within loans granted to households, the share of housing loans edged down from 52.2% to 52.0%, while the stock of housing loans fell by HUF 59.3 billion. Foreign currency loans fell from 50.9% to 50.4% as a percentage of housing loans. The percentage share of consumer credit within the total stock of loans to households rose from 42.4% to 42.6%, while the outstanding amount of loans fell by HUF 28.2 billion to HUF 2,667.7 billion. Foreign currency loans fell from 71.6% to 70.4% as a percentage of total consumer credit. The share of other loans edged up form 5.3% to 5.4%, but their stock fell by HUF 3.2 billion. Here, the percentage share of foreign currency loans fell 39.3% to 36.5%.

Hungary Employment and Unemployment March-May 2008

Hungary's unemployment rate for the 15 to 64 age group held constant at 7.8% in the March-May period, the same as in February-April, according to data from the Central Statistics Office (KSH) earlier today. The number of those unemployed was 321,700 and the number of employed was 3,827,200. This latter figure compares with 3,820,800 in February-April and 3,890,500 in the same period in 2007. The number of unemployed dropped by 1,700 from the previous 3 month period but was up by 14,200 from the reading in the same period of last year.

The participation rate for the 15-64 population was 61,1% in March-May, up from 61 in February-April, but down 0.6 ppts from the same period in 2007. The employment rate of the population aged 15-64 was 56.3%, as against 56.2% in the previous 3 month period and down 0.9ppt from March-May 2007.

The KSH said 48.4% of all unemployed have been seeking jobs for a year or more (up from 47.3% in the previous 3 months). The average duration of joblessness was 17.8 months, up from 17.1 in the previous 3-m period.

So as we can see from the chart below, despite the fall in the number of unemployed, levels of employment are actually now substantially down from where they were one year ago.

The reason for this is quite straight forward, the 15-64 working age population in Hungary is now in more or less continuous decline, while the participation rate among that population is down slightly.


Now the supply-side macro economics of what happens next are actually remarkably simple. Either Hungary significantly raises productivity among the work force as it contracts, or it substantially increases employment participation rates among the working age population (or both), or headline rates of GDP growth will remain very low.

Now the latest year for which we really have productivity stats is 2006, and as can be seen from the chart below - which is expressed in purchasing power standards relative to other EU countries (Eurostat data) and is only for comparative purposes - while there was quite a burst of productivity improvement between 1999 and 2004, the rate actually started to slow between 2005 and 2006, and give the substantial growth slowdown in 2007, it is very probable that this slowdown continued in 2007, although we don't yet have actual data.


The OECD on the other hand do present year on year changes in easy manageable form, and again we can note a slight slowing in productivity growth since 2004. So this is the task ahead, to turn this trend round.