Producer Prices

According to the Hungarian Statistics Office (watch out PDF):

"Domestic sales prices rose by 0.4% in May 2007 compared to the previous month, and by 7.8% compared to May 2006. The export sales prices expressed in HUF were higher by 0.4% compared to the previous month and lower by 5.5% compared to the corresponding month of the preceding year. Industrial producer prices involving both of the price changes of domestic and export sales were higher by 0.4% compared to both of the previous month and to May 2006."

This explains the slightly improved trade balance, since the lower HUF value (as expressed in the 5.5% drop in real PPI for export) means that exports are now somewhat cheaper. Nonetheless, a 7.8% annual rate for the domestic PPI increase is far from being positive news or benign.

To get some idea while export real PPIs have dropped it might be useful to look at this twelve month Huf/Euro chart:




And then to put things in perspective to look at the two year one to see that things are now, more or less, back where they started. The interesting question, is, of course, what happens next?

Current Account Deficit Reducing

According to the National Bank of Hungary the current account deficit amounted to EUR 1,102 million in the first quarter of 2007 (watch out PDF) or EUR 1,105 million, according to seasonally adjusted figures. The corresponding deficit figures for Q4 2006 were EUR 1,115 m and EUR 1,191 m.:

According to quarterly data, the downward trend of Hungary’s net financing requirement (i.e. the balance on its combined current and capital accounts), calculated using the top-down approach, continued in 2007 Q1. The net financing requirement amounted to EUR 1,048 million and it was EUR 985 million, or 4% of GDP, after adjusting for seasonal effects. Expressed in domestic currency terms, the net financing requirement was HUF 265 billion. The net financing requirement, derived as the combined current and capital account balance using the bottom-up method, was EUR 1,552 million and EUR 1,469 million seasonally adjusted. This was the equivalent of 6% of GDP.

In general the news is moderately good, since, while both goods imports and exports are rising, exports are rising more rapidly than imports, which is only natural given the contraction of internal demand which is taking place.The recent path of the deficit can be seen in the chart below.




Trade in goods continued to be in surplus, at EUR 117 million seasonally adjusted and at EUR 128 million not seasonally adjusted. According to the seasonally adjusted data, the surplus on services amounted to EUR 269 million, and EUR 140 million not seasonally adjusted.

On the income and transfer accounts balance side income on debt (interest) and income on equity (dividends) (see Chart below) continued their downward trend movement, although note that the negative income on equity (dotted red line) is up from the lows reached a year ago. In 2007 Q1, the seasonally adjusted deficit on income on debt amounted to EUR 473 million, and negative income on equity was EUR 1,122 million. The general trend of both these components remained unchanged: the deficits on both income on equity and income on debt rose evenly, as a result of (i) the continued rise in reinvested earnings and (ii) increasing cost of interest payments.


On the negative side, non-debt coverage of the current account deficit was negative for the second consecutive quarter (EUR -61million), leaving bond purchases of non-residents to cover the bulk of the Q1 current account deficit. Now the worrying thing about this is how the central bank are going to get interest rates down from the current 7.75% refi rate and attract bond purchasers to fund the deficit. This is going to become important later in the year, as the economy is now slowing noticeably (and this data on employment).


Also FDI inflows into Hungary declined to EUR 481 million in Q1 from EUR 2.2 billion a year earlier. JPMorgan's Nóra Szentiványi was quoted as saying that:

“Over the past four quarters, FDI inflows fell to 3.4% of GDP while net FDI inflows amounted to just 0.7% of GDP due to the ongoing expansion of Hungarian companies abroad,"

she also noted that:

“It is not too encouraging that foreign companies in Hungary are reinvesting less than they were in previous years (0.8% of GDP down from over 2% of GDP in 1997-2005),"

Central bank foreign exchange reserves amounted to EUR 17.0 billion at end-March 2007 up from EUR 16.4 billion at end-December 2006.

Hungary To Raise Retirement Age

Portfolio Hungary reports on a new plan agreed by the government parties to raise the retirement age. I basically agree with the central bank experts that this plan is too little, too slowly, but even the central bank alternative doesn't seem anything like decisive enough.


Hungary‘s junior governing coalition party, the Free Democrats (SZDSZ), has compiled a reform list with ten conditions that its senior ally, the Socialist Party (MSZP), would need to comply with if it wants the liberals to remain in the coalition, broadsheet Népszabadság reported on Thursday. Coalition talks are set to continue on Sunday. One of the points says the parties have already agreed that retirement age would be hiked gradually.

The government is to raise retirement age from 2010 onwards but only cautiously, by one month every year, the paper said.

The parties also agreed to tighten rules on early retirement and that families with annual revenue of over HUF 8 million would not be entitled to family allowance.

A pension model elaborated by two central bank (NBH) experts last year suggested taking the retirement age (62 yrs currently) higher when life expectancy increases. They urged a raise of six months every three years, double the pace suggested by the parties. According to this model, retirement age in Hungary would be 64-65 years by 2020 and 68-69 years by 2050 for women and men, respectively.