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Wednesday, October 03, 2007

Hungary Current Account Balance Components

As can be seen from the charts below the Hungarian Current Account deficit puts the small trade in goods and services surplus that is steadily being achieved rather in the shade.

Services is generating a rather more stable surplus than trade, which - according to the quarterly balance of payments data provided by the Magyar Nemzeti Bank - has been in postive territory for the last three quarters (although it should be noted that the monthly trade data provided by the statistical office - the KSH - shows a slight negative balance here, possibly due to methodological differences in the calculations, be that as it may there is no doubt that there has been a considerable improvement). The problem is the very large negative balance on debt and equities. This is what keeps the CA deficit so strongly negative, and it is hard to see what order of magnitude improvement in the performance of trade exports would serve to correct this situation, since remember, as exports improve so too does the balance sheet situation and dividend potential of the firms doing the exporting, and so, back out the money goes again. This is one of the difficulties of an excessive reliance on FDI to fund a CA deficit, because at the end of the day FDI generates income, negative income from the point of view of the recipient. So while such investment may create domestic employment, which is very good, if not backed by a solid external financial position, it can lead to problems as we are seeing.

And as can be seen from the breakdown in the income deficit between debt and equities shown below, the lions share of the picture here is held by income streams generated by equity holdings.

Data Source: Magyar Nemzeti Bank, Balance of Payments, International Investment Position

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