Hungary Producer Prices March 2008

Hungarian producer prices show ``worrying signs'' that rising oil and food costs are making other consumer goods more expensive - that is that the second round consequences of these rising prices are making themselves evident and this alone may prompt the central bank to decide on yet another interest rate increase, economists at Intesa Sanpaolo SpA said this morning.

Prices ``in the consumer goods producing branches show some worrying signs, suggesting that external shocks started to impact a broader range of product categories,'' said the economists, led by Mariann Trippon. They forecast a third consecutive rate increase in this month to 8.5 percent.

Hungary's March industrial producer price inflation was up to 5.7% year on year from 4.9% in February, according to the Central Statistics Office (KSH) last Wednesday. Month on month prices were up by 0.2% in March, down from the 0.7% rate registered in February.

Domestic producer price inflation came in at 10.8% year on year in March (versus 10.6% year on year in Feb and +7.8% in March 07) and in monthly terms it was up by 0.8%, slightly above the increase of 0.5% in the previous month (and the 0.4% for March 2007).

Producer prices in manufacturing industry were up 0.1% month on month and 4.4% year on year, against 0.7% and 3.4% respectively in February.

More disturbingly export sales prices in March rose by 2.0% year on year against an increase of 0.8% in the previous month and a drop of 5.5% in March 2007. Month on month there was a 0.3% decline in export prices, following an 0.8% increase in February and 0.4% increase month on month in March last year.



Food price inflation came to 0.6% m/m (vs. 0.9% in Feb) and 13.8% yr/yr (vs. +13.1% in Feb). On the domestic front food price inflation ticked up to 0.6% m/m from 0.2% in Feb, but increased some in annual terms to 13.0% from 12.5%.

Given that the Hungarian economy is now structurally dependent on exports for growth these increases in export prices are hardly to be welcomed, to say the least.

The Hungarian Central Bank Raises Its Base Rate

Hungary's central bank raised its benchmark interest rate to the highest in more than three years today in an attempt to retain credibility for its inflation target and to try to stop second round effects of rising energy prices from spreading across the economy. The Magyar Nemzeti Bank in Budapest, led by President Andras Simor, raised the two-week deposit rate 0.25 percent to a three year high of 8.25 percent. Policy makers, who also discussed holding the rate, had a ``safe'' majority for the increase, Simor said.




The move was not unexpected and a majority of analysts were expecting the Monetary Council to continue its rate hike cycle initiated in March. The last time Hungary's base rate was this high was in March 2005 when interest rates were still on their way down from the extreme highs of 2003.

Six of the world's central banks, mostly in emerging markets including Brazil, Iceland, Russia and South Africa, have raised interest rates this month to stem global inflation. Hungarian consumer prices in March rose more than twice as fast as the central bank's target and wage growth was faster than expected. Policy makers said they may raise the rate further.




The forint rose to 252.17 per euro by 2.44 p.m. in Budapest from 252.66 late on April 25. The yield on the benchmark three-year bond fell to 8.98 percent from 9.12 percent.


The average monthly gross wage in February rose an annual 13.4 percent to 188,629 forint ($1,190). Regular private-industry wages, which exclude bonuses and are one of the central bank's most closely watched indicators, rose 10.4 percent from a year ago. Policy makers last month raised rates for the first time since 2006 to rein in inflation, which has exceeded the 3 percent target since August 2006. Consumer prices in March were 6.7 percent higher than a year earlier.





Commentary

“Today's rate hike is yet another example that the central banks are being “forced" by the global environment to tighten monetary policy despite a gloomy outlook for growth. Hence recently, the Turkish central bank ended its monetary easing cycle and is likely to starting tightening soon - the same can be said for the South African Reserve Bank, which is also likely to tighten monetary policy further."

“This morning the Russian central bank also hiked interest rates. Similarly the Brazilian central bank has recently hiked its key policy. Hence, there is no doubt that despite the outlook for a slowdown in most transitional and emerging economies around the world, the outlook for monetary policy is likely to be twisted toward higher and not lower rates."

“The general trend toward higher interest rates in the Emerging Markets could provide some support to currencies like the forint, the Turkish lira and the South African rand, but it should also be noted that these rate hikes reflect a significantly more negative global financial environment than we have been used to over the last couple of years and hence the rate hikes in that respect simply reflect a re-pricing of risk and hence may not bring long-lasting support to these currencies."
Lars Christensen, Danske Bank, Copenhagen

Basically I broadly agree with Christensen here. The Hungarian economy is stuck in some form of stagflation remember.




As we saw this morning, the number of people employed in Hungary is now dropping steadily:



Retail sales simply fall and fall:



As does construction activity:




and the only leg left is external trade:




But it is precisely the export environment which may now deteriorate as the EU economies gradually slow under the weight of the global credit crunch. So, all in all, not a pretty picture, and it is unclear how the present policy of the National Bank of Hungary - however necessary it may be in the face of extraordinarily "sticky" wages and prices, and however much it may be needed to avoid a wholesale sell-off in forint denominated assets - is actually going to help turn the Hungarian economy itself around.

Hungary Unemployment Q1 2008

Hungary's unemployment rate for the 15 to 64 population was 8.0% during the January-March 2008 period, down slightly from the 8.1% rehitsred in December 2007 -February 2008 period, the Central Statistics Office (KSH) reported this morning. The unemployment rate for the 15 to 74 age group remained unchanged at 8.0%.

What we have here is a slight paradox, since unemployment is actually falling at the same time as the number of those in employment is also falling.



The KSH said the number of unemployed was 332,400 and the number of employed 3,817,400 in the first quarter (all figures for the 15 to 64 age group). This latter figure compares with 3,826,100 in the Dec 07-Feb 08 period and 3,876,800 in the same period of 2007. The number of unemployed was by 4,200 from the previous 3-m period but was up by 16,400 from the same period of 2007. As we can see total employment has now been falling since the summer of 2007, and momentum has been weakening since the high point of mid 2006.



The solution to our enigma is undoubtedly the declining numbers in the economically active population and the decline in participation rates (undoubtedly aided by the high numbers of early retirees which has accompanied the downsizing of the state sector). The economically active population was 4.150 million in Q1, down from the 4.163 million recorded in Dec-Feb and well down (by 43,000) from the 4.193 million of Q1 2007

The labour market activity of the population aged 15-64 was 56.1% in Q1, down from the 56.3% registered in the previous three-month period, and also down 0.6 ppts from the same period a year earlier. The employment rate of the population aged 15-64 was 56.1% in Q1, against 56.3% in the previous 3-m period and down by 0.8ppt from the 56.9% registered in Q1 of 2007. That is things are going in decidedly the wrong direction here.

Hungary Retail Sales February 2008

Well there are no real surprises in this months retail sales data since Hungarian retail sales dropped by 0.2% month on month in February, following a 0.1% increase January, according to data adjusted for calendar and seasonal effects from the Central Statistics Office (KSH). I say this is not surprising since there were only two months last year when the KSH reported a month on month rise. At the same time on a working day adjusted basis retail sales fell by 2.5% over February 2007. Sine the annual drop was by 3.0% in January and 4% in December we could say that the rate of decline is now slowing, and that we should expect this situation to continue.

If we look at the volume index for industrial sales chart then the position becomes abundantly clear, with sales having peaked in the middle of 2006 and headed steadily down since that point.



Combined sales of cars, car parts and fuel (which do not a part of European statistical systems) were up, and totalled HUF 163.24 billion in Feb, or an annual rise of 2.6% which compares with a 1.4% fall in January.

Really as I say, I don't think we should expect this situation to change anytime soon, and I hold this view because of the appreciation I have of Hungary's internal consumption dynamics, an appreciation which I would say basically sets me apart from the other analysts working the Hungarian economy.

Hungary's domestic consumption as can be seen from the chart below actually peaked in 2002., and since 2004 it has not be especially strong. It is now in full retreat. Would anyone like to tell me when it will recover, and by how much? I certainly can't tell you, but I certainly strongly doubt we will ever see the 2002 level again, and I am even rather unconvinced we will get back to the 2005 level. My intuition is that Hungary will now become an export driven economy.

Basically I the reasons I hold to my view are based on the differences I have in my appreciation of what the whole idea of "convergence" means in an East European context, and I hold to my view due to the special importance I attribute to demographic factors in the economic growth process.

In order to illustrate what I mean I would like to close this post by taking a quick look at historical German private consumption data. One of the core arguments I am presenting on this blog is the idea that part of the issue facing East European economies like the Hungarian one is the population ageing situation. This argument is being by and large ignored by mainstream analysts, but simply ignoring a problem doesn't make it go away.

Most analysts, as I have been arguing, tend to look at what is happening in Hungary on a "convergence" cyclical basis. But there are reasons for thinking that this view may be inadequate. Hungary's economy grew for ten years up to 2005, and then the growth process started to grind to a halt. Indeed you could argue that the whole wasy that the fiscal deficit got so out of hand in Hungary was a result of the slowdown in domestic consumtion and economic growth. Now Germany also had a very significant consumer boom and correction back in 1995, and if you look at the chart below German domestic consumption has never recovered.

And indeed if we look at the next chart we will see that in 2007 (following the significant VAT rise induced local spike in the 4th quarter of 2006) German private consumption has been steadily declining across 2007, and this despite a very rapid rate of new job creation and a substantial drop in unemployment. I think people should at least think about this carefully, and ask themselves whether or not Hungary may now follow this course, becoming an export driven economy. At least, I would argue, there are prima facie reasons for considering this outcome to be a real and present possibility.

OTP's Shares Downgraded

OTP Bank, which is Hungary's largest lender, has had its price estimate cut 25 percent by analysts at HSBC Holdings Plc, who cited the country's slowing economic growth damaging demand for loans.

OTP's share-price estimate was reduced to 9,200 forint ($57.77) from 12,308 forint, HSBC analysts Maciej Baranski and Walid Khalfallah in London wrote in a note to clients today. They maintained their ``overweight'' recommendation for the stock.

Hungary's economic growth was 0.8 percent in the fourth quarter from a year earlier, the slowest in 11 years, following the implementation of a government austerity plan which cut spending and raised taxes to narrow a record budget deficit.

``Hungary is the key reason behind our expectations of poor earnings growth in this core market for OTP,'' the analysts wrote. ``The latest developments in Hungary suggest that the country's economy and the banking sector are set to be stuck in the doldrums for a long while.''

Portfolio Hungary also reports this morning that Hungary now has the 7th “worst" EM sovereign rating in Standard & Poor's liquidity vulnerability index.


according to the crdit rating agency Eastern European sovereigns are the most vulnerable in the emerging market galaxy should the global credit squeeze tighten. The ranking does at least show however that there are economies in the region which are even more vulnerable than Hungary.

“Just how vulnerable each individual sovereign could become relates directly to its degree of dependence on foreign capital inflows to finance external imbalances and avert balance-of-payments crises, said the report titled "Why The Global Credit Squeeze Could Hit European Emerging Market Sovereigns Harder Than Others".

S&P's credit analyst Moritz Kraemer said Eastern European sovereigns looked to be the most exposed, while Asian and Latin American sovereigns, with their trade surpluses and large foreign exchange reserves, were “generally better insulated against the dearth of financial flows that may be in store if the global economy declines more sharply."

S&P's Liquidity Vulnerability Index underlines this trend, showing that almost all of the most vulnerable countries are East European, with only Iceland, Lebanon and South Africa coming from other areas.

Iceland, which is considered an "honorary" member of the emerging market (EM) sovereigns for present purposes due to its strong correlation with general EM market conditions, tops the list of the most vulnerable, but Iceland is clearly something of a special case.

The come Romania, Lebanon, Latvia, Turkey and Kazakhstan. Hungary came in 7th (0.97 pts) and thus was found more vulnerable than Bulgaria (0.92), Poland (0.92), Slovakia (-0.01), the Czech Republic (-0.30) and Russia (-1.00), which is the only European emerging sovereign that managed to squeeze into the “sheltered group".

Chile is the least vulnerable owing to its robust external and government balance sheet, S&P said.

Hungary Construction Activity February 2008

Hungary's construction activity was down by 19.3% year on year in February, on a working day adjusted basis, according to data from the Central Statistics Office (KSH) today. This followed a 27.48% year on year decline in January and a 8.4% increase in February 07.




Output was up 5.9% from January which compares with a 5.6% decline between December and January and a 1.4% month on month fall in February 07. In the first two months of 2008 taken together construction output was down by 13.3%, which was slightly below the 2007 average of a monthly decline of 14.1%.




The building of complete constructions was down by 20.1% year on year in February, compared to a 31.6% fall in Januray and a 1.2% increase in February 2007. Building installations were down 27.2% year on year against a 12.7% fall in January and a 26% rise in February 2007.



The stock of orders at the end of February (HUF 719.9 bn at current prices) was down 23% from February 2007. The stock of orders for buildings totalled HUF 360.6 bn in February, down 8.2% year on year, which compares with a fall of 15.5% in January and a 4.6% rise in February 2007.

For civil engineering the stock of orders was down by 33.6% year on year (to HUF 359.3 bn), against a drop of 38.6% a month earlier and a 49.8% decline in February 2007.

As far as new orders go the picture looks pretty bleak. Following promising growth of 49.5% in January, new orders in the construction industry were down by 15.9% in February, totalling HUF 95.1 bn. In February 2007 new orders were up 7.7% year on year.

New orders concluded in February for buildings were down 11.4% year on year at HUF 59bn, which compares with a drop of 24.8% in January and an 8.8% growth in February 2007.

As far as civil engineering goes, while a one-off impact in January (a major contract for the continuation of the building of M6 motorway) pushed the new orders indicator up by 185.6%, the situation returned to “normal" in February with a 22.4% fall in new orders (HUF 36.1 bn)

The value of total construction industry output was HUF 94.1 billion in February, up from HUF 87.6 bn in January, but down from HUF 111 bn in February 07.

Hungary Wages and Salaries February 2008

The forint fell again in Budapest this morning following a government report from the statistics off that showed that monthly average gross wages rose far more than expected in February, adding to the case for the central bank to raise what is currently the European Union's second-highest interest rate (after Romania). The data stoked speculation higher borrowing costs will damp growth in an economy that's already growing one of the slowest rates in the entire European Union (Latvia and Italay would be other candidates here for the "reverse poll position".

Hungary's monthly average gross wages soared by 13.4% year on year in February, according to the latest data from the Central Statistics Office (KSH). This increase follows a 1.5% decline in January. Net wages went up by 11.5% yr/yr in the second month of 2008, against a drop of 0.2% in Jan.



The forint weakened to 158.895 per dollar by 1:35 p.m. in Budapest, from 158.753 yesterday, when it had climbed to its highest level since December. It was little changed at 253.11 per euro, after gaining to a six-month high of 249.27 on April 14.

The slight moderation in inflation in February (down to 6.9% from 7.1% in January) and this substantial jump in wages mean that Hungary's real wage decline has come to a sudden stop. The 6.8% decline registered in January became a a 4.3% rise in Feb, which means that the rate of real wage decline is 1.7% for January-February taken together. In terms of net wages the 7.3% annual decline in January became a 4.6% annual rise in February. As can be seen from the chart below the turnround in pretty dramatic.

“This is a shockingly high number and points to wage growth acceleration in 2008, instead of the slowdown that the NBH was hoping for. Looking at the details the increase is fairly widespread, and cannot be explained by the minimum wage increases for employees with higher education."
István Zsoldos, Goldman Sachs, London

Perhaps it would be better if we strip the January data out of the picture altogether here, since the apparent decline in January was due to bonus payment distortions in the public sector.

Basically January wages in the public sector do not contain the entire 13th month bonus payout, but only its monthly proportionate share (one twelfth), as this bonus is now being distributed fractionally, and indeed some monthly instalments wrere already paid last year. According to the statistics office, they paid four of the 12 monthly wage bonuses last year and the remaining eight will be paid as of January this year.

If we look at the private sector alone, we get a more representative picture, and find that the gross average wage in the private sector rose by 14.4% year on year to HUF 187,350 in February, up from a 9.7% increase in January. In real - inflation adjusted - terms this means that year on year wages were up 2.6% in the private sector in January and 7.5% in February.




Gross average wage in the public sector was HUF 193,990, up 11.8% yr/yr, against a decline of 14.6% in Jan.

Recent comments from the MNB have highlighted the importance attached to this year's wage data in shaping monetary policy and so today's data will be hard for them to ignore and retain credibility, since they suggest - according to the logic of policy as it currently stands - more rate hikes rather than less. In light of this further 50bp rate hike to 8.5% could easily be on the cards at a meeting in the not too distant future.

"In our view, the current strong wage data clearly increases the chance of an April rate hike........the MPC will be ready to act in April and hike rates by 25bp due to the unfavourable developments in the underlying factors to inflation, such as private sector wages and market service prices. We expect 25bp rate hikes in April and May, increasing the base rate to 8.50%, while the rate cutting cycle is likely to be delayed until 1H09."
Eszter Gárgyán, Citibank, Budapest

The acceleration in private sector wage growth was largely driven by the financial services sector, where total wage growth jumped to 58% YoY in February, while regular wages accelerated to 13.2% YoY up from 4.5% in January. Eszter Gárgyán ( Citibank, Budapest) argues that the strong February financial sector data is partly the consequence of base period effects of previous bonus payments and an earlier wage hike and that calculating annual wage growth over a five-month period (October to February would give a milder, 5.7% YoY growth in the financial sector).

"In the financial sector, there was a major acceleration in wage payments ... and there was also a jump in the real estate sector. Looking at ex-bonus figures, real estate sector wages jumped most sharply. This is in partly due to the whitening of the economy. Many white collar workers were brought properly onto the payroll. Gross wage growth in the financial sector was almost 34 percent while real estate sector wages rose 15%."
Erika Molnárfi, KSH Statistician, Budapest

Of course viewed in another light the uptick in financial services wages should not surprise us at all in the light of the growing importance of the financial services secor in terms of GDP share - since this component has gone up from 16.64% of GDP in Q4 2005 to 20.99% in Q4 2007 (or over 4 percentage points in 2 years).



And this at a time when construction activity has been in almost total retreat. Naturally all those nice swiss franc mortgages people have been selling will have helped swell the bonus payout:



As will all those CHF personal loan mortgage refis, which have been busy running a horse and cart through the domestic credit monetary tightening plans over at the NBH:




Regular wages also accelerated in industry, mining, construction, tourism, restaurants, and real estate and business services in February, and remained above 10% in the retail sector. Bonus payments unexpectedly jumped in most of the service sector.


Perhaps even more significantly with all this wages growth taking place the number of employed in the whole economy dropped by 1.3% year on year to 2,736,900 in February following a 2.0% drop in January. Even in the private sector with 1,940,200 people employed there was a 0.1% year on year decline, while in the public sector employment was down 5.5% year on year to a total of 715,100 in February, which compares with a 5.8% fall in January.



This is why I earlier spoke of the Hungarian economy being in a condition of stagfaltion, since we have very little - if any, let's wait and see - GDP growth, negative employment growth, and yet significant wage and consumer price growth, which may well mean that even as the economy contracts - if we actually get to enter recession as the year advances (what out the decline in German investor confidence this week) - then the NBH may find it is still in a tightening and not in a loosening cycle.

Hungary Industrial Output February 2008 (Provisional and Update)

Hungary's industrial output jumped by 13.2% year on year in February, according to unadjusted data, and was up 9.8% over February 2007 according to figures adjusted for working days, according to provisional data released by the Central StatisticOffice (KSH) earlier this morning. Output increased by a seasonally and working day adjusted 2.3% month on month (as compared with a 1.3% month on month increase in January). These are pretty healthy numbers, and confirm the picture presented in my last post about the trade balance. Everything now depends on the short term evolution of trade in the EU and on the path of the Hungarian (export sector) producer price index.



The KSH is scheduled to release detailed data on the industry on 15 April.

Eszter Gárgyán, from Citibank, Budapest - quoted in Portfolio Hungary - is pretty much to the point:

“The latest Euro Area economic indicators were surprisingly strong, suggesting that Hungary's main export partner is so far in good shape and that the effects of the US slow down and rising credit costs are limited. We expect a broader Euro Area weakness in the second half of the year, which is likely to limit the Hungarian growth recovery due to weaker net exports."

Hungary's main export partner is, of course, Germany:





We had German industrial production numbers yesterday, and output rose again in February, for its third monthly gain in as many months, as manufacturing output continued to hold up and unusually warm temperatures boosted construction. Output rose a seasonally adjusted 0.4 percent from January, when it gained 1.4 percent, the Economy Ministry in Berlin said today. Year on year total industrial production was up 6.1 percent when adjusted for the number of working days.




So German industry still seems to be holding up pretty well, and is busily working off the huge batch of orders which it built up during the fourth quarter of 2007 - and Hungary is following in close tandem. More than likely however we'll see a slowdown over the coming months as global demand is cooling, the euro remains strong and economies like Spain, Italy and the UK are now slowing visibly. As a possible early warning of this situation German factory orders fell 0.5 percent in February, a government report showed last week, and the International Monetary Fund has cut its 2008 outlook for economic growth in Germany to 1.4 percent from 1.5 percent. It will be interesting to watch how the decline in German orders reflects itself in orders in Hungary as we move forward.


Update 15 April 2008


Hungary's unadjusted industrial output growth was confirmed at 13.2% year on year in February by the KSH today, and was also confirmed at 9.8% yr/yr, when adjusted for working days.

Output increased by 2.3% month on month (vs. +1.1% in Jan), according to figures adjusted seasonally and by working days.This is now the fourth consecutive month that output has risen. While the year on year data (up to 13.2% from 6.1% in Januray) shows an upturn, order figures are still very disappointing.

Total new orders for industry were down 5.3% yr/yr in February as compared with a decline of only 2.5% in Jan. New exports orders fell 4.2% yr/yr (vs. + 0.8% yr/yr in Jan), and domestic orders slumped by 11.8% (vs. -11.9% in Jan). Total orders were down 2.7% yr/yr, against a dip of 9.2% in the previous month. Industrial output growth in the January-February period came to 9.7% yr/yr.

Exports sales in the industry were up 15.5% yr/yr in February, against +10.8% in Jan and +22.2% in Feb 07. While domestic sales came to a screeching halt in January (no yr/yr change detected), they grew by 6.4% in annual terms February, which compares with a 1.4% increase in Feb 07.

German Confidence Deteriorates


Some indication of why the order books in Hungary's German-dependent economy can be found in today's news that investor confidence in Germany fell in April for the first time since January on concern that faster inflation, a stronger euro and fallout on exports from the slowing economies in Italy and Spain will hurt company earnings. The ZEW Center for European Economic Research said its index of investor and analyst expectations declined to minus 40.7 from minus 32 in March. This was just above the 15-year low of minus 41.6 it in January.

The euro dropped more than half a cent to $1.5828 at 11:06 a.m. in Frankfurt after the report was released. The DAX index retreated as much as 25 points to an intra-day low of 6532.76. Germany's benchmark DAX share index has dropped 19 percent this year, the biggest decline among major European stock markets. While growth in Europe's largest economy is holding up, the outlook is now evidently deteriorating.

A third of medium-sized German companies are already finding it more difficult to get loans, the Creditreform agency said April 1. The cost of borrowing euros for three months rose to 4.75 percent yesterday, the highest level since Dec. 27.

Companies and consumers are also grappling with higher energy and food prices, which drove Germany's inflation rate to 3.2 percent last month. Crude oil prices have climbed 76 percent over the past year, reaching a record $112.48 today.

The International Monetary Fund last week cut its prediction for German economic growth this year to 1.4 percent from 1.6 percent. The IMF recommended the European Central Bank start cutting interest rates.

Hungary Faces Another Referendum

Another motion has been put forward to Hungary's National Election Office for a second referendum on the healthcare reforms. The Liga Union Federation, the Workers Council and other NGOs have collected 491,958 signatures in support of a new referendum against the multi-player healthcare insurance model - a major component of the health care reform approved last year.

The National Election Office (OVI) will have 45 days to verify the signatures and file a report to the National Election Commission. If agreed to the referendum will probably take place in the autumn or early next year.


Hungary's Prime Minister, Ferenc Gyurcsány, has pledged on Tuesday to continue the overhaul of the health care system despite the rift between the Socialist Party (MSZP) and its junior ally, the liberal Free Democrats (SZDSZ), and added that government spending would not be raised before elections only to boost party popularity. He also said the budget remained the highest priority for the cabinet, and that extra revenues should be spent on tax reductions.

The Socialist faction decided last Tuesday that the party (MSZP) would table a new bill to overhaul the health insurance act, according to which private capital would not be allowed in the would-be five to seven state-owned health insurance funds. The new bill will be introduced to Parliament only if the liberal Free Democrats (SZDSZ) break up the coalition at the end of April, as looks likely.

The MSZP faction plans to nullify the sections on the involvement of private capital in health insurance fund, a feature promoted heavily by SZDSZ. Until the end-April “deadline" the execution of the related parts of the act passed in February will be suspended. It was the ousting of Hungarian health minister and SZDSZ member Agnes Horvath two weeks ago that triggered the collapse of the governing coalition and increased the risk to investors of participating in Eastern Europe's health-care providers. Agnes Horvath, 34, was fired on March 31 after pushing through a law allowing companies to buy minority stakes in Hungary's state health-insurance system. She argued outside investment would increase funding and improve clinics.

The opposition to Horvath's plan reflects a certain ambivalence in a number of East European countries towards free market solutions in areas like health care. While eager to improve public health care, both politicians and citizens alike are wary of allowing private operators to enter a domain that is still seen as being the responsibility of the state.

``Companies have to know that they're treading on very risky territory,'' said former Hungarian Prime Minister Viktor Orban, one of Horvath's main opponents, in a press conference March 12. ``If the people don't want them, businesses shouldn't be allowed in.''

Horvath lost her job after Fidesz opposition leaders threatened a referendum to halt the law. Prime Minister Ferenc Gyurcsany's Socialists are now drafting a bill banning private capital from health insurance.

Hungary is not alone in its unwillingness to open the health-insurance market to commercial enterprises. Slovakia last year passed a law prohibiting health insurers from keeping profits, forcing them instead to put excess funds back into the system. In the Czech Republic, Health Minister Tomas Julinek is working against opponents in his own government to a plan to transform health insurers into for-profit corporations. Hungary, Slovakia and the Czech Republic all finance health insurance through mandatory payroll taxes. The state funds basic health care for all, although individuals may take out additional coverage from private companies.

OECD data show that the three eastern European countries devote an average of 7.5 percent of gross domestic product to health care, compared with an average 9 percent for OECD countries as a whole. Since increasing taxes to improve health care is effectively impossible in the country's present economic circumstances Horvath wanted to try to find extra funds to inject by breaking-up the country's state insurer into several health-management companies in which corporations could buy up to 49 percent. Under her proposal, the companies would compete with each other for patient premiums, devising insurance packages that would be more attractive than what the state can offer. An investor's profit would have been capped at 0.98 percent of annual revenue. Horvath said hospitals would improve their facilities with outside investment in order to attract more business from the companies.

``We set in motion a process, the likes of which has rarely been seen since the fall of communism,'' Horvath said at an April 1 press conference. ``I think it's perfectly natural that this kind of transformation should come with difficulties.''

The failure of Horvath's law means the state will continue to manage the entirety of the estimated 1.69 trillion forint that Hungarians contribute annually to the health system through payroll taxes.

Pessimism On The Industrial Ouput Front and Interest Yield Pressure on Public Spending

Businesses and Consumers Get More Gloomy

Hungarian businesses became more pessimistic in March as their expectations for industrial production worsened, market research company GKI said today. Overall economic sentiment index fell to minus 19.5, from minus 17.3 in February. The index is near a 12-year low of minus 21.2 recorded in October of last year. The business confidence index dropped to minus 7.9 from minus 6.7.

``The expectations of industry and service sectors, until now relatively optimistic, worsened while the more pessimistic construction and retail sectors improved,''

Economic sentiment has been near all-time lows since June 2006, when Prime Minister Ferenc Gyurcsany's government revealed a program to curb the budget deficit that has since weighed heavily on disposable incomes. Menahwile the GKI consumer confidence index meanwhile fell to minus 52.4 from minus 47.6 in February and minus 47.8 in January.

And Rising Yields Squeeze Government Spending

The cost of financing Hungary's budget spending will increase by more than 100 billion forint ($624 million) over the next few years simply due to the rise in government bond yields, Finance Minister Janos Veres said this morning.

The extra cost may be "several tens of billion forint" this year, Veres told a Budapest conference this morning. Yields have risen rose due to declining confidence that Hungary will be able to continue to cut its budget deficit after voters last month rejected some deficit-reducing measures, he said.


Hungary is working to narrow what used to be the European Union's largest budget deficit. The government is seeking to reduce the shortfall to about 3 percent of gross domestic product this year from a record 9.2 percent in 2006.

The yield on the benchmark three-year bond rose to as high as 9.83 percent on March 31 from 8.04 percent a month earlier. The yield was at 9.04 percent at 9:55 a.m. today in Bupapest.

Hungary Inflation March 2008

Hungary's inflation rate remained at more than twice the central bank's target in March, keeping pressure on policy makers to raise interest rates further. The inflation rate fell to 6.7 percent from 6.9 percent in February, the third consecutive monthly decline, the Budapest- based statistics office said today. The figure compares with a 6.8 percent median estimate of 19 economists in a Bloomberg survey. Consumer prices rose 0.6 percent in a month.



Seasonally adjusted core inflation came to 5.3% year on year, unchanged from Feb, the Central Statistics Office (KSH) has reported on Friday. The month on month rise was up by 0.5% from a 0.4% rise in Feb. The short-based core-inflation figure, closely watched by the central bank, also shows hardly any reduction from February. The quarterly annualised index remained around 6%, at more or less the same level we have seen in the past six months. Taking a slightly more optimistic approach Portfolio Hungary say it is good news that for the first time in a long time the indicator went below 6% (to 5.9%).



Hungarian inflation has thus now exceeded the central bank's 3 percent target since August 2006. Monetary policy makers last month responded by raising interest rates for the first time in 17 months and may now come under pressure to lift borrowing costs again to retain their credibility and to sustain the forint. After all it was only a couple of days ago that Hungarian central bank policy maker Gabor Oblath was saying the bank raised interest rates more than expected last month to signal its commitment to slowing inflation. Perhaps it is going to be pushed to give yet another signal, certainly forward looking yields suggest that they may be.


Meantime Morgan Stanley this morning lowered its rating on Hungarian markets to ‘Equal-weight' from ‘Overweight', citing rising political risks as the reason.

Hungary External Trade January 2008 Update

We now have detailed results for external trade for January confirm the positive impression given by the preliminary results (reported on here).

As anticipated, Hungary's monthly trade deficit continued to reduce in January as exports rose faster than imports. The shortfall was 79.5 million euros ($124.5 million), compared with 170.2 million euros in December and 219.3 million euros in January 2007, according to data released by the Budapest-based statistics office KSH this morning. The figure was revised from a 70.5 million-euro preliminary estimate.

Hungary's trade gap has been narrowing for two years now as export growth picked up and government measures to cut the budget deficit have constrained consumer demand for imported products. Exports in January rose 19.4 percent from a year ago, while imports increased 14.7 percent. In January Hungary sold 77 percent of its exports to European Union countries, while 65 percent of the imports arrived from within the EU.



What we can see clearly from the chart is that exports in January far more vibrant than they were in the doldrum months of October to December (which may give some slight optimism for a slightly better reading on GDP in Q1 2008), and this is consistent with the general picture we have been getting from Germany, and some other CEE countries like Poland, the Czech Republic and Russia that trade in the January to March period may have held up reasonably well. But there are now evident signs that the eurozone and UK economies are starting to slow, and severe inflation issues are now affecting many CEE economies, so the future going into Q2 2008 looks far more uncertain. However looking at the data I can only concur with the Portfolio Hungary conclusion that - if things continue as they are "in a few months Hungary will certainly reach the stage when the trade balance will be in a surplus on an annual basis".

Moody's Dowgrade FHB mortgage covered bonds

This story being run by Portfolio Hungary is definitely not one to miss, since of course the covered bonds market is one of the mechanisms through which the global credit crunch could hit Hungarian financial markets. Beyond simply noting this I do not have the knowledge and expertise to make any additional assessment. But certainly one to watch.

Moody's has downgraded the mortgage covered bonds (Mortgage Bonds) issued by Hungary's Land Credit and Mortgage Bank Co. Plc. (FHB) to Aa3 from Aa2, which has been on review for downgrade since 4 September 2007.

“This rating action was triggered by the downgrade of FHB's long term bank deposit ratings to Baa3 from A2 and its short term bank deposit ratings to Prime-3 from Prime-1 as a result of FHB's privatisation. This rating action concludes the review process," Moody's said in a statement on Tuesday.