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Monday, June 30, 2008

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.


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.

Friday, June 27, 2008

Hungary Producer Prices May 2008

The rate of increase in Hungarian producer prices slowed slightly in May. Prices were down 1.1% month on month, as compared with a 0.1% fall in April, according to data from the Central Statistics Office (KSH) this morning. Year on year the PPI fell back from a 6.5% rate in April to a 4.9% one. We are clearly seeing some impact of the recent rise in the value of the forint here. The HUF hit an all time high of 235 to the euro on Wednesday, and has risen 2.1 percent so far this month, ranking it as the third-best performer in emerging markets.

Domestic producer price inflation was down 0.1% at 11.7% year on year (as compared with 11.8% year on year in April 7.8% in May 2007) and in monthly terms it was up by 0.3%, whilch was still down from the 1.0% rise in April.

Producer prices in the manufacturing industry dropped by 1.4% on the month (versus -0.3% in April) and were up 3.1% year on year (as compared with 5.1% in April 2007).

Export sales prices were down by 0.1% year on year, which compares with 2.6% rise in April (5.5% drop in May 2007). In monthly terms the KSH reported a 2.2% decline, following an 1.0% drop in April (there was a 0.4% rise in May 07).

In May, food price inflation was up by 0.6% on the month (versus 0.4% in April), and by 14.7% year on year (up from 14.1% in April). On the domestic front food price inflation also accelerated to 0.8% month on month from 0.4% in April and to 13.7% year on year from 12.9% in April.

Wednesday, June 25, 2008

Hungary Retail Sales April 2008

Hungarian retail sales rose by 0.4% month on month in April, following a 0.5% decline in March, according to data adjusted for calendar and seasonal effects. The Central Statistics Office (KSH) reported a 1.5% year on year fall in April, as compared with a 3.5% fall in March.

Despite the fact that the data was better than some expected the release still confirms the view that any recovery in domestic consumption is likely to be slow and drawn out affair this year following the austerity package-induced contraction in 2007.

As can be seen from the above chart, even though sales did improve slightly over March, they are still languishing down at a very low level.

Monday, June 23, 2008

Hungarian Central Bank Leaves Interest Rates on Hold June 2008

Hungary's Monetary Council surprised everyone this morning by leaving the benchmark rate on hold at 8.50%. Market participants (as well as yours truly himself) had been more or less unanimous in expecting a 25-basis-point rate hike, especially after the last wages data. Of course, higher interest rates may well not be precisely what the Hungarian domestic economy needs right now, but then the central bank is in a very difficult position here, with domestic consumption weak at the same time as inflation continues to run well above target.

There is some speculation that political pressures may have been mounting on the NBH, as the forint strongthened against the euro and this could have been one of the factors which influenced the Monetary Council in today's decision. The forint has strengthened 5% against the euro since April. The problem is that with the ECB possibly raising in July, some of this ground may well now be lost, and then we will see the inflation benefit unwind.

Unsurprisingly the immediate market response was a weakening of the forint on the interbank market. Within five minutes of the decision being announced the HUF had fallen back to 240.20/50 to the EUR from around 238.50, only to gained back some strength to around 239.50 by 14:30.

Thursday, June 19, 2008

Hungary Wages and Employment April 2008

Gross wages in Hungary's private sector increased at an annual rate of 9.0% in April when compared with April 2007, up from a 7.7% rate in March. This now seems to make a rate increase more or less inevitable at the Bank of Hungary's next rate setting meeting.

Real wages have, after a substantial period of wage deflation, have now started to rise again, and were up by 2.3% year on year in April. The problem is that if real wages stay in positive territory it is hard to see how inflation can come under control as what we have is a constant pass through of first round into second round effects, while unfortunately the presence of high structural oil and food prices mean that in Europe - which is a net energy importer - living standards do have to fall somewhat in order to be able to pay the new prices without a constant and vicious spiral in inflation.

Increasing expectations that interest interests rates would be raised on the back of this data immediately sent the HUF shooting up, and within 5 minutes of the announcement it had strengthened from 244 to 241.6 against Euro.

Alongside the wages data the Central Statistics Office also published employment details. The average number of employees in businesses employing at least 5 people and in the state sector was 2 million 745 thousand in January–April 2008. Some 1 million 943 thousand of these worked in the private sector and 719 thousand in the public sector.

The number employed in the state sector decreased by nearly 5.3% year on year, but has been rising steadily from the trough of 710,000 in January, and in April stood at 729,000.

while in the private sector has remained more or less constant on the year, climbing back in recent months after a steady decline in the second half of 2007.

In a second wave of HUF buying after lunch the HUF rose against the Euro, rising from 242 to 240.30 in the space 30 minutes, which set a five-year end-of-May Forint-record.

On inter-bank markets Euro was worth 244 HUF this morning and 248 yesterday morning, and this means an3% rise in the HUF has taken place within 36 hours.

In another indication of the rising yield expectations which have been produced the Hungarian Government Debt Management Agency (AKK) offered 70 billion HUF-worth of three-year bonds for auction this morning, but investors only bid for 60 billion HUF worth, leaving the AKK only able to sell 50 billion. But not only were 20 billion less bonds sold than planned, the yield rocketed to 10.02%, up from 9.22 in May.

The average yield now exceeds yesterday's benchmark reference-yield for three-year bonds by 11 basis points. The yield on quotations accepted today ranged between 9.90% and 10.15%.
We have to go back to the summer of 2004 to find the last auction average yield for three-year bonds at over 10%, whilst to find fewer bids than there were today it is necessary to go back to December 2002.

Wednesday, June 18, 2008

Hungary Construction Output April 2008

Hungary's construction industry may be stabilising (ie it may not continue to contract) although the level of output is very low when comapered to the higher levels achieved before the start of the 2007 slump.

The volume of construction industry output rose 0.8% year-on-year in April (unadjusted figures), and declined by 1.6% when adjusted for the number of working days, according to data from the Central Statistics Office. In seasonally and workday-adjusted figures, construction industry output rose 2.9% compared with March. In the first four months of the year, total output was down by 13.5% over the first four months of 2007.

Orders continue to remain low. At the end of April, orders for construction companies stood 31.7% lower than a year earlier, with approximately the same rate for buildings and other structures. New contracts signed in the first four months of 2008 represent only a reduction of 3.1% on the orders placed in the corresponding months of 2007, however there is a big difference between the two major branches of the construction industry: new orders for building construction actually fell 28,7%, while contracts for other construction projects grew 41.2% - a number which is largely produced by a major highway construction contract signed in January.

Another important consideration is that last year's massive construction industry slump is almost certain to push each year-on-year growth figure in 2008 into the positive range (with the exception of May, when negative year-on-year growth is expected). This means that a small-scale improvement will translate into higher growth figures compared with last year - even if these higher “growth figures" actually represent a decrease in output. Despite this, the trend willobviously tend to nudge up GDP growth slightly.

Friday, June 13, 2008

Hungary Industrial Output May 2008 (updated)

(This post has been updated following release of the detailed figures, see foot of post).

Hungary's industrial output was up by 11.8% year on year in April, and by 6.7%,when the data is adjusted for working days (Easter was in March this year), the Central Statistics Office (KSH) reported this morning. This marks a significant increase after the last month's 4.3% working day corrected increase, which had been the weakest registered year on year growth since February 2005.

Industrial output grew by 8.1% yr/yr in the January-April period, up from 6.9% in Q1.

Following a 2.6% decline in March, output rose by 1.4% month on month in April, according to seasonally and working day adjusted figures.

Industrial output growth accelerated more than expected in April. The strong pick up is partly the result of one-off factors (two more working days), but the low base from last April also played a role. We need to be very careful in interpreting data from March/April due to the size of the Easter calendar effect.

Monthly adjusted data showed 1.4% growth in April, but this was not enough to fully compensate for March's 2.6% monthly drop in output. Despite the stronger than expected headline number, the details confirm that the industry is loosing some momentum, which is not a surprise given the global slowdown and still weak state of domestic demand.


Hungary's industrial output increased at the confirmed rate of 11.8% year on year in April, according to unadjusted data and went up 6.5% year on year, according to figures adjusted for working days, according to revised data from KSH. The working day adjusted number was down slightly from the preliminary 6.7%.

The detailed figures show that the driving force behind industrial output growth are export sales, which were up by 2.1% month on month.

The volume of electrical and optical goods exports, which constitute about a third of all manufacturing industry exports, rose by 10.7% year on year in January-November. Exports of the vehicle industry, which make up about 30% of all processing industry exports, were up 23.2% in April.

Industrial exports were up by 19.2% year on year in April (as compared with3.4% in March) and 12% in Jan-Apr.

Domestic sales were up by 8.2% year on year in April, against the tiny 0.5% rise in March. The Jan-Apr growth rate was 3.4%. Really it is well worth taking March and April together in all this data.

Wednesday, June 11, 2008

Hungary's Inflation Rate Accelerates in May

Hungary's consumer prices rose by 1.1% month on month and by 7.0% year on year in May 2008,well above the 6.6% consensus forecast. This is obviously not good news, and a further interest rate hike would seem to be all but inevitable. Back in April the respective CPI increases were 0.3% and 6.6%. For the end of the year analysts are now project a CPI of around 5.1%, while a year ago the median of forecasts was only 3.3%.

Worse still, seasonally adjusted core inflation rose to 5.9% year on year - up from 5.6% in April. The month on month rise remained unchanged at 0.5%.

This acceleration in inflation is basically attributable to three factors. The increase in fuel prices alone pushed the index higher by 0.2 percentage point and the gas price increase had the same impact. This hardly comes as a surprise, but analysts did expected these two factors to be at least partly offset by price drops in other areas. Instead, Hungary has just been hit by another wave of food price increases.

So in addition to the 3.2% and 7% month on month rise in fuel and gas prices, food prices were up 1.9% month on month. This rise was mainly attributable to an 11.4% increase in seasonal food prices (potato, fresh vegetables, fruit), but there was a rise in the price of coffee (3.1%), poultry (2.8%) and chocolate/cocoa (2.3%), as well. However, and this is the worst bit, excluding seasonal food, food price inflation came to 0.7% month on month, which shows that the pass-through from the initial price shock is also now making itself felt at at the processed food level, as well.

The central bank's reaction to this is expected to be another rate hike. The Monetary Council would need a shockingly low wage rise number in the second half of this month for it to seriously contemplate putting off further monetary tightening. In addition, the forint has been also weakening in the past days, obliterating a great deal of the strength it obtained against the euro previously, and further declines in the forint at this point will only add to inflationary pressures.

Saturday, June 07, 2008

Hungary GDP Q1 2008 Detailed Results

Hungary's gross domestic product grew by 1.7% year on year in the first quarter of 2008, according to unadjusted data. However this figure when adjusted for calendar impacts (2008 was a leapyear) was a 0.9% increase over Q1 2007. The revised data are the same as the preliminary numbers. The engine of growth remained industrial output and in particular the improvement in the trade balance as a result of the strong increase in exports and the slower increase in imports (where weaknesses in domestic demand continued to weigh).

Adjusted year on year GDP growth was thus up moderately to 0.9% in Q1 from 0.7% in Q4 2007. Quarterl on quarter growth edged up to 0.3% from 0.1%. The moderate pick-up is attributable to a leap in agricultural performance and a slight improvement in the external trade position.

The position is very clear in the above chart I think. On the back of the fiscal adjustment package which was introduced in the summer of 2006 Hungary's economic growth plummeted and since hitting the bottom in Q1 2007 has continued to languish in the 1% per annum growth region. Given that internal demand conditions are unlikely to change substantially for the better, while the external environment on which Hungary's exports depend may well worsen (though agriculture could give some plus impetus if the harvest is as good as people are saying) it is hard to see headline growth moving up much out of this zone and the unadjusted 1.7% number should be regarded (at this point at least) as something of a "freak" reading.

The structure of Hungarian growth has however changed enormously, and that I think is what many commentators are missing. In a pattern we have already seen in other ageing societies like Japan, Germany and Italy, internal consumption seems to have "maxed out" according to my estimates in the second half of 2002 (see chart below, where the difference between "private" and "total" household consumption is simply that the latter includes government transfers, which have of course been affected by the adjustment programme hence the more rapid decline).

It is my interpretation of the situation that the increase in government fiscal deficit in 2005 and 2006 was in fact a knock on consequence of this decline in private consumption in an attempt to maintain the momentum which was being lost.

Investments in the Hungarian economy were down by 4.8% year on year in the first quarter of 2008. The volume of investment – according to seasonally adjusted indices – was 1% lower than in the previous quarter. Construction investments fell by 15.5%, while investments in machines and equipment were up by 8.4%.

After the impact of last years drought, the agricultural sector is now growing again (and in particular given the rapid rise in food prices).Since this sector is highly volatile it can have substantial impacts on short term GDP growth rates despite its small weight in the whole economy - last year it brought the headline data down and this year it may well pump it up. Most analysts expect a good harvest this year, but this is precisely why Q1 growth estimates are a little uncertain, since the real value of current operations will not be known before the middle of the year. For this reason, the current data may even be revised upward if crops prove to be as good as is being forecast this year.

So if there is a stable external environoment (in the eurozone) - something which is open to question - we could expect a slight pick-up in GDP growth during the year on the back of agricultural output and continuing exports, but it seems right now there is no spectacular change of pace in sight. Any economic recovery is going to be ``slow'' (especially given the inflation problem, and the very tight monetary policy being run by the NBH) and household consumption and investments are unlikely to improve dramtiaclly, and certainly cannot be expected to replace exports as the growth engine (as central bank President Andras Simor recently suggested) and investment will be very much driven by the export sector much as we have been seeing in Germany in recent years. The chart for total domestic use (which is the sum of private and public consumption demand and capital formation - or if you prefer investment) makes this abundantly clear. Without the improvement in the trade balance there is no growth whatsoever in Hungary at the present time. I think this is quite an important result, and one which people need to think about a lot, since if this is not understood none of the 1001 "remedies" are ever going to work. Hungary is an "elderly" society with a declining and ageing population, and the macroeconomic consequences of this need to be assimilated and understood.

Of course, we have strong downside risks on this scenario, since any deterioration in Germany, or increase in global risk aversion can unsettle a Hungarian economy which continues to remain precariously perched between heading up and heading down.

Friday, June 06, 2008

Hungary Investments Q1 2008

According to preliminary data from the national statistics office investments in the Hungarian economy were down by 4.8% year on year in the first quarter of 2008. The volume of investment – according to seasonally adjusted indices – was 1% lower than in the previous quarter.

Construction investments fell by 15.5%, while investments in machines and equipment were up by 8.4%.

The decrease of investments – and in particular the fall in construction investments – has largely been caused by a decline of 16.8% under the transport, storage and communication heading, since these investments consist mainly of highway and road construction.

This pace of the decrease is partly produced by the very high base for first quarter investments in 2007.

Investments in manufacturing industry were down by 9.8%. Within manufacturing substantial decreases occured in the manufacture of rubber and plastic products and the decrease was also significant in the manufacture of electrical and optical equipment, both of these are areas which saw substantial investment last year.

Investment in the manufacture of transport equipment was largely unchanged.

Investment also fell in education (27.9%), public administration and defence; compulsory social security (24.5%) and in other community, social and personal service activities (19.4%). The volume of investment in real estate, renting and business activities grew by 8%. This section also includes housing construction.

Hotels and restaurants were up due to renovation and extension of hotel buildings, while a rise of 43.7% took place in agriculture, due largely to significant machine and equipment investments and to the low base of the previous year. The section wholesale, retail and repair trades was up 19.5% largely on investments by big chain stores.