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Hungary Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

Real GDP growth in Hungary will slow in 2016, mainly on accountof a decline in EU structural funds as a new cycle commences.Accelerating private consumption and a sustained recovery in theindustrial sector will see growth rebound in 2017.Growth will be dampened somewhat by the UK's recent decision toleave the European Union (EU). Our core view is that the decisionwill trigger widespread political and economic instability in the EUand this will result in weaker growth than previously anticipated. InHungary's case, the negative impact on real GDP growth will stemfrom a decrease in confidence and economic activity in the eurozone,which in turn will weigh on external demand.The government's recently legislated budget for 2017 indicated a shiftto a pro-cyclical fiscal policy. Among a number of fiscal measuresplanned in 2017 are public sector wage rises, public investment,and VAT cuts.Fiscal loosening in 2016 and 2017 will not result in an adverse marketreaction. Indeed, despite the change in fiscal policy – to one moreexpansionary – there has of yet been no considerable reaction fromfinancial markets.Hungary's current account surplus will narrow considerably over thenext two years, as an expected slowdown in key eurozone tradingpartners weighs on external demand. Despite shrinking, excesssavings will continue contributing to external debt deleveraging.

Despite narrowing, Hungary's current account will remain in surplusover the next two years. Therefore, we do not foresee any externalfinancing issues arising. Rather, Hungary will continue to generateexcess national savings, as it consumes less than it produces.The Hungarian National Bank's policy rate will remain lower forlonger in light of the UK's vote to leave the EU, which will weigh onregional growth and prompt further easing from developed statecentral banks. That said, inflation is still expected to accelerate in2017 and in contrast to the markets, we see little scope for additionalrate cuts in Hungary.Major Forecast ChangesGrowth will be dampened somewhat by the UK's recent decision toleave the European Union (EU). Our core view is that the decisionwill trigger widespread political and economic instability in the EUand this will result in weaker growth than previously anticipated. InHungary's case, the negative impact on the country's growth ratewill stem from a decrease in confidence and economic activity in theeurozone, which in turn will weigh on external demand. Reflectingthis, we have revised down our growth forecast for 2016 and 2017to 2.1% (from 2.3%) and 2.2% (from 2.8%), respectively.

Table Of Contents

Hungary Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
Drop In EU Funding Will Temporarily Dampen Growth8
Real GDP growth in Hungary will slow in 2016, mainly on account of a decline in EU structural funds as a new cycle commences.
Accelerating private consumption and a sustained recovery in the industrial sector will see growth rebound in 2017.
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS..10
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS.11
TABLE: NET EXPORTS FORECASTS..11
Fiscal Policy And Public Debt Outlook 11
Budget Deficit To Widen In Line With Pro-Cyclical Fiscal Policy11
Hungary's budget deficit will widen over the next two years as the government pursues a pro-cyclical fiscal policy in the run-up to the
2018 general election. Recovering growth and low borrowing costs will see Hungary's public debt ratio continue its gradual decline,
although the debt load will remain among the highest in the region, posing latent risk.
Structural Fiscal Position. 13
MAIN REVENUE AND EXPENDITURE CATEGORIES13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..14
External Trade And Investment Outlook. 15
Eurozone Slowdown Will Narrow Current Account Surplus..15
Hungary's current account surplus will narrow considerably over the next two years, as an expected slowdown in key eurozone trading
partners weighs on external demand. Despite shrinking, excess savings will continue contributing to external debt deleveraging.
Outlook On External Position. 17
TABLE: CURRENT ACCOUNT BALANCE FORECASTS17
TABLE: TOP 5 GOODS IMPORTS IN 201518
TABLE: TOP 5 GOODS EXPORTS IN 2015..19
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..19
Monetary Policy . 19
After Brexit, Rates Staying Low For Longer.19
The Hungarian National Bank's policy rate will remain lower for longer in light of the UK's vote to leave the EU, which will weigh on
regional growth and prompt further easing from developed state central banks. That said, inflation is still expected to accelerate in 2017
and in contrast to the markets, we see little scope for additional rate cuts in Hungary.
Monetary Policy Framework 21
TABLE: MONETARY POLICY FORECASTS.21
Currency Forecast. 22
HUF: Interest Rate Differential To Drive Multi-Year Appreciation22
The Hungarian Forint will follow a mild appreciatory trend over the remainder of 2016, before strengthening in 2017 on the back of solid
economic fundamentals and interest rate hikes.
TABLE: BMI CURRENCY FORECAST..22
4 www.bmiresearch.com Business Monitor International Ltd
HUNGARY Q4 2016
Chapter 2: 10-Year Forecast. 25
The Hungarian Economy To 2025 25
We continue to hold a reasonably sanguine view on Hungary's real economic convergence prospects with Western Europe over the
long term, although mounting challenges face the country from both a political and economic perspective. Convergence of GDP per
capita will continue over the long term, albeit at a much slower pace relative to pre-crisis years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.25
Chapter 3: Political Outlook. 27
SWOT Analysis 27
BMI Political Risk Index. 27
Domestic Politics.. 28
On Course To Reject Future EU Migrant Quota.28
Hungary's upcoming referendum on EU migrant quotas will result in a rejection of the EU's proposals. This will enhance the popularity of
the ruling Fidesz party, placing them in a good position to achieve re-election in 2018. However, relations with Brussels will deteriorate
further, threatening vital EU structural funding.
TABLE: POLITICAL OVERVIEW..28
Long-Term Political Outlook.. 30
Significant Long-Term Challenges.30
Our core view is for Hungary to continue to converge both economically and politically with Western Europe over the next decade, albeit
at a much slower pace relative to pre-crisis years. The country will face substantial challenges, including the continuing rise of far-right
parties, sustained poor relations with the EU between ethnic Hungarian and minority groups, and rising fiscal pressures from an ageing
population.
Chapter 4: Operational Risk. 33
SWOT Analysis 33
Operational Risk Index.. 33
Operational Risk. 34
TABLE: OPERATIONAL RISK34
Market Size And Utilities 35
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK.35
Labour Costs 39
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE.. 40
Chapter 5: BMI Global Macro Outlook 43
Global Macro Outlook. 43
Brexit Risk Casts A Long Shadow..43
TABLE: GLOBAL ASSUMPTIONS..43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %..45
TABLE: MACROECONOMIC DATA and FORECASTS.47

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