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Hungary Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views

Hungary will be a regional underperformer over the next two years. Domestic consumption will be the primary driver of growth, while slow absorption of EU funding and weak economic activity in key eurozone trading partners will present major headwinds. Our Infrastructure team holds a negative outlook on Hungary's construction sector for 2016, projecting that the volume of construction output will decline by over 14.0% y-o-y, before expanding by just 0.25% in 2017. The automotive industry, which accounted for over 30% of Hungary's industrial output in June, is set to see a reduction in output. Our Autos team believe the impact of Brexit will have predominantly negative effects across the EU autos sector. Hungary's budget deficit will widen over the next two years, as the government pursues an expansionary fiscal policy from Q416. Low borrowing costs and a primary surplus will allow for a gradual reduction in the public debt ratio, although it will remain the highest in the CEE region. Given rising domestic inflationary pressures over the next two years, the Hungarian central bank will begin to normalise monetary policy by end-2017. In light of a number of headwinds facing the economy, the policy rate trajectory will follow a gradual path. Following a referendum on October 2, Hungary's rejection of the EU's migrant resettlement proposals will bolster domestic support for Prime Minister Viktor Orbán and the governing Fidesz party. Tensions with the EU will worsen considerably and could result in a number of punitive measures being taken against Hungary. Major Forecast Changes Persistently weak economic outlook for key eurozone trading partners will weigh on external demand in Hungary and this is likely to be worsened by the economic impact resulting from the Brexit referendum in June. In line with this, we expect real GDP growth to decelerate from 2.9% in 2015 to 1.8% in 2016 (from 2.3% previously) before accelerating marginally to 2.3% in 2017 (from 2.8% previously).

Table Of Contents

Hungary Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Hungary Set To Be A Regional Underperformer..........................................................................................................................8
Hungary will be a regional underperformer over the next two years. Domestic consumption will be the primary driver of growth, while
slow absorption of EU funding and weak economic activity in key eurozone trading partners will present major headwinds.
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................11
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................11
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................11
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 12
Fiscal Stimulus To Be Deployed By Government......................................................................................................................12
Hungary's budget deficit will widen over the next two years, as the government pursues an expansionary fiscal policy from Q416. Low
borrowing costs and a primary surplus will allow for a gradual reduction in the public debt ratio, although it will remain the highest in the
CEE region.
Structural Fiscal Position........................................................................................................................................ 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 14
Current Account Surplus Set To Shrink......................................................................................................................................14
Hungary's current account surplus will narrow over the next two years, on the back of weakening external demand in key eurozone
trading partners and strong domestic consumption. Despite this, we do not foresee any external financing issues arising.
Outlook On External Position.................................................................................................................................. 16
TABLE: CURRENT ACCOUNT BALANCE FORECASTS....................................................................................................................................... 16
TABLE: TOP 5 GOODS IMPORTS.......................................................................................................................................................................... 16
TABLE: TOP 5 GOODS EXPORTS ........................................................................................................................................................................17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................17
Monetary Policy........................................................................................................................................................ 18
Tightening To Commence By End-2017 Amid Rising Inflation.................................................................................................18
Given rising domestic inflationary pressures over the next two years, the Hungarian central bank will begin to normalise monetary policy
by end- 2017. In light of a number of headwinds facing the economy, the policy rate trajectory will follow a gradual path.
Monetary Policy Framework.................................................................................................................................... 20
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................20
Currency Forecast.................................................................................................................................................... 21
HUF: Appreciation On The Cards................................................................................................................................................21
The Hungarian forint will strengthen over the coming years, on account of solid macroeconomic fundamentals and a growing interest
rate differential with the eurozone.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................21
Chapter 2: 10-Year Forecast................................................................................................................... 23
The Hungarian Economy To 2025........................................................................................................................... 23
Convergence Prospects Now More Challenging.......................................................................................................................23
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.....................................................................................................................................23
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
Domestic Politics..................................................................................................................................................... 26
Referendum Result Will Boost Orbán's Popularity....................................................................................................................26
Following a referendum on October 2, Hungary's rejection of the EU's migrant resettlement proposals will bolster domestic support for
Prime Minister Viktor Orbán and the governing Fidesz party. Tensions with the EU will worsen considerably and could result in a number
of punitive measures being taken against Hungary.
TABLE: POLITICAL OVERVIEW............................................................................................................................................................................ 26
Long-Term Political Outlook................................................................................................................................... 27
Significant Long-Term Challenges..............................................................................................................................................27
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.................................................................................................................. 31
SWOT Analysis......................................................................................................................................................... 31
Operational Risk Index............................................................................................................................................ 31
Operational Risk....................................................................................................................................................... 32
TABLE: OPERATIONAL RISK.................................................................................................................................................................................32
Business Crime ....................................................................................................................................................... 33
TABLE: BUSINESS RESPONSE TO RISK IN HUNGARY......................................................................................................................................33
Government Intervention ........................................................................................................................................ 36
TABLE: BUSINESS TAXES.....................................................................................................................................................................................37
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................38
Chapter 5: BMI Global Macro Outlook................................................................................................... 41
Global Macro Outlook.............................................................................................................................................. 41
Broad Recovery But Three Notes Of Caution.............................................................................................................................41
TABLE: GLOBAL FORECASTS, 2015-2020........................................................................................................................................................... 41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %................................................................................................................................... 43
TABLE: MACROECONOMIC DATA and FORECASTS.............................................................................................................................................. 45

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