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Hungary Country Risk Report Q2 2016

  • January 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Having been propped up by fiscal stimulus and EU transfers, realGDP growth in Hungary will remain at relatively subdued levelsin the coming quarters as government spending is scaled back.Hungary's domestic demand recovery will continue, but trail that ofCentral European peers due in part to a crippled banking sector.However, we see steady economic growth ahead, driven by acceleratingexternal demand, improving terms of trade and a betteroutlook for private consumption.Although public debt remains well above Emerging European averagesand is forecast to decline slowly in the coming years, Hungary'ssovereign profile has improved in recent years following substantialexternal deleveraging.Hungary's current account surplus will remain sizeable in the comingyears, bolstered by falling oil prices. We forecast a long-term narrowingof the surplus on the back of weak external demand.Strong deflationary forces and additional monetary easing fromemerging and developed peers will enable the Hungarian NationalBank to keep policy extremely accommodative in the comingquarters.

The bank's pro-growth stance and policy coordinationwith the government pose minimal risks in the short term as globalmonetary conditions remain loose, but could damage its credibilityover the long term.Alleged infringements of civil liberties in Hungary will leave thegovernment ostracised from decision-making at an EU level. Thisisolation will pose little threat to government stability, given the strongpopular support the government enjoys, but it does pose a threat toHungary's influence on regional policy.Major Forecast ChangesNo major forecast changes

Table Of Contents

Hungary Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth To Slow Down, Despite Rising Consumption And Exports8
Rising private consumption and exports to the eurozone will support economic growth in Hungary amid a slowdown in fixed investment
growth in the coming years Hungarian real GDP growth will underperform Central European averages both in the short and longer
term
TABLE: GDP GROWTH FORECASTS8
GDP By Expenditure Outlook 9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS9
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy And Public Debt Outlook 11
Rating Upgrade In 201611
Hungary will regain investment grade status in 2016 on the back of substantial improvements in its sovereign risk profile However,
government debt will remain high, both by European and emerging market standards
Structural Fiscal Position 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES13
External Trade And Investment Outlook 14
Massive Current Account Surplus Unsustainable14
Hungary's current account surplus will remain among emerging Europe's largest in the coming years, as economic recovery in the
eurozone boosts export demand and oil prices remain low However, we expect the surplus to decline steadily in the coming years on
the back of weaker global trade volumes, a modest rebound in commodity prices, and relatively strong domestic demand
Outlook On External Position 15
TABLE: TOP FIVE GOODS IMPORT SOURCES IN 201415
TABLE: TOP FIVE GOODS EXPORT DESTINATIONS IN 201415
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE16
Monetary Policy 17
Dovish MNB Underestimating Inflation Risks17
The Hungarian National Bank (MNB) is underestimating inflation risks, in particular those stemming from labour market shortages
While energy prices will keep headline inflation low over 2016, we forecast the first rate hike to come in early 2017, compared to MNB
forecasts of 2018 Unorthodox easing measures being pursued in 2016 are not only unwarranted given the growth and inflation outlook,
but also pose hidden risks to financial stability
Monetary Policy Framework 19
TABLE: MONETARY POLICY FORECASTS20
Currency Forecast 20
HUF: Short-Term Stability, Long-Term Appreciation20
We expect relative stability of the HUF/EUR exchange rate to continue, with global risk aversion and market volatility being reflected
primarily in depreciation of the forint against the US dollar Beyond a six-month time horizon, we believe fundamentals support a gradual
appreciatory path for the forint
TABLE: BMI CURRENCY FORECAST21
Chapter 2: 10-Year Forecast 23
The Hungarian Economy To 2025 23
Convergence Prospects Now More Challenging23
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 b oth a political and economic perspective Convergence of GDP pe r
capita will continue over the long term, albeit at a much slowe r pace relative to pre-crisis years
TABLE: LONG-TERM MACROECONOMIC FORECASTS23
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Domestic Politics 26
Fidesz Continues To Benefit From Migrant Crisis26
Domestic support for the ruling Fidesz party will stay strong over the coming months, as the government's aggressive measures to keep
out migrants prove to be effective Moreover, a common stance on the migrant crisis will strengthen the position of the Visegrad Group
in Europe
TABLE: POLITICAL OVERVIEW26
Long-Term Political Outlook 28
Significant Long-Term Challenges28
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 RISK32
TABLE: EMERGING EUROPE - TRADE PROCEDURES AND GOVERNANCE RISK 33
Trade Procedures And Governance 34
TABLE: EXPORT AND IMPORT DOCUMENTS 34
TABLE: TRADE PROCEDURES BREAKDOWN34
Vulnerability To Crime 35
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Unfinished Business In 201639
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %41
TABLE: HUNGARY - MACROECONOMIC DATA and FORECASTS43

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