Modest recovery for Hungary in the first half of 2010

In 2009, Hungarys GDP contracted 6.3%, as domestic demand-oriented sectors were hit by budgetary tightening and industrial exports suffered as a result of the economic meltdown in the Eurozone. A massive standby package of US$ 25.8 billion, from the EU and the IMF, was introduced to shore up the forint and Hungarys considerably eroded international reserves. IMF-monitored fiscal consolidation led to a reduction in the budget deficit from a record 9.4% of GDP in 2006 to 3.9% of GDP in 2009, as the government introduced further austerity measures: curbing public sector spending even more and raising taxes - especially VAT. However, government debt as a percentage of GDP has increased.

Hungarys GDP recovered modestly in the first half of 2010 [GDP growth was 0.2% year-on-year in Q1 and 0.8% in Q2]. While export-oriented manufacturing increased 12.1% in Q2, the performance of construction [-14.1%] and agriculture [-13.6%] declined: the latter due to adverse weather conditions.

In the first eight months of this year, both export and import values increased in euro terms, by 22% and 19% respectively, due mainly to a rise in the volumes of exports and imports of general industrial machinery and equipment, electrical machinery & appliances, as well as road vehicles, which between them account for half of Hungarys imports and two fifths of its exports. During this period a trade surplus of 3.4 billion was recorded, compared to 2.0 billion between January and August last year.

However, domestic demand is still very weak, with expenditure on household consumption decreasing 4.9% in Q2. The contraction of the construction sector persists, with output declining 12.3% year-on-year in the first seven months of 2010. While performance will remain subdued for the rest of this year, a slight recovery is expected in 2011. The number of construction insolvencies has decreased since July 2010, when it reached its peak of 393 cases. but, at the same time, the number of new companies established is also very high [467 in August], suggesting that the construction industry remains the preferred choice for those entrepreneurs who leave behind failed or indebted companies.

In 2009, Hungarian companies suffered from banks reluctance to provide credit. After some easing of lending conditions in early 2010, Crédito y Caución expects bank lending to become tighter and more expensive again in 2011, due to a new tax to be imposed on banks. When that happens, financial institutions will either restrict lending or pass the tax burden on to their clients. However, small and medium-sized enterprises [SMEs] should be able to access loans from public sources more readily than in the past, thanks to the New Széchenyi Plan [a 29-point government action plan designed to boost the economy], which it is said will provide forint 1 trillion of loans from both EU subsidies and national financing.

Low payment morale and increasing insolvencies

Payment delays are still prevalent in all sectors, including public buyers such as municipalities and ministries. Construction and transport in particular are notorious for their very late payment record. Corporate insolvencies increased almost 30% year-on-year in 2009. This trend has continued into 2010, with more than 13,000 cases registered in the first three quarters. Crédito y Caución expects a further increase in the coming months, with construction, food, consumer durables, IT, and retail sales the main victims.

After moderate growth in the first half of 2010, experts dont anticipate significant acceleration in the second half. The IMF currently forecasts 0.6% GDP growth this year and 2% in 2011. Industrial production growth is still driven by external demand, as Hungarys exporters profit from the strong rebound in Germany.

The government is unlikely to meet its fiscal deficit target of 3.8% in 2010 and this, together with Hungarys unsustainable debt burden, is a major source of contention with international donors, such as IMF and the EU. The administration refuses to negotiate a new stand-by agreement with the IMF, arguing that it cannot impose new austerity measures that will meet the tight budget deficit targets set for 2011. This stance could trigger adverse sentiment from the financial markets but, on the positive side, the government currently enjoys large public support, enabling it to make progress with vital economic reforms and thus decrease of the public deficit.