Some stabilisation in Hungary after a deep recession

After years of private and public sector overspending, resulting in strong GDP growth, but also in high twin deficits, the economy has fallen into deep recession. The sharp drop of the forint at the end of 2008 increased commercial credit risks, as the debt service burden for heavily euro-indebted household/corporate/public debtors rose steeply. A massive standby package of US-$ 25.8 billion, from the EU and the IMF, was introduced to shore up the forint and the strongly eroded international reserves. In the second half of 2009 the forint exchange rate recovered, and the government supported a shift to forint-denominated loans, but the foreign currency loan stock still represents a significant risk.

In 2009, 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. However, 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.

The construction sector is still under considerable strain, with a fifth consecutive year of contraction expected, due to falling demand coupled with tightened conditions for project financing. The steel and automotive sectors have fallen victim to the worldwide decline in demand, and consumer electronics has been severely hit by the reduction in consumer spending. All these industries are still considered to be high risk sectors in Hungary.

In 2009, Hungarian companies suffered from banks reluctance to provide credit. Generally, banks were very cautious in their lending: withdrawing cover, increasing prices, and imposing stricter conditions. Besides the economic crisis, the main reasons for this were historically low savings and increasing financing costs. The construction sector and SMEs have been particularly affected by loan restrictions, although, in the last six months, Crédito y Caución has seen that, with growing economic stabilisation, banks have increased their lending and eased conditions.

Recovery expected in the second half of 2010

Payment delays are prevalent in all sectors, with even public buyers such as municipalities and ministries paying late. Generally, the number of non-payments increased in 2009 because of the crisis - and the overall trend is still negative. However, a slow improvement is likely in the second half of the year.

Corporate insolvencies increased 30% year-on-year in 2009 - to more than 14,000. This trend has continued into 2010, with more than 4,000 registered in the first quarter. Crédito y Caución expects a further increase this year, with construction, food, consumer durables, IT, and retail sales mainly affected.

The economy may well bottom out in the first quarter or half year of 2010, and experts predict a slow recovery in the second half of the year. For the whole of 2010, GDP is expected to contract between 0.5% and 1%. Tight fiscal discipline is necessary to keep the budget deficits under control, and austerity measures will continue to curb domestic demand.