Hungary still in the doldrums – Country Risk CEE Q1 results
Hungary’s fiscal problems are more acute than the rest of the region. Far from stabilizing, Hungary’s ECR score plumbed new depths during Q1 2013, falling to 46.6, and sending the tier-four sovereign a further five places downwards in the rankings to 73rd, just one step and less than one point better off than Romania.
With a 32-place drop during the past five years, Hungarys slide has been nothing short of monumental since the 2008 global crisis, when it was adjudged to have been safer than Estonia. The credit rating agencies have slowly cottoned on to the declining trend, as ECR has previously explored (Hungary policy blunders spook rating agencies).
Nine of Hungarys 15 risk factors were lower in Q1 2013 compared with levels a year earlier, notably the indicators for bank stability, institutional risk, the economic-GNP outlook (now one of two indicators scoring less than 4.0 out of 10 along with government finances) and, worst of all, a 0.6 point fall for monetary policy/currency stability.
According to DZ Bank (Emerging Markets Quarterly 0213): Markets demonstrated their dissatisfaction with [György] Matolcsy becoming the new [central bank] governor by speculating on EUR-HUF going upward. A statement by the government that a nationalization of the banking industry would be a possible option also put pressure on the currency.
The current weakness of the forint is justified with reference to Hungarys economic problems and the governments poor political credibility abroad. The pairs overshoot might even continue in the very short run. However, we expect the [central bank] to pause its rate cut cycle or intervene into the FX market once the all-time highs around 320 get reached. Later we expect some normalization but it could take up to six months until EUR-HUF returns to levels below 300.
With the country gripped by recession in 2012, including a fourth consecutive year of declining investment, the country is still facing acutely severe domestic and external economic conditions, exacerbated by tight lending conditions as considerable bank deleveraging continues, with high unemployment and weak export markets.
Moreover, projections by the European Commission show the general government deficit worsening in 2013 to 3.4% of GDP from 2.4% in 2012, due to various budgeted measures, including the phasing out of temporary taxes imposed in 2010 and other revenue measures, as well as weaker underlying economic conditions affecting state revenue and transfers.
BBVAs Country Risk Quarterly Q1 2013 shows a series of charts demonstrating that while Hungarys private household and corporate sector debt-to-GDP ratios remain comfortably within acceptable risk parameters, its gross public debt and external debt-to-GDP ratios are among the highest of the emerging markets included in the report, and almost on a par with Spain.
DZ Bank states: Although the sovereign successfully returned to the Eurobond primary market in February, Hungary is not out of the woods yet. Another up to 2.5 billion needs to be sold till year-end. Investors are likely to remain sceptical about the outlook for Hungarys Eurobonds/CDS not only because of the growing supply.
The failed loan talks with the IMF increase Hungarys dependency on market refinancing as well as the vulnerability in case of further shock waves from the EMU crisis. We therefore see considerable risks for further spread widening in the forthcoming quarter.
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