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Hungary Country Risk Reports Q2 2015

Hungary Country Risk Reports Q2 2015

Core Views

Having been propped up by fiscal stimulus in 2013 and 2014, real GDP growth in Hungary will slow substantially in the coming quarters as government spending is scaled back. Hungary’s domestic demand recovery will trail that of Central European peers due in part to a crippled banking sector, while external demand will remain weak on the back of a stalled eurozone recovery.

We believe that the threat of EU structural funding cuts – which Hungary has become increasingly dependent on – will be sufficient motivation for the government to do just enough to keep the country’s deficit within EU limits in the coming years. However, public debt will remain well above Emerging European averages and Hungary will remain in a precarious fiscal position with minimal resilience to shocks.

Hungary’s current account surplus will remain sizeable in the coming years, bolstered by falling oil prices. However, we forecast a longterm narrowing of the surplus on the back of weak external demand and a gradual but sustained loss of competitiveness.

Strong deflationary forces and additional monetary easing from emerging and developed peers will compel the Hungarian National Bank to resume a rate cutting cycle in 2015. The bank’s pro-growth stance and policy coordination with the government pose minimal risks in the short term as global monetary conditions remain loose, but will damage its credibility over the long-term, undermining its ability to achieve price and financial stability.

Alleged infringements of civil liberties in Hungary will leave the government ostracised from decision-making at an EU level. This isolation will pose little threat to government stability, given the strong popular support the government enjoys, but it does pose a threat to Hungary’s influence on regional policy.

Major Forecast Changes

No major forecast changes


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Shine Coming Off Fidesz Rule
Despite recent declines in popular support on the back of corruption allegations and unpopular tax proposals, we do not expect
any major shift in the populist policy agenda of Hungary's ruling Fidesz party owing to a weak opposition and distant general
elections.
Table: Political overview
Long-Term Political Outlook
Western Convergence Story More Uncertain
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 thecontinuing rise of farright
parties, sustained poor relations between ethnic Hungarian and minority groups as well as rising fiscal pressures from an ageing
population.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
From Outperformer To Laggard In 2015
The Hungarian economy will go from regional outperformer to underperformer in 2015, with real GDP growth decelerating to 2.2 % from
an estimated 3.3% in 2014. Private consumption will continue to improve, but less fiscal stimulus, weak external demand and ongoing
tightness in credit conditions will constrain headline growth potential.
Table: GDP By Expenditure
Monetary Policy
Rate Cutting Cycle To Resume
We now forecast 50 basis points of interest rate cuts from the Hungarian National Bank (HNB) in 2015, from 2.10% to 1.60%. Additional
monetary easing from developed and regional peers, rising real interest rates and the ongoing decline in commodity prices will prompt
the bank to adopt a more dovish stance in the coming months.
Table: Monetary Policy
Fiscal Policy
Tax Policy Undermining Growth
While headline public debt and deficit metrics in Hungary are set to gradually improve over the coming years, the ruling Fidesz party's
tax policy will constrain investment in large portions of the economy. This will undermine long-term economic growth and sustainable
fiscal consolidation.
Table: Fiscal Policy
Exchange Rate Policy
HUF: Remaining A Regional Laggard
The forint will remain among the most vulnerable regional currencies to external volatility over the coming quarters owing to high
external debt, a precarious fiscal position and relatively elevated levels of political risk. In the short-term, additional monetary easing will
put downside pressure on the unit.
Table: Curency Forecast
hungary Q2 2015
Balance Of Payments
Cheaper Oil Boosts Current Account Surplus
Hungary's current account will remain sizeable in the face of weak external demand in 2015 and 2016, bolstered by significant savings
from lower oil import prices. Beyond 2015, we continue to expect a gradual narrowing of Hungary's current account surplus on account
of domestic demand growth outpacing that of developed state peers and waning external competitiveness.
Table: Balance Of Payments
Chapter 3: 10-Year Forecast
The Hungarian Economy To 2024
Western European Economic Convergence Now More Uncertain
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
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Table: Operational Risk
Availability Of Labour
Table: Europe – Availability of Labour Risk
Table: Mig rants Top 10 Sou rce Count ries ('000)
Table: LABOUR FORCE EMPLOYMENT BY SECTOR ('000) 2003-2013
Crime Risk
Table: Emerging Europe Crime Risks
Table: Crime Statistics
Chapter 5: Key Sectors
Autos
Table: Autos Total Market – Historical Data And Forecasts
Food & Drink
Table: Food Consumption Indicators – Historical Data & Forecasts
Table: Alcoholic Drinks Value/Volume Sales, Production & Trade – Historical Data & Forecasts
Table: Mass Grocery Retail Sales By Format – Historical Data & Forecasts
Other Key Sectors
Table: Oil and Gas Sector Key Indicators
Table: Pharma Sector Key Indicators
Table: Defence and Security Sector Key Indicators
Table: Telecoms Sector Key Indicators
Table: Infrastructure Sector Key Indicators
Table: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Global Asumptions
Table: Developed States, Real GDP GrowtH, %
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table: Emerging Markets, Real GDP Growth, %

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