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Hungary Country Risk Report Q2 2016

Hungary Country Risk Report Q2 2016

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 Changes

No major forecast changes


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth To Slow Down, Despite Rising Consumption And Exports
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 FORECASTS
GDP By Expenditure Outlook
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Rating Upgrade In 2016
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
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
External Trade And Investment Outlook
Massive Current Account Surplus Unsustainable
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
TABLE: TOP FIVE GOODS IMPORT SOURCES IN 2014
TABLE: TOP FIVE GOODS EXPORT DESTINATIONS IN 2014
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
Dovish MNB Underestimating Inflation Risks
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
TABLE: MONETARY POLICY FORECASTS
Currency Forecast
HUF: Short-Term Stability, Long-Term Appreciation
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 FORECAST
Chapter 2: 10-Year Forecast
The Hungarian Economy To 2025
Convergence Prospects Now More Challenging
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 FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Fidesz Continues To Benefit From Migrant Crisis
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 OVERVIEW
Long-Term Political Outlook
Significant Long-Term Challenges
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
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
TABLE: EMERGING EUROPE – TRADE PROCEDURES AND GOVERNANCE RISK
Trade Procedures And Governance
TABLE: EXPORT AND IMPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Unfinished Business In 2016
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: HUNGARY – MACROECONOMIC DATA & FORECASTS

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