Hungary Country Risk Report Q4 2018
Economic growth rates in Hungary will ease in the coming years, but remain comfortably higher than in more developed EU peers. Emerging from a protracted period of private deleveraging, the economy will be boosted by stronger consumer demand. However, a large public debt load and precarious operational and political risk backdrop will weigh on Hungary's growth potential relative to some emerging EU peers.
A major headwind facing Hungary's economy is its tight labour market, severe labour shortages and worsening demographic profile, which poses a risk to the country's FDI and export-orientated growth model. Strong real wage growth will continue to push up unit labour costs, hurting external competitiveness and making Hungary's position as a regional manufacturing hub increasingly fragile.
With the Hungarian National Bank (MNB) maintaining its ultra-dovish policy path and encouraging a weaker HUF, the risk of falling behind the curve has risen substantially. Core inflationary pressures continue to mount, and the possibility of headline inflation overshooting the MNB's target is elevated. Our core view is that policy normalisation and rate hikes will have to come much faster than the MNB's forward guidance suggests.
The structure of Hungary's public debt burden has become less risky given a falling share of FX debt, but remains high by emerging market standards at 74% of GDP and will continue to impede the government's fiscal flexibility in any future downturn, particularly in light of pro-cyclical fiscal stimulus at present. The government will keep FX exposure low, whilst refinancing at lower costs in the currently favourable global backdrop, but public debt deleveraging will be slow in light of expansionary fiscal policies being enacted.
Hungary's Prime Minister Viktor Orban and the ruling Fidesz party will maintain a comfortable grip on power over the coming years. Risks of domestic political instability remains low as public opinion remains favourable to Orban, however, his increasing intervention in the private sector, media and judicial system will continue to deter foreign investors and attract the ire of the EU. Hungary's fractious relations with the EU remains a risk going forward, although we expect some compromise from Orban following the 2018 elections.
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