2012-11-15 19:42:52 - Hungary Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com
The continued deterioration in economic activity in the eurozone, and the failure of the government to so far reach an external financing arrangement with the IMF/EU continue to weigh on all areas of the economy. As it stands, net exports will provide some degree of support to headline growth in 2012, given how weak import demand has been. However, risks to our growth medium-term growth forecasts lie firmly to the downside.
Owing to weak domestic demand in Hungary, we continue to forecast a full-year current account surplus in 2012, with an income account deficit precluding a more pronounced external surplus. As demand gradually picks up over the medium term, we expect a move back into deficit territory for the current account
by 2014. On the monetary front, we are confident that inflation will head steadily lower owing to the country´s extremely weak domestic demand story. We also believe authorities will seek to loosen monetary policy further over the coming months, targeting another 25bps cut by end-2012. That said, we concede that weakening negotiations with the IMF over an external financing arrangement could yet result in renewed financial market volatility, which would limit the central bank´s capacity for further rate cuts.
The government´s recent resistance to IMF conditions notwithstanding, we still expect Hungary to reach some form of external financing arrangement with the IMF and EU, most likely at some point in Q113. As it stands, we expect the domestic population to remain most concerned with the harsh economic situation at home, and as a result, we do not expect an improvement in the ruling Fidesz party´s public support anytime soon. We see a lot of potential for extremist parties such as the far-right Jobbik to benefit from an increasingly disillusioned electorate.
Major Forecast Changes
We have revised down 2013 growth to 1.2% from 1.5% previously on account of the continued deterioration in economic activity in the eurozone, and the failure of the government to so far reach an external financing arrangement with the IMF/EU.
Key Risks To Outlook
The failure to thus far reach a deal with the IMF on a financial backstop leaves the Hungarian economy susceptible to a sudden loss in investor confidence. Any major global financial shock could leave Hungarian assets reeling, forcing the central bank to tighten policy aggressively. T his would most likely lead us to revise down our medium-term growth forecasts for the country.
Given Hungary´s dependence on trade and investment linkages with Western Europe, a worse than expected downturn in the eurozone economy would have a major knock-on effect on Hungarian economic activity and broader confidence.
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