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Hungary Business Forecast Report Q4 2012

Hungary Business Forecast Report Q4 2012 - new country guide report published



companiesandmarkets.com
2013-01-01 00:25:54 - Hungary Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com

While the deteriorating external macroeconomic picture presents sizeable headwinds to Hungary´s trade and investment dynamics, ongoing domestic concerns, specifically tight policy and depressed economic confidence, will mean that Hungary does not avoid recessionary conditions this year. Given the financial pressures still facing Hungary, the severely weakened domestic economy and the government´s high stock of debt, we still believe that an

 

 

IMF/ EU financing deal will be reached before the end of the year.

With progress towards the start of official negotiations continuing steadily, we see a deal by early October as most likely, and this will help to bolster financial market stability. The Hungarian government has made some progress on the fiscal front, but as it stands it is still expected to miss its own deficit target of 2.5% of GDP this year as well as the EU´s less severe 3.0% limit. As a result we expect further fiscal consolidation efforts to be outlined before the end of the year, and fiscal and debt dynamics are expected to be major discussion points once official IMF/EU negotiations begin. On the monetary front, while consumer price inflation remains close to double the central bank´s 3.0% medium-term inflation target, we do not foresee significant inflationary pressures building over the next 18 months due to weak domestic demand dynamics.

We still believe the central bank will have room to cut interest rates once an IMF/EU financial backstop is in place. While an IMF/EU financing arrangement will help safeguard financial market stability for Hungary, specifically helping to lower borrowing costs, it is unlikely to bring about a rapid turnaround in the economy. In turn, we expect public support for the Fidesz administration to continue weakening heading into 2013. While we acknowledge that the political opposition remains fragmented, we believe that growing levels of discontent and political apathy with the established parties could still trigger a shift towards extremist ones.

Major Forecast Changes

Owing to a worse than expected real GDP growth reading in the first quarter of 2012, and a continued deterioration in eurozone dynamics, we have been prompted to revise down our growth forecast for 2012 to -1.2% from -0.5% previously. Given the strong efforts made at fiscal consolidation over the course of the first six months of the year, we have revised down our budget deficit forecast for 2012 to 3.8% from 4.5% previously.

Key Risks To Outlook

Risks to Hungary´s growth outlook are firmly to the downside and emanate from at home as well as abroad. On the domestic front, further delays in obtaining an IMF/EU financing arrangement will cause further financial market instability and prompt the central bank to maintain tight monetary policy for longer, in turn endangering any recovery in the domestic economy. On the external front, any further deterioration in the eurozone sovereign debt crisis would have severe knock-on effects on Hungary´s growth trajectory given the economy´s strong trade and investment linkages with the common currency area.

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