Emerging

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14  
EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
Hungary  
Embracing policy contradictions  
Hungary’s macroeconomic situation provides a good illustration of how Central Europe is flourishing economically, but has  
jettisoned some of the principles of liberal democracy, which is the crucible of the European Union. Hungary’s real GDP growth is  
estimated at an average of 4.5% in 2018, the highest level since 2004 and higher than its long-term potential. Endogenous and  
exogenous factors announce a downturn in the economic cycle in the quarters ahead. Yet there is nothing alarming about the  
expected deterioration in macroeconomic fundamentals in the short to medium term.  
Between interventionism and market-friendly policies  
1- Forecasts  
The weakening of European institutions since the eurozone crisis  
has fostered the rise of national populism, notably in Hungary. In  
power since 2010 and strengthened by the Fidesz’s landslide victory  
in the April 2018 legislative elections, Prime Minister Victor Orban  
can boast of a favourable macroeconomic situation. He intends to  
lead a eurosceptic, sovereigntist and anti-immigration revolt during  
European elections next May, and to weigh on the general  
orientation of the EU in the years ahead, at a time marked by the  
weakening of the French-German couple, the traditional motor of  
EU construction.  
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017 2018e 2019e 2020e  
Real GDP growth (%)  
4.1  
4.5  
3.2  
2.8  
Inflation (HICP, year average, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
2.4  
2.9  
3.3  
3.0  
-2.2  
-2.4  
-2.0  
-1.8  
74.8  
3.2  
74.2  
1.9  
71.7  
0.7  
69.8  
1.1  
Current account balance / GDP (%)  
External debt / GDP (%)  
84.6  
23  
76.9  
27  
70.3  
28  
62.2  
28  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
Exchange rate EURHUF (year end)  
2.8  
3.1  
2.9  
2.8  
309  
319  
330  
330  
From an economic perspective, the Orban model is more pragmatic  
than dogmatic, striking a fragile balance between interventionism  
and pro-business measures. It consists of several contradictions.  
Despite the strong rejection of European institutions, Hungary is  
fond of EU structural funds. For Central and Eastern European  
countries, these funds are likely to decline as of 2021,  
independently of any measures currently being discussed in  
Brussels to introduce conditionality criteria that would tie the amount  
and attribution of these funds to upholding the rule of law. Economic  
patriotism prevails in strategic sectors (energy, telecommunications,  
finance), but the authorities are pushing to open up labour intensive  
industrial sectors to non-resident investors. A small, open economy  
whose exports of goods and services account for 87% of GDP, the  
Hungarian economy is highly integrated in European and global  
supply chains. All the German carmakers operate in Hungary and  
the sector accounts for ¼ of exports with the second lowest labour  
costs (EUR 8/hr) in the EU behind Romania. In this quest for  
attractiveness and competitiveness, the corporate tax was lowered  
from 19% to 9% in 2017, making it the lowest in the UE. Employer  
social welfare contributions were also lowered by 2.5 percentage  
points in 2018. In December, a law raising the ceiling on overtime  
work (from 250 to 400 hours a year, with the possibility of deferring  
payment for up to three years) triggered popular backlash, which  
must be monitored.  
e: BNP Paribas Group Economic Research estimates and forecasts  
2- Economic growth and inflation  
Real GDP growth (%, y/y)  
Inflation (HICP, %, y/y)  
10  
8
y/y  
6
4
2
0
-2  
-4  
-
6
8
-
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018  
Source: Eurostat, Hungarian Central Statistical Office (KSH)  
support from the central bank (low interest rates, SME financing  
programme). Although barely 30% of European structural funds  
have been paid out so far (out of a total of EUR 21.9 bn in 2014-  
2
020), the government has already pre-financed quite a few eligible  
Cyclical peak  
projects (according to the co-financing principle).  
Economic growth continued to accelerate in 2018 thanks to a  
cocktail of expansionist economic policies, European structural  
funds and an upturn in domestic lending since year-end 2016.  
Banks have cleaned up their balance sheets and are now showing  
satisfactory levels of capitalisation, liquidity and profitability. This  
has enabled them to pursue a more aggressive lending policy with  
In 2018, real GDP rose 4.8% in the first 9 months compared to the  
previous year (year-on-year, y/y). Hungary has reported ten  
consecutive quarters of growth. Household consumption is the main  
growth engine (+5.5% y/y in the first three quarters of 2018), and  
retail sales rose 6.3% in the first 11 months of the year. Household  
spending continues to be supported by strong nominal wage growth,  
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EcoEmerging// 1 quarter 2019  
economic-research.bnpparibas.com  
up 10% for the year, driven up by labour market tensions in an  
economy operating at quasi-full employment, with an unemployment  
rate of 3.8%.  
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- Public finances (general government, % GDP)  
 Public debt  Primary balance  Overall balance  
Investment surged by 17.4% y/y in the first three quarters of 2018,  
driven by the construction sector, whose value added has increased  
Public debt  
Budget balances  
90  
80  
70  
60  
3
2
1
0
23.8% y/y in the first three quarters. Fiscal incentives for new home  
purchases that expire in January 2020 continue to boost residential  
investment. Investment in the industrial sector (machinery and  
equipment) continued to benefit from favourable financing  
conditions as well as foreign direct investment (EUR 4.5 bn in the  
year to Q3 2018, compared to an average of EUR 2 bn a year since  
50  
40  
30  
20  
10  
0
-1  
-2  
-3  
-4  
-5  
-6  
2
010, or barely 2% of GDP).  
Manufacturing output let up slightly in Q3 (+2.5% y/y), notably due  
to the slowdown in the automobile sector (sharp decline in car  
registrations in Germany) owing to new European anti-pollution  
standards. Yet monthly indicators show a rebound in automobiles  
and electronics in October. Thanks to very robust domestic demand,  
net foreign trade has made a negative contribution to GDP over the  
past two years, with import growth surpassing export growth (+6.8%  
and +5.4%, respectively, y/y in volume in the first three quarters of  
2
007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e  
Source: European Commission  
country that is not a commodity exporter and that posts a current  
account surplus.  
The forint (HUF) has been relatively stable for the past three years  
but it could experience renewed volatility due to greater political risk  
2
018).  
(
European legislative elections in May) and the end of quantitative  
Economic activity is expected to slow in 2019-2020. Consumption  
and investment should grow at a more subdued pace. Bottlenecks  
have triggered an upsurge in construction costs, and consumer  
prices have accelerated (2.7% y/y in December, vs 2.1% in the  
year-earlier period), which is expected to weigh on household  
purchasing power. Despite the expansion of production capacity, a  
less buoyant international environment is likely to undermine  
industrial exports (notably in the automotive sector).  
easing in the eurozone, more so than from the tightening of US  
monetary policy. In a very agitated year for emerging market  
currencies, the forint depreciated by only 4% against the euro and  
1
0% against the dollar, which shows that investors are still confident  
in Hungary and the other Central European economies. The  
Hungarian central bank (MNB) announced that it intends to maintain  
its key policy rate unchanged at 0.90% (an historically low rate in  
place since May 2016) through 2020, even though core inflation  
(
excluding energy, food and regulated prices) is expected to  
accelerate above the central target of 3%, to an average of 3.5% in  
019 and 3.3% in 2020. Yet the MNB might be forced to raise its  
Nothing alarming about the deterioration in  
macroeconomic fundamentals  
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Several factors are expected to strain Hungary’s external accounts  
including the economic slowdown forecast for the EU, the risks  
associated with trade tensions and Brexit, and the “normalisation” of  
US and eurozone monetary policies. Despite the downward revision  
of oil prices, the substantial trade and current account surpluses  
reported in 2015-2017 are bound to narrow in 2019-2020. At the  
same time, FDI inflows are also likely to slow given the deterioration  
in the business climate.  
key rate during the course of 2019.  
As to public finances, the estimates of the Hungarian authorities and  
international institutions (European Commission, IMF, OECD)  
converge on a general government deficit of 2.3-2.4% of GDP in  
2
018. The deficit is expected to widen again due in part to the loss  
of certain exceptional revenues and fiscal measures, while the  
strong performance in terms of fiscal revenues was largely eroded  
by additional spending (wages and investment). The pro-cyclical  
nature of fiscal policy is illustrated by the high structural deficit (3.8%  
of GDP in 2018 according to the European Commission). The  
apparent deficit is expected to narrow slightly, to about 2% of GDP  
in 2019-2020, based on the introduction of new fiscal incentives, but  
also on the assumption that wages and social transfers will rise at a  
slower pace than nominal GDP growth, and that structural funds will  
be paid out for projects partially pre-financed by the government.  
Public debt is nonetheless expected to drop below 70% of GDP in  
This outlook does not endanger the country’s external position in the  
short and medium term. The external debt, though still substantial,  
has been reduced sharply since 2010 (from 145% of GDP to below  
8
0% in 2018) thanks to deleveraging by the state and the private  
sector (although the foreign currency liability of banks increased in  
018). The country’s net external position (foreign assets minus  
2
foreign liabilities) has improved (-47% of GDP in mid-2018  
compared to -105% in 2010). The reduction in government  
borrowing in foreign currencies has drained foreign reserves in  
recent years. Yet this trend was reversed by foreign currency  
inflows in late 2018, thanks to Eurobond issues and European  
transfers. Although foreign exchange reserves are at the threshold  
of 3 months of imports, they are not a real source of concern for a  
2
020.  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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