Economy
Analysts start to realise they were overly upbeat about Hungarian growth
Q2 GDP data surprised many
After 3.5% GDP growth in the first quarter the Central Statistical Office’s (KSH) first estimate delivered a negative surprise for many, as Hungary’s economic output expanded by only 2.7% yr/yr in April-June. The structure of growth is unclear at this point but we will know more when the stats office publishes detailed figures on Friday.
In any case, some foreign analysts have already revised their annual growth projections downwardly. Bank of America Merrill Lynch cut its 3.5% forecast to 30% and in a research note published on Tuesday Morgan Stanley lowered its own estimate to 2.9% from 3.5% previously.
Despite the harsh cuts, the analysts at both investment banks stress that Hungary’s growth potential gives no reason to worry. BofA-ML believes that growth of around 3% is sustainable also in 2016, whereas Pasquale Diana, economist at Morgan Stanley in London, lowered his GDP forecast for next year to 2.4% from 2.5% previously.
Diana thinks that the central bank is likely to revise down both its GDP and its inflation forecasts when it publishes its new outlook in September.
“The NBH’s GDP forecast at 3.3%Y this year and 2.5%Y next year looks too bullish. And the NBH’s CPI forecast was done assuming oil prices of USD 68 for next year. Simply marking-to-market that assumption would bring the CPI forecast down by around 0.5pp," he said.
The updated quarterly Report on Inflation will be published at the end of this month.
“Disappointing 2Q GDP at 2.7% yoy led us to revise down our 2015 GDP forecast to 3% from 3.5%, but growth should still be trending relatively close to 3% through 2016," said Mai Doan, analyst at BofA/ML in London, in a recently released research note.
The statistical office attributed to the downside surprise to the agriculture sector. Meanwhile, robust industrial activity, solid consumption, and strong net exports were likely the key driver of GDP, she noted.
“Monthly data reveal slightly weaker momentum since the beginning of the year, but business surveys do not suggest any sharp turnaround in the trend. Industrial confidence is holding at 1Q levels, while export orders are reportedly improving. Consumers may not be performing as well as we thought, as confidence has been on a gradual downtrend since early 2014 from post-crisis highs. However, several tailwinds from debt reduction to lower energy prices, and low interest rates should remain supportive."
Morgan Stanley remains constructive on the CEE region (Poland, Hungary, the Czech Republic), saying that “the region runs external surpluses, has no major imbalances or unsustainable growth models, and its superior fundamentals have served it well in the recent sell-off. CEE currencies and rates have held up far better than other emerging markets."
“Somewhat slower growth than expected does not really change the underlying macro story. Hungary is enjoying a recovery in domestic demand from depressed levels," Diana at Morgan Stanley noted.
“Fiscal policy is turning expansionary after years of austerity, rates are at record lows, consumers got a large wealth transfer from the banks following FX loan conversion earlier this year, and face a debt-service burden of sub-8% of disposable GDP, the lowest in over ten years. Corporates have access to easy funding via FGS (Funding for Growth Scheme), which expires at end-2016 and has so far disbursed HUF 1.5 trillion of credit (around 4.5% of GDP) to SMEs," he added.
No more manoeuvring room left for c.bank
Doan thinks that “together with a commodity-driven soft July inflation reading (0.4% yoy), recent data do not suggest any significant changes in the National Bank of Hungary’s monetary policy stance." She reminded that the central bank has clearly announced the end of the easing cycle in July and plans to keep rates steady at 1.35% for an extended period.
“As inflation will quicken up from 4Q 2015, reaching around 2.5% in 1Q next year, deep negative real interest rates should deter any further easing by the NBH," she added.
MNB Deputy Governor Márton Nagy said in an interview on Tuesday that the Funding for Growth Scheme (FGS) will not be phased out at the end of this year, as planned earlier, which also suggests that the central bank as a feeling it will have to do something to stimulate growth. The current programme cannot be extended much longer, but the measure ensuring cheap credit may be restructured and gradually extended in 2016.
“Disappointing 2Q GDP raises caution about potential changes in Fidesz’s policy, but we think that 2018 is far out enough for the government to refrain from radical changes for now. Better relationships with banks give reassuring signals," commented Doan at BofA/ML. She does not expect the 3% ceiling to be broken, “in view of strong budget execution, the EU commission’s tight monitoring and Fidesz’s strong desire to regain investment grade status."
Morgan Stanley has delayed policy tightening in CEE well into 2017, on lower growth and CPI forecasts.
Diana is of the view that “there is scope for the NBH to sound incrementally more dovish, though we think it will refrain from cutting further, given that its commitment to stop cutting but keep policy accommodative for longer will only be a couple of months old."
“That said, it is important to recognise that even keeping policy rates on hold will amount to implicit monetary easing. With inflation set to approach 2%Y by year-end, Hungarian real policy rates will move firmly into negative territory starting in late summer this year and stay at around -1% throughout next year also. In addition, we would reiterate that policy rates offer only a very partial view of the monetary stance. FGS (Funding for Growth Scheme), the Self-Financing Programme, the use of FX reserves to facilitate CHF loan conversion (CHF car loan conversion is imminent) and the provision of interest rate swaps to incentivise the purchase of HGBs have all shown that the NBH is able to use unconventional tools to lower funding costs and help growth," he added.
HUF strategy
BofA/ML stays long via short RON/HUF and a short PLN/HUF position.
“The central bank’s decision to end its rate cutting cycle is a significant positive and should help reverse the uptrend in EUR/HUF since 2012. We retain our long-term positive bias on Hungary given the prospect of rating upgrades in 2H. The latest selloff hit Hungary bonds as well, making them more attractive. We still favor Croatia over Hungary tactically as the former returns to positive growth. The long end weakened significantly in April-June. We continue to hold 25Bs and 2s10s IRS flatteners, though after the recent MNB decision the market has moved significantly and we may now see some consolidation," said Arko Sen.
Diana at Morgan Stanley sees an outlook upgrade by S&P and Moody’s as realistic by year-end, followed by an upgrade to investment grade in 2016.
He underlined that “the resilience of Hungarian assets in the recent market turmoil has been remarkable. A strong external surplus is clearly acting as a powerful buffer, though lower oil prices have probably flattered the overall picture." He also expects HUF firming and sees the Hungarian currency at 300 versus the euro by Q3 2016.
After 3.5% GDP growth in the first quarter the Central Statistical Office’s (KSH) first estimate delivered a negative surprise for many, as Hungary’s economic output expanded by only 2.7% yr/yr in April-June. The structure of growth is unclear at this point but we will know more when the stats office publishes detailed figures on Friday.
In any case, some foreign analysts have already revised their annual growth projections downwardly. Bank of America Merrill Lynch cut its 3.5% forecast to 30% and in a research note published on Tuesday Morgan Stanley lowered its own estimate to 2.9% from 3.5% previously.
Despite the harsh cuts, the analysts at both investment banks stress that Hungary’s growth potential gives no reason to worry. BofA-ML believes that growth of around 3% is sustainable also in 2016, whereas Pasquale Diana, economist at Morgan Stanley in London, lowered his GDP forecast for next year to 2.4% from 2.5% previously.
Diana thinks that the central bank is likely to revise down both its GDP and its inflation forecasts when it publishes its new outlook in September.
“The NBH’s GDP forecast at 3.3%Y this year and 2.5%Y next year looks too bullish. And the NBH’s CPI forecast was done assuming oil prices of USD 68 for next year. Simply marking-to-market that assumption would bring the CPI forecast down by around 0.5pp," he said.
The updated quarterly Report on Inflation will be published at the end of this month.
“Disappointing 2Q GDP at 2.7% yoy led us to revise down our 2015 GDP forecast to 3% from 3.5%, but growth should still be trending relatively close to 3% through 2016," said Mai Doan, analyst at BofA/ML in London, in a recently released research note.
The statistical office attributed to the downside surprise to the agriculture sector. Meanwhile, robust industrial activity, solid consumption, and strong net exports were likely the key driver of GDP, she noted.
“Monthly data reveal slightly weaker momentum since the beginning of the year, but business surveys do not suggest any sharp turnaround in the trend. Industrial confidence is holding at 1Q levels, while export orders are reportedly improving. Consumers may not be performing as well as we thought, as confidence has been on a gradual downtrend since early 2014 from post-crisis highs. However, several tailwinds from debt reduction to lower energy prices, and low interest rates should remain supportive."
Morgan Stanley remains constructive on the CEE region (Poland, Hungary, the Czech Republic), saying that “the region runs external surpluses, has no major imbalances or unsustainable growth models, and its superior fundamentals have served it well in the recent sell-off. CEE currencies and rates have held up far better than other emerging markets."
“Somewhat slower growth than expected does not really change the underlying macro story. Hungary is enjoying a recovery in domestic demand from depressed levels," Diana at Morgan Stanley noted.
“Fiscal policy is turning expansionary after years of austerity, rates are at record lows, consumers got a large wealth transfer from the banks following FX loan conversion earlier this year, and face a debt-service burden of sub-8% of disposable GDP, the lowest in over ten years. Corporates have access to easy funding via FGS (Funding for Growth Scheme), which expires at end-2016 and has so far disbursed HUF 1.5 trillion of credit (around 4.5% of GDP) to SMEs," he added.
No more manoeuvring room left for c.bank
Doan thinks that “together with a commodity-driven soft July inflation reading (0.4% yoy), recent data do not suggest any significant changes in the National Bank of Hungary’s monetary policy stance." She reminded that the central bank has clearly announced the end of the easing cycle in July and plans to keep rates steady at 1.35% for an extended period.
“As inflation will quicken up from 4Q 2015, reaching around 2.5% in 1Q next year, deep negative real interest rates should deter any further easing by the NBH," she added.
MNB Deputy Governor Márton Nagy said in an interview on Tuesday that the Funding for Growth Scheme (FGS) will not be phased out at the end of this year, as planned earlier, which also suggests that the central bank as a feeling it will have to do something to stimulate growth. The current programme cannot be extended much longer, but the measure ensuring cheap credit may be restructured and gradually extended in 2016.
“Disappointing 2Q GDP raises caution about potential changes in Fidesz’s policy, but we think that 2018 is far out enough for the government to refrain from radical changes for now. Better relationships with banks give reassuring signals," commented Doan at BofA/ML. She does not expect the 3% ceiling to be broken, “in view of strong budget execution, the EU commission’s tight monitoring and Fidesz’s strong desire to regain investment grade status."
Morgan Stanley has delayed policy tightening in CEE well into 2017, on lower growth and CPI forecasts.
Diana is of the view that “there is scope for the NBH to sound incrementally more dovish, though we think it will refrain from cutting further, given that its commitment to stop cutting but keep policy accommodative for longer will only be a couple of months old."
“That said, it is important to recognise that even keeping policy rates on hold will amount to implicit monetary easing. With inflation set to approach 2%Y by year-end, Hungarian real policy rates will move firmly into negative territory starting in late summer this year and stay at around -1% throughout next year also. In addition, we would reiterate that policy rates offer only a very partial view of the monetary stance. FGS (Funding for Growth Scheme), the Self-Financing Programme, the use of FX reserves to facilitate CHF loan conversion (CHF car loan conversion is imminent) and the provision of interest rate swaps to incentivise the purchase of HGBs have all shown that the NBH is able to use unconventional tools to lower funding costs and help growth," he added.
HUF strategy
BofA/ML stays long via short RON/HUF and a short PLN/HUF position.
“The central bank’s decision to end its rate cutting cycle is a significant positive and should help reverse the uptrend in EUR/HUF since 2012. We retain our long-term positive bias on Hungary given the prospect of rating upgrades in 2H. The latest selloff hit Hungary bonds as well, making them more attractive. We still favor Croatia over Hungary tactically as the former returns to positive growth. The long end weakened significantly in April-June. We continue to hold 25Bs and 2s10s IRS flatteners, though after the recent MNB decision the market has moved significantly and we may now see some consolidation," said Arko Sen.
Diana at Morgan Stanley sees an outlook upgrade by S&P and Moody’s as realistic by year-end, followed by an upgrade to investment grade in 2016.
He underlined that “the resilience of Hungarian assets in the recent market turmoil has been remarkable. A strong external surplus is clearly acting as a powerful buffer, though lower oil prices have probably flattered the overall picture." He also expects HUF firming and sees the Hungarian currency at 300 versus the euro by Q3 2016.
