Economy
ANALYST VIEW - Hungary referendum idea may draw the ire of EU - Morgan Stanley
Moody’s and referendum idea in focus
Morgan Stanley publishes an outlook for the following week’s key events and releases every Friday. This time the highlights of its report were the following:- Pasquale Diana, a London-based analyst at MS, suspects that the referendum announced by PM Orbán on whether Hungary should accept the compulsory quotas set by the EU “will gather more and more attention in the coming weeks, and potentially draw the ire of the European institutions, who would fear similar initiatives in other countries." He noted that there is no definite timeline, but if the government can present 200k signatures, the vote can be called within 30 days.
- Moody’s is scheduled to review Hungary’s ratings next Friday. Diana thinks that “at least two of the rating agencies will upgrade Hungary in 2016, on the back of improving debt metrics and a more predictable policy backdrop."
- “Given that Moody’s upgraded its outlook to positive only last November, it seems a little early for it to upgrade Hungary’s rating, though there is an outside chance, we think (20%)," Diana added.
- He believes that upgrades will come later in the year, possibly in July.
- Diana also believes that 2016 might be the year that the relationship between the banking system and the government returns to normal.
- The National Bank of Hungary (MNB) left rates on hold this month, as expected, but Diana reminded that in the statement the central bank explicitly indicated the March Inflation Report as a key opportunity for the bank to reassess its stance. “In addition, the statement mentioned nothing about unconventional policy, a sign that the MPC as a whole may be closer to considering conventional easing, i.e., rate cuts," he added.
- Despite a temporary rise in inflation in 1Q16, the analyst thinks that slower growth and the desire to ease monetary conditions will translate into more easing. He expect cuts in the policy rate to 1% by mid- 2016 (-35bp from current), and further unorthodox policies to keep yields low.
- MNB Deputy Governor Managing Director Márton Nagy suggests it is too soon for cuts but more changes are on the way. He said on Wednesday that a March or April cut in the base rate is unlikely, but he no longer rules these out. In addition, Nagy said that the NBH may focus on the O/N rate corridor, where the deposit rate (currently 10bp) could go to zero or possibly negative. Finally, he hinted that the NBH is talking to local banks about separating BUBOR from the 3m policy rate as a further easing step." Although no more details were given, it seems possible that the NBH will cap access to the 3m facility. Recall that the 2w facility will be eliminated as of April. The final aim seems to be to push excess liquidity into HGBs," Diana commented.
Where Morgan Stanley differs
There is a widespread perception that the Hungarian authorities would welcome a weaker HUF as part of a move towards easier monetary conditions.“While this may be true, the BoP looks supportive for the long-term HUF outlook. Should bank deleveraging pressures ease, the strong C/A surplus could lead to HUF gains. HUF is one of the currencies with most potential to appreciate in all of CEE over the medium term," Diana said.
He also believes that we might be at a crucial turnaround in Hungary’s relationship with foreign banks.
“Many issues remain on the table of course, but the scaling down of the bank tax, the resolution of the controversy around the Quaestor law and the setting up of an Asset Management Company (recently given the green light by the EC) to buy bad loans from banks are important steps forward. While many remain sceptical, we think that the government has every incentive to forge a better working relationship with the banks, and it is possible that fiscal incentives for those who expand their balance sheet may eventually be a part of this," he explained.
