Economy
Hungary is still facing serious risks even after upgrade - S&P
Portfolio: What are the biggest risk for Hungary in the coming years?
Karen Vartapetov: In the shorter-term, the key risks stem from possible economic overheating (given existing capacity contains) and external shocks, like a significant slowdown in the Eurozone and/or escalation of global trade tensions. Weaker external demand will immediately affect the relatively small and very open Hungarian economy.
In the longer-term, key risks are adverse demography, infrastructure gaps and low productivity - factors which will limit long-term growth and, with time, weigh on public finance. Tensions with the EU, perhaps resulting in lower EU funding post-2020, could also trigger downside risks to growth.
What do you think about the deceleration of global economic growth? What effect could it exert on the Hungarian economy?
Our base-line scenario does not suggest a sharp global slowdown rather a moderation of growth, which will also be reflected in somewhat softer growth in Hungary (we expect real GRP to expand by 3.3% in 2019). A more pronounced slowdown in Europe and/or China could indeed weigh on Hungary’s growth prospects.
However, in contrast to previous global financial crisis,
Public and private debt is lower and is mostly denominated in local-currency, the exchange rate is floating, the current account is in surpluses, whereas banks are stronger and better supervised. These were the factors which supported the rating upgrade.
Is the Hungarian economy overheated now? Does it need immediate cooling action? What actions do you think could be successful?
What do you think about the potential growth of Hungary?
We estimate it at around 2.0%-2.5%. These relatively low levels reflect Hungary's structural growth challenges, namely poor demographics--exacerbated by the political reluctance to accept labor migrants--a large public sector, low productivity (especially among small and midsize enterprises [SMEs]), and a chronic skills shortage.
This means the Hungarian economy has been growing at a faster rate than its potential for a while now. How long do you think this could last? What kind of structural reforms does the country need to boost potential growth?
Our base-line scenario supporting BBB ratings assumes a soft landing of the economy, with growth rates converging with a long-term potential. As rating agency, we don’t advise on policy but rather assesses credit risks associates with different policy choices. The government is well aware of key structural constrains to growth and has already proposed an ambitious structural reform agenda. However, escaping from the ‘middle income trap’ (i.e. transitioning to the productivity-driven growth model) could prove challenging, especially in light of somewhat weaker checks and balances between Hungarian institutions.
What do you think about the Hungarian debt profile? Do you see any risks relating to mounting retail bond purchases and the expanding government security holdings of banks?
“We believe that the opportunity to put public debt on a sharp downward trend offered by the current cyclical upturn might be missed," you wrote in your analysis on Friday . Do you think Hungary can have another shot at that in the following years?
Absent unexpected shocks, growth is likely to stay solid in 2019-20. This lays foundation for a more sizable fiscal adjustment, and we understand that the government does plan to reduce headline fiscal deficits in the medium-term. Whether this proves to be the case, remains to be seen. So far, the underlying fiscal stance has been quite procyclical. At the same time, a more decisive reduction in public debt is one of our upside rating triggers.
PM Viktor Orbán published his ‘demography action plan’ last week, a few days before your rating action. Were you able to take these planned measures into consideration before the rating upgrade?
The upgrade was a recognition of the improvement in fundamental rating factors: reasonable growth prospects, stronger and more resilient external profile of the economy, and a healthier banking system.
Front page photo by Emmanual Dunand / AFP
Karen Vartapetov: In the shorter-term, the key risks stem from possible economic overheating (given existing capacity contains) and external shocks, like a significant slowdown in the Eurozone and/or escalation of global trade tensions. Weaker external demand will immediately affect the relatively small and very open Hungarian economy.
In the longer-term, key risks are adverse demography, infrastructure gaps and low productivity - factors which will limit long-term growth and, with time, weigh on public finance. Tensions with the EU, perhaps resulting in lower EU funding post-2020, could also trigger downside risks to growth.
What do you think about the deceleration of global economic growth? What effect could it exert on the Hungarian economy?
Our base-line scenario does not suggest a sharp global slowdown rather a moderation of growth, which will also be reflected in somewhat softer growth in Hungary (we expect real GRP to expand by 3.3% in 2019). A more pronounced slowdown in Europe and/or China could indeed weigh on Hungary’s growth prospects.
However, in contrast to previous global financial crisis,
the Hungarian economy is now more resilient and could weather external shocks better
.Public and private debt is lower and is mostly denominated in local-currency, the exchange rate is floating, the current account is in surpluses, whereas banks are stronger and better supervised. These were the factors which supported the rating upgrade.
Is the Hungarian economy overheated now? Does it need immediate cooling action? What actions do you think could be successful?
There are clear signs of overheating, especially in the labor market. Absent policy response, this could undermine Hungary’s external competitiveness and lead to higher expose to balance of payments shocks.
Yet, we think that risks of overheating are manageable: wage increases have been so far compensated by cuts in social security contributions; the floating exchange rate regime will likely help mitigate a buildup of sustained wage pressures; Hungary's labor costs remain below neighboring countries.What do you think about the potential growth of Hungary?
We estimate it at around 2.0%-2.5%. These relatively low levels reflect Hungary's structural growth challenges, namely poor demographics--exacerbated by the political reluctance to accept labor migrants--a large public sector, low productivity (especially among small and midsize enterprises [SMEs]), and a chronic skills shortage.
This means the Hungarian economy has been growing at a faster rate than its potential for a while now. How long do you think this could last? What kind of structural reforms does the country need to boost potential growth?
Our base-line scenario supporting BBB ratings assumes a soft landing of the economy, with growth rates converging with a long-term potential. As rating agency, we don’t advise on policy but rather assesses credit risks associates with different policy choices. The government is well aware of key structural constrains to growth and has already proposed an ambitious structural reform agenda. However, escaping from the ‘middle income trap’ (i.e. transitioning to the productivity-driven growth model) could prove challenging, especially in light of somewhat weaker checks and balances between Hungarian institutions.
What do you think about the Hungarian debt profile? Do you see any risks relating to mounting retail bond purchases and the expanding government security holdings of banks?
The level of public debt is still a rating weakness, it has declined over the last few years, but not as rapidly as it could have, given favorable macroeconomic conditions.
Yet we note improvements in the debt profile: the share of FX debt is only about 20% (vs 60% in 2010), non-residents hold some 35-36% of debt, effective interest rate has declined. Retail bonds are relatively short-term (especially if view against strong sovereign fundamental), but we understand that the government is trying to gradually extend their average maturity.“We believe that the opportunity to put public debt on a sharp downward trend offered by the current cyclical upturn might be missed," you wrote in your analysis on Friday . Do you think Hungary can have another shot at that in the following years?
Absent unexpected shocks, growth is likely to stay solid in 2019-20. This lays foundation for a more sizable fiscal adjustment, and we understand that the government does plan to reduce headline fiscal deficits in the medium-term. Whether this proves to be the case, remains to be seen. So far, the underlying fiscal stance has been quite procyclical. At the same time, a more decisive reduction in public debt is one of our upside rating triggers.
PM Viktor Orbán published his ‘demography action plan’ last week, a few days before your rating action. Were you able to take these planned measures into consideration before the rating upgrade?
The upgrade was a recognition of the improvement in fundamental rating factors: reasonable growth prospects, stronger and more resilient external profile of the economy, and a healthier banking system.
Front page photo by Emmanual Dunand / AFP
