Economy 27 June 2019, 11:52am

Is Hungary really such a great success story?

Portfolio

It is easy to point out that economic divergences, structural characteristics and vulnerability, particularly to capital flows, can vary widely across countries and therefore that the EM world is not homogeneous. There are differences from one country to another in respect of economic growth, inflation, external trade, energy dependence, the leeway in terms of monetary policy, etc., which lead to different extents of vulnerability, according to a research note by Amundi. But where is Hungary placed on this particular world map?

Investors often lump together semi-developed economies that are theoretically capable of rapid growth; these include Asian, African or Eastern European countries. This emerging markets group raises the interest of the same group of investors therefore certain market fundamentals tend to behave similarly despite the huge geographical distances. Yet, these countries are in extremely different economic situations. Experts at fund management company Amundi examined how vulnerable these countries are.

We need to be clear about the fact that very few countries can achieve rapid GDP growth while their balance remains intact. The Slovakian economy was able to boost its output significantly while retaining its balance. Hungary’s growth is not different from the average of emerging economies, but the basic balance (FDI, current account) currently shows one of the greatest surpluses. Only Bulgaria and the Czech Republic’s balance position is better, but their growth was not that robust as in Hungary.

China, India or even Turkey managed to achieve higher GDP growth rates than most countries while their balance indicators worsened. Brazil and Argentina could be in the worst positions. Their growth rates are behind the regional average and they are struggling with massive balance issues (i.e. they should shore up inward capital flows amidst significant adjustment needs).

Amundi also put the spot light on vulnerability factors from the aspect of public financing. At the end of 2018, we identified two groups (see graph below):

The first (on the left) is composed of countries with healthy public finances. Two sub-groups can be identified: some countries have an excess of savings (eg, Saudi Arabia, Russia, China, Taiwan) and some have in common being dependent on external capital flows (eg, Hungary, Czech Republic, Croatia). These two sub-groups have a strong regional component: one of the two is linked to Asia, the other is linked to Europe.
The second (on the right) is composed of countries presenting vulnerabilities and higher inflation rates. This group is highly diversified: it includes European countries (Romania, Turkey), Asian countries (Philippines, India, Indonesia), Africa (South Africa) and countries in Latin America (Brazil, Peru, Chile, Colombia) and Central America (Mexico). Note that in this group, Argentina needs to be treated separately, as it is not similar to any other country at the moment.

This typology shows several interesting things:

The indices (benchmarks) do not reflect any economic reality;
The regional angle cannot be totally suppressed from investment approaches, but it gives a very partial picture of the underlying reality (made up of political, geopolitical, economic and financial factors);
It shows how close countries are economically and financially, regardless of the region in which they are located, which gives a clear idea of the risks of contagion at all times;
All BRICS are located in different sub-groups.

Although Hungary is in the ‘healthy group’, it is greatly dependent on external capital flows, along with Bulgaria, Croatia, the Czech Republic, and Poland. In the CEE region, only Romania belongs to the group of vulnerable economies in this respect.

The vulnerability index used in Amundi’s study (totalling 22 countries) shows a different picture, It is made up of three components: balance of payments, ‘liquidity’ and external vulnerability indicators, on the basis of which Hungary is not ranked so high. At the end of last year, it was on the list of vulnerable countries.

The assessment by Amundi will probably be contested by many, considering that the vulnerability of the Hungarian economy improved greatly over the last few years, according to all kinds of evaluations. A different approach by Amundi paints a lot more favourable picture of risks to Hungary. The analysts looked at the harmony between credit ratings and CDS spreads. The sovereign debt ratings of most CEE countries largely match the market’s judgement therefore the market perception of Hungary needs to improve greatly for large credit rating agencies to place the country’s credit rating several notches higher.