Economy 29 November 2023, 4:15pm

Outlook for agricultural companies in the Hungarian economy in 2024

Portfolio

The Hungarian economy is expected to grow by 3-4% next year, with an average inflation rate of 5-6%, according to the first Financing Roundtable of Portfolio's Agricultural Conference 2023, where bank leaders shared their thoughts on what lies ahead for the Hungarian economy and what interest rate prospects agricultural companies can expect. There was also a consensus among the experts that in the future, companies operating in the sector should also focus on the green transition and sustainability when deciding on financing issues. The second panel discussion with bank managers addressed the specific financing opportunities for agri-food companies in the near future.

Outlook on the Hungarian economy

The year 2024 could definitely be better for the Hungarian economy than this year, given the expected growth of the economy and the subsiding level of inflation, they agreed in the panel discussion.

Róbert Cselovszki, Deputy CEO of Erste Bank Hungary for Corporate and Financial Markets, said that after a slight decline this year, the Hungarian economy is expected to expand by 3.4% next year, with inflation at 5.4%. As for the exchange rate, they do not expect much change, with levels of EUR/HUF 385.

According to Anita Laurinyecz, director of UniCredit Bank Hungary, analysts expect a 0.5% contraction this year, followed by 3.3% GDP growth in 2024. In addition, the average annual inflation rate could be 6.6% next year, which could add up to a year-end euro exchange rate of 398 forints.

According to Balázs Szabó, Deputy CEO of CIB Bank, the bank's experts also project a stable EUR/HUF exchange rate. GDP growth in 2024 could be below 3%, while CIB expects inflation at 4.8%, he added.

According to Zsolt Takáts, CEO of Raiffeisen Bank, the growth rate of the Hungarian economy could be around 3% in 2024, while the average rate of inflation next year could be 5.8%. The EUR/HUF exchange rate is expected to be around 380 next year.

portfolio agrárszektor panelbeszélgetés — Photo: Márton Mónus/Portfolio

High interest rates are not everything

The next part of the discussion focused on the Hungarian interest rate outlook. According to bank executives, expectations for the Hungarian base rate range between 6% and 7%. UniCredit expects a benchmark rate of 5% by the end of 2025, while Raiffeisen Bank projects a base rate of 4.5-5.0% in 2026.

The most important question in the field of financing at the moment is how agricultural companies will replace the phase-out of subsidised loans.

Several banking experts agreed that euro-based lending could become more important in the future for the sector, especially for those with a natural euro hedging.

There was also a consensus among the panellists that high interest rates are only one element of the way lending activity in the sector is evolving. Interest expense has now risen to a noticeable level in the management of firms, especially when you add in the rising cost of energy and the pressure on wages. Taken together, this is no small task and challenge, according to the panelists.

Lending has not been dampened by banks, but by the high interest rates that customers have faced as a result of interest rate rises, said Anita Laurinyecz. She added that the focus of future financing should be on the green transition. She suggested that companies in the sector should move their business in this direction.

Róbert Cselovszki agreed, saying they are under external, proprietary pressure to comply with ESG and sustainability aspects of banking operations.

Funding issues

In the next roundtable, the invited experts expressed their views on the specific financing opportunities currently available on the Hungarian market for agricultural market players and the attractiveness of this sector for financing institutions and banks.

Dávid Hollósi, Managing Director of MBH Bank's Agri-Food Business Unit, said that based on his own experience, agricultural entrepreneurs in Western Hungary and Eastern Hungary have a completely different business approach, with companies in Western Hungary being more business-minded.

He pointed out that this reflects Western European influences: mass production is currently being outsourced from Europe, so the future for the Hungarian sector is not to produce raw materials and export them, he said. Hollósi also said that last year the price increases were passed on to the market, but sooner or later the Hungarian food industry's efficiency problems will come to the fore.

In response, László Krisán, CEO of SME lender KAVOSZ, pointed out that the price increases indeed reflected the pricing of food companies and this was reflected in inflation. He also stressed that credit is a prerequisite for economic growth, without it there is a credit crunch. There are certain levels of interest rates that are a concrete wall for an SME.

András Herczegh, Executive Director of the Agricultural Enterprise Credit Guarantee Foundation, pointed out that the value of guaranteed loans in the crop production sector has increased by 25% this year compared to 2022, while in the case of livestock breeding the amount is below last year's levels. This could be due to the significant investments made in the food and livestock sectors last year. Crop production has therefore seen a surge in bank financing so far this year, he said.

Zoltán Demeter, Head of K&H Group's Agricultural Business Unit, drew attention to the fact that sustainability issues will become much more prominent in livestock farming. This in turn foreshadows the need for new investments in this segment. But this will require good years for companies to build up the strength to invest, he said.

agrárszektor konferencia második finanszírozási panel — Photo: Márton Mónus/Portfolio

András Herczeg also mentioned during the discussion that the share of subsidised loans in this sector was 1% in 2011, but now it has reached 88%.

Krisán said that commercial financing should return to the market from the second half of next year as interest rates normalise. The attractiveness of a credit product is not only the interest rate, but also its terms and flexibility, he underlined.

As regards the banks' willingness to lend, he stressed that there is a difference between prudent lending and bringing lending to a screeching halt. Even if we cannot talk about a sudden stop in the case of lending in Hungary, banks are still characterised by increased prudence.

Dávid Hollósi said that in their banking experience, the agricultural sector, with the exception of the larger market players, cannot tolerate a loan interest rate above 10%. He also provided detailed data: this year, 6,100 loan contracts were signed in the agri-food sector, with a total value of HUF 310 billion, and the average value of the loans was HUF 50 million.

In response to a question, Zoltán Demeter also underlined that banks do not examine in detail the creditworthiness and bankability of a company operating in the sector just for the sake of bullying, but because it basically protects depositors' money and analyses and manages risk. He noted that with a 2-3% bank lending margin, there is not room for many credit defaults if the bank wants the lending model to be viable and sustainable.