In presenting its latest analysis, Equilor said Hungary’s economic outlook is negatively impacted by the struggling German industrial sector, with a projected GDP growth of only 1.8% this year. The Hungarian forint is expected to remain stable, with the euro trading at around HUF 395 at year-end. The firm notes that uncertainties surrounding the U.S. economy, primarily due to what seems sure to be a highly contested presidential election this fall, will affect Hungary indirectly.
Equilor views the forint exchange rate as stable and anticipates growth in the Hungarian economy next year. The domestic stock market is seen as undervalued, while international markets are less so. Gergely Muhi, chief analyst at Equilor, highlighted that the U.S. presidential election is the most critical factor influencing the economy in the near future. The race is extremely tight, with polls within the margin of error and a handful of battleground states likely to decide the outcome.
Both presidential candidates aim to reduce inflation, although not much remains to be done on this front since it is already nearing target levels. Trump seeks greater control over the Federal Reserve, which could lead to a significant fiscal deficit. Over a decade, his policies could add USD 4.5 trillion to the deficit, compared to Harris’ projected USD 1.4 tln.
Many promises, however, are unlikely to materialize due to a divided House of Representatives. The U.S. economy is growing at around 2%, but downside risks remain, including high consumer credit reliance and the end of COVID-era financial support, Equilor says.
The U.S. economy is cooling due to monetary tightening, making a rate-cutting cycle more urgent, potentially starting soon. The market expects a 110-basis point cut this year, but Equilor predicts a more modest 75 basis points. There may also be a reduction or halt in the buyback of uncollateralized money due to shrinking liquidity in the U.S. banking system.
In Europe, Germany’s manufacturing sector is faltering, while southern countries, particularly those reliant on tourism, are growing. The Eurozone has seen two rate cuts, with another expected this year, and a reduction to 2.25% in four steps next year.
The German market is critical for Hungary due to the latter’s high dependency, which is evident in the lack of a rapid economic rebound and weaker consumer spending. Equilor forecasts 1.6% growth for Hungary this year, contingent on increased consumer spending, which has been delayed as households remain cautious due to rising costs. The budget deficit has increased to 4.5%, with further adjustments needed. Next year’s budget is expected in November, potentially reducing uncertainty.
The National Bank of Hungary (MNB) has room for a rate cut, with the market expecting a 75-basis point reduction this year. Equilor, once again, is predicting a more conservative 50 basis points, resulting in a 6.25% rate by year-end. The rate could decline further next year, but it is hard to predict by how much. Apart from anything else, a change in the MNB governor is due in March. After pausing the easing cycle in August, the national bank reduced the base rate by 25 basis points to 6.5% on Sep. 24, which was in line with projections. Actions by major central banks, particularly the Fed, will be crucial to the direction of the future path.
The inflation target might be met next year, with consumer spending picking up and national energy bills remaining favorable. Lower interest rates will reduce public debt servicing costs. The balance of payments showed a strong performance early in the year but decreased over the summer. New production capacities next year should boost exports.
EU funds are a decisive factor; many previously blocked funds are expected to reach businesses, but EUR 32.5 billion remains blocked. Limited time is available for utilization, risking a EUR 1 bln loss this year if no agreement is reached. Major credit rating agencies are unlikely to change Hungary’s rating, but vigilance is needed to prevent deterioration. Economic growth is forecasted at 3.5% next year, with inflation at 3.8% and a fiscal deficit of 4.1%, according to Equilor.
A significant rally has occurred in stock markets, driven mainly by seven major tech stocks, while others in the S&P 500 index have not shown similar gains. The tech rally seems to be losing momentum, partly due to the rapid closure of Japanese carry trade positions. The Bank of Japan is inclined to tighten monetary policy, reducing the significant interest rate differential and diminishing the yen’s role as a funding currency.
The Budapest Stock Exchange (BSE) is one of the best-performing stock markets this year due to low valuations and the gradual pricing out of negative news. Of Hungary’s four blue-chip shares, 70% of OTP Bank’s profits come from abroad, with stable profits and potential for further share buybacks. MOL, meanwhile, faces challenges with declining refinery margins and rising windfall taxes. Richter’s acquisitions have expanded its portfolio, and inflationary fee adjustments have boosted Telekom’s results.
Szilárd Buró, head of financial innovation at Equilor, discussed the outlook for the forint. The exchange rate has approached the HUF 400 per euro level but has not crossed it. Risks remain, including budget issues, credit ratings, and EU funds, though conditions could strengthen the forint. The MNB remains cautious, as indicated by the 25 basis points cut in September, and that will likely be enough to keep the rate below HUF 400 per euro this year.
Buró emphasized the importance of the Japanese yen: the country’s monetary policy is changing fundamentally, moving away from its ultra-loose policy, reversing the weakening trend of the yen. The shrinking interest rate differential between the dollar and yen diminishes the latter’s role as a funding currency.
Due to weaker Chinese demand, oil prices have fallen below USD 70 per barrel for Brent crude. OPEC is struggling to maintain a USD 75 price level as non-OPEC producers increase exports. Gold prices are rising, driven by falling interest rates, substantial central bank purchases (it was announced on Oct. 1 that the MNB had decided to increase the gold reserve from 94.5 tonnes to 110 tonnes), and increased investor confidence in exchange-traded funds, with room for further gains before any significant correction.
This article was first published in the Budapest Business Journal print issue of October 4, 2024.
Producing journalism that is worthy of the name is a costly business. For over 30 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.
