Report: Outlook for foreign investments in Hungary optimistic

Although Poland remains the region’s strongest economy, the country’s newly elected right-wing government could push it off the investment map as it is currently being investigated by the EC regarding its anti-democratic policies, Reuters said.

In the recent past, Hungary frequently spooked investors as a result of its disputes with the EC on revisions to the country’s media law, the state’s increasing influence over the Constitutional Court and extraordinary taxes levied on retailers, telecoms and banks. The lack of legal predictability is often cited by ratings agencies as a reason for not upgrading Hungaryʼs sovereign debt rating.

“Poland and Hungary are the biggest draws for investors in Central and Eastern Europe (CEE), with the largest, most liquid, fixed-income and currency markets,” Reuters said, adding that “spreads between Hungarian and Polish bond yields narrowed significantly in 2015” and analysts expect this to continue this year as a result of “political noise”, Reuters said, according to Commerzbank analyst Simon Quijano-Evans.

The National Bank of Hungary (MNB) has also been instrumental in boosting the economy by lowering the bank levy for 2016, and phasing out its two-week deposit facility thereby decreasing bond yields and improving investor sentiment, Reuters added. The MNB has also reduced its main benchmark interest rate to 1.35%, its lowest rate to date.

The country’s 2015 budget deficit has also dropped to 2% of economic output and is likely to continue to decline for the next three years, the news agency reported.

UniCredit analysts expect Hungarian bonds to outperform regional peers this year, following central bank measures, and this could prevent the negative impact on the forint from further bond outflows, according to Reuters.

“All in all, I think we wonʼt see much inflow into CEE, we will rather see outflows, and the question is how stable markets would stay,” Eszter Gargyan of Citigroup was quoted as telling Reuters in her somewhat cautious outlook. “We could perhaps suffer from this outflow less than Poland since foreign investorsʼ holdings in the Hungarian local bond markets already fell by 20% in 2015.”