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2013: A look ahead

Telco

Predictability probably tops every decision maker’s wish list these days, yet the economic and business environment in Hungary (and elsewhere in the world, for that matter), is less predictable than ever. The Budapest Business Journal attempts to give a helping hand by featuring snapshot forecasts of seven of the most important sectors of the Hungarian economy.

Retail

The economic recession of 2012 weighed heavily on households and, consequently, the retail industry with all signs pointing to the situation getting worse in 2013 before it could get any better.

The latest figures from the Central Statistics Office (KSH) show that the sector’s turnover slumped 3.7% in annual terms in October along with an aggregated 1.8% year-on-year drop from the first 10 months of 2012.

Households are facing increasing difficulties in shopping, especially when it comes to staple products like food, with some product groups drifting into unaffordable regions for a growing number of people.

While the government previously voiced high hopes that the overall stabilization of the economy would lead to the reappearance of household spending as they go ahead with previously postponed purchases, any such expectations may well be swept away by the costs of basic goods.

A poor 2012 harvest and rising import costs could boost the price of potatoes by around 150% compared to early 2011, and dairy goods are also set to increase by up to 20%, producers said.

Changes to the regulatory environment, such as the monopolization of selling tobacco products or the mandatory installation of modern cash registers so the tax authorities can fully monitor commerce are all aspects that are set to have adverse effects on the industry, not to mention the 5.2% consumer price inflation registered in November.

The overall situation has already prompted large players like Cora and DIY chain Bricostore to give up on Hungary.

Real estate

Participants of Hungary’s real estate market are tentatively optimistic but don’t realistically see a major upswing for the industry this year following the standstill of 2012.

The records of the Budapest Research Forum show there were no new completions in either the office or industrial segments in the first three quarters of 2012 and only one newcomer late December. Vacancy in both segments continues to hover around 20%, largely unchanged since early 2010.

The residential sector is likewise in hibernation, with the overall market edging lower if going anywhere at all. Housing broker Otthon Centrum expects that 2012 will have seen around 90,000 residential transactions, the same as in 2011, with newly built properties accounting for a mere 5% of the overall turnover. OC is hopeful that changes in duties and other forms of central incentives will lead to a small boost this year.

Given the lack of new developments, the construction industry is in free fall, though plunging somewhat slower than in 2011. The latest figures from the KSH show that in the period between January and October, the construction sector’s output dropped 4.2% in annual terms, with some individual months in 2012 seeing slumps of around 15% compared to the corresponding month of 2011.

The stasis of the property industry is, ironically, also the main basis for any optimism: this is a low that is holding, meaning (theoretically) it can only get better from here. Still, the real estate business is highly susceptible to changes in overall market confidence. The prolonged crisis of the euro zone, compounded by the often-haphazard policymaking practices of the government, isn’t conducive to large improvements.

Banking sector

Hungary’s banking sector faces another challenging year in 2013 due to increasing economic risks and deteriorating portfolios.

Both Fitch Ratings and Standard and Poor’s expect the Hungarian banking sector to post its third consecutive annual loss in 2012 and remain in the red this year. Hungarian banks reported combined after tax losses of HUF 282.4 billion in 2011 compared to HUF 17.3 billion losses in the previous year, according to the ‘Golden Book’ published by financial authority PSzÁF in September 2012. In 2009, the banking sector was still profitable with after tax profits of HUF 211.3 billion.

Equilor analyst Ákos Kuti does not expect the government to add further burdens on the banking sector, which is already struggling with the effects of the early repayment scheme for FX mortgage loans and the no longer extraordinary banking tax, as well as the introduction of the financial transaction tax as of January 2013. He believes that a lot will depend on any new measures to be implemented by the new head of the National Bank of Hungary, due to be appointed in March. Kuti does not foresee any exits, at least by Hungary’s biggest banks, this year, but does not expect new entries, either.

Corporate and retail lending is expected to further decline in 2013. The deterioration of the lending portfolios is likely to continue in 2013, although at a slower pace.

One of the most important tasks in the new year will be restoring confidence between the banking sector and the government, as well as between Hungarian banks and clients, because these are prerequisites for normal business in the sector, acting chairman of the Hungarian Banking Association Dániel Gyuris told state news agency MTI.

Car industry

The worst years of the crisis might well be over for the auto industry, but there is still a long way to go until full recovery, the latest sales and production figures would suggest. But while market growth may be slow, car manufacturing has been an esteemed and privileged area of the Hungarian industry, and these tendencies are likely to continue over the course of the upcoming years. As professionals often highlight, in an environment where major market players are forced to contribute to the state’s efforts aimed at mitigating the impact of the crisis (with an extra tax levied on the bank and telco sectors, as well as mandatory price cuts in the energy industry), the auto sector has remained completely isolated from all such burdens.

The completion of Daimler AG’s Kecskemét factory in March 2012 was an important milestone not only for the car industry but for the entire Hungarian economy as well. Unsurprisingly, Daimler AG was among the first companies to be offered a “strategic partnership” by the government. The agreement, signed in November 2012, is expected to be a foundation of a “broader industrial cooperation”, according to the government, but no specific details were revealed. Daimler AG was also named “workplace-creator of the year” by renowned business weekly Figyelő in its yearly TOP 200 list.

Another strategic partnership agreement was signed with Suzuki’s Hungarian branch, Magyar Suzuki Zrt, acknowledging the importance of the Esztergom factory, and according to government-friendly sources, negotiations are also well underway between the government and Győr-based Audi. The company had an eventful 2012: on top of finishing a record year with 1.9 million manufactured engines and recruiting 1,500 additional people on top of its then headcount of 7,500, it agreed with the municipality of Győr to take on a strategic role in the renewal of the city’s airport. The company was also busy constructing its new factory unit, an investment of some EUR 900 million. Due to be completed in 2013, the unit will start production of hatchback A3 models later this year.

Energy

In 2013, the country’s energy outlook will be characterized by stagnation and declines, reflecting the shape of the economy. The crisis tax, the windfall tax, and strict price regulation all hinder activity in the sector; there are no new investments and developments except beyond the existing ones, says a survey by GKI Energiakutató Kft (GKI) conducted in 2012. Though there have been several policy changes in legislation, no sign of steps towards the goals outlined can be observed.

In 2012, energy demand in all sectors stagnated: a trend not expected to alter this year.

In the energy portfolio/mix, the share of hydrocarbons will continue to decrease. As for the origin of resources, domestically produced energy will keep on decreasing while imports will rise.

The downward trend in electricity consumption that started in 2012 may stop this year, leading to an average 0-0.5% growth (or rather stagnation) for the two years, said Miklós Hegedűs, analyst of GKI. The volume and share of imported electricity (20% in 2012), which increased considerably last year as a result of more favorable prices available in some neighboring countries, will likely stop.

Natural gas consumption is expected to stagnate or slightly decline in 2012-2013. With no savings possible, household consumption will probably not change; the demand for gas for electricity will decrease, though demand in other sectors (industry, chemicals) will rise.

On the oil and oil products market GKI has only indirect information. Demand for fuels will continue to decrease further in 2013. In 2012, a stronger decline took place: around 5% in petrol consumption and 3% for gasoil. 

Renewable energy based electricity generation in 2012-13 is expected to decline further. Investors are thought to be waiting for the new feed-in tariffs (METÁR).

Insurance

Lean years didn’t come to an end for the insurance industry in 2012: both the life and non-life insurance sectors had to face decreasing sales, according to the latest figures from insurers’ association MABISz from Q3 2012.

The early repayment scheme for mortgage loans caused heavy losses for the sector, as a lot of people had cashed in their life insurance to pay back their mortgages under very favorable conditions. 
And this year is not expected to be any better, with the introduction of an insurance tax in from the January 1.

The increased expenses related to the new burden will be passed over to customers; however, insurers might not be able to do so in some segments due to the fierce competition. The new tax could thus contribute to the already visible trend of consolidation on the insurers’ market and to the exit of some market players. 


New cars sales fell to a quarter of recent years, having a huge negative impact on Casco insurance revenues. In parallel, tough competition has driven profit margins down on the third party insurance market. 
As the real estate market stagnates in the country, growth on the home insurance market has lost momentum.

At the end of last year, the new “Gender-directive” passed by the European Union requires the dropping of all pricing differences between insurance for men and women. That heavily affects the life and accident insurance market, as up to now women could get better insurance fees than men, based on their more advantageous statistical indicators, not least on life expectancy.

IT/Telco

While experts on world wide IT markets are foreseeing huge clouds, myriads of mobile devices, a tablet revolution and the slow demise of personal computers, the Hungarian market started the year with a much more pragmatic problem.

Getronics, the winner of the e-toll tender, the biggest IT public procurement in recent years, didn’t sign the contract with the state on the appointed date. The e-toll – proportional to traveled distance – should start on July 1 2013, the budget estimates HUF 75 billion in revenue from the road toll in Q2 2013. T-Systems, the other valid bidder, publicly doubts that Getronics can comply with the required deadlines and implement the system with the necessary technical content from its winning bid of HUF 34.89 billion.

Regarding the telco sector, the tax burden of telecom operators on fixed and mobile telephone conversations grows by around 80%. However, double taxation came to an end, as sectoral players are no longer required to pay the special “crisis tax”. This had been estimated at HUF 61 billion for 2012.

The tax rate of HUF 2 per call and SMS/MMS hasn’t changed, however, but the upper limit has increased to HUF 700 from HUF 400 in the case of retail clients, and to HUF 2,500 from HUF 1,400 for corporate clients.

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