Analysts see rising forex loan costs slow GDP growth

Higher repayments on foreign currency-denominated loans caused by the firming Swiss franc could slow Hungary's GDP growth by three-quarter of a percentage point in the next two quarters, according to analysts at JP Morgan.

The emerging market analysts based in London noted that Hungarian households with Swiss franc-denominated mortgage loans ─ earlier the most popular lending product in the country ─ have seen their repayments rise 55% since the end of 2008. Annual interest and principal due on these loans is now equivalent to 1.7% of Hungary's GDP, they added.

The analysts put Hungary's GDP growth for 2011 at just 2.1%, well under the 3.1% government projection.

Parliament approved in June legislation that aims to assist temporarily Hungarians with foreign currency-denominated mortgage loans. The legislation fixes the exchange rates on repayments for borrowers that avail of the program for a period of 36 months but no longer than the end of 2014. The rate for Swiss franc-denominated loans is set at 180 forints to the franc.

The forint traded at about 251 to the franc in the afternoon on Friday.

Borrowers will have to pay back the difference between the set exchange rates and market rates when the package expires.

The JP Morgan analysts said about 60pc of eligible Hungarian borrowers are likely to avail of the assistance, freeing up household income equivalent to 0.4pc of GDP. How much of this borrowers will spend remains in question as households know well their repayments will grow later, creating an incentive to make savings.

Emerging market analysts at Morgan Stanley expect the "vast majority" of eligible Hungarian borrowers to join the assistance program, freeing up household income equivalent to 0.5% of GDP. Households will probably put this extra money into savings in anticipation of higher repayments later, they added.