Are you sure?

Hungary BoP position

Hungary's balance-of-payment position is now the best in Central-Europe, easing the risks from the large FX debt stock, London-based analysts said after a record €787 million current account surplus for Q1/2011 was announced by the central bank on Thursday.

Analysts at JP Morgan said that the Hungary "continues its transformation from a deep C/A deficit country to a C/A surplus country ... (and) this positive development mitigates the risk coming from large external debt". The C/A surplus reached 2.2% of GDP, which is "significant improvement" from the 7-8% of GDP C/A deficits seen ahead of the 2008 crisis.

"We look for the full-year current account surplus to moderate slightly to 1.8% of GDP on recovering domestic demand but to post a renewed rise in 2012 to 2.5% of GDP as exports from the automotive sector investments come on tap".

However, before becoming "excessively positive" about BoP developments, "we have to bear in mind that so called errors and omissions have widened to almost 3% of GDP .... thus, we can see some downward revision in the future, similarly as in (the) Czech (Republic in March) and Poland (on Wednesday)". Yet, the overall picture is likely to remain positive even after a potential revision, JP Morgan's City-based economists said.

They added that C/A surpluses mitigate the risks from large external debt, cumulated during the last decade, and represent "a good chance" that the country will be able to "grow out from the indebtedness".

In a separate comment, Morgan Stanley's economists said that currently "the Hungarian BoP (balance-of payment position) looks by far the best in Central Europe". While the flow story looks good, debt stocks "remain Hungary's Achilles heel". These will take years to unwind but "Hungary is on the right track".

However, given that the accumulated debt needs rolling over, access to funding and a healthy risk appetite which supports the HUF remain key for Hungary. This explains the NBH's focus on the external environment and "why we think the bank is very unlikely to cut rates as long as risk is fragile, no matter how benign the medium-term inflation story is perceived to be".

The combination of a domestic demand recession and strong external demand resulted in a "spectacular improvement" in the goods trade balance. As the pull from external demand weakens, the trade improvement should slow. That said, much of the move seems structural, not simply cyclical, Morgan Stanley's London-based economists stressed.