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Brexit bodes ill for economic outlook

All CEE countries are expected to feel a heavy impact, and Hungary is deemed especially vulnerable.

Prime Minister Viktor Orbán, seated next to press aide Bertalan Havasi, speaks during a press conference in Brussels on June 29, held during a break in discussions at a summit to address the crisis caused by the Brexit vote. Orbán said he will seek to address concerns of Hungarians working in the U.K. (MTI Photo: Balázs Szecsődi)

Although Hungary successfully weathered the first wave of shock generated by Great Britain voting to leave the European Union, medium- and longer-term indirect effects are still threatening. 

Hungary and Poland “have the most at stake from this decision” among emerging markets, Morgan Stanley wrote in a note before the vote, as both countries are dependent on trade with the U.K. and Europe and also receive financial support from the EU. Without the billions that the U.K. contributes to the EU budget annually, the amount of funding Hungary and Poland receive is likely to be reduced. According to estimates by Morgan Stanley, Brexit could hit Poland’s economic growth by 0.5 of a percentage point next year, while Hungary might suffer an even bigger setback. The bank forecast some 0.9 percentage point fallback in its economic growth in 2017, so the country’s GDP growth will be around 2% next year, not even close to the 3% the Hungarian government expects.

Morgan Stanley also mentioned the much-awaited upgrade from Moody’s Investors Services, noting that although it is still very likely the ratings agency will upgrade Hungary to the investment category in November, more challenging fiscal numbers could derail the upward rating momentum.

As for Hungary’s monetary policy, Morgan Stanley wrote that although the National Bank of Hungary (MNB) had just announced the end of its latest easing cycle, if economic growth slows down, it does not rule out that another cut will take place this year yet.

JP Morgan basically has the same worries about the region’s open economies as the other bank, but in addition to Hungary, it highlights Czech Republic as one of the countries most affected by Brexit. However, JP Morgan thinks that the MNB will keep its current 0.9% base rate on hold until the end of 2017, but it says that the central bank will implement monetary easing in the form of BUBOR (Budapest Inter-Bank Offered Rate) intervention quantitative easing-type measures.

The London-based investment bank’s latest forecast downgrades Hungary’s expected economic growth in 2016 to 2.4% from the previous 3%, seeing the government’s 3.1% target as increasingly unlikely.

Hungary’s GKI Economic Research Institute has also lowered its GDP growth forecast for this year from 2.3% to 2%, but as it writes in its latest forecast, even a lower growth rate is feasible. The fall of investments may be deeper than predicted earlier, and might reach about 8%, the research institute added.

No need to change budget

National Economy Minister Mihály Varga said prior to the vote that the exit of Great Britain from the European Union could slow the speed of Hungarian GDP growth by 0.3-0.4 of a percentage point. In an interview with business daily Világgazdaság after the vote, Varga was quick to note that no amendment will be required to this or next year’s budget due to the Brexit, and said that the Brits leaving the EU will have no short-term impact on Hungary’s economy. He added, however, that the Hungarian budget will be affected by the fact that the U.K. will no longer contribute to the common EU budget. Currently Hungary is paying HUF 310 billion a year to the EU and has access to funds of about HUF 2 trillion.

Varga also said that the ministry is working on a new incentive package for companies seeking to leave the U.K. and relocate to a EU member state. He mentioned car makers and finance firms among possible companies to move.

The MNB also reacted to the vote in a note, saying that “uncertainty around the future relationship between the United Kingdom and the European Union has led to turbulence in money and capital markets. Rises in risk indices have caused volatility in Hungarian asset prices as well; however, the magnitude of this is not considered excessive in international comparison.” The MNB emphasized that Hungary’s vulnerability had decreased in recent years, significantly reducing the risks associated with the country’s economy,

Cumulative shock

Morgan Stanley estimates that the Central and Eastern European region would be disproportionately affected by Brexit via the trade channel. The cumulative hit to CEE GDP from a trade shock could be around 0.5 of a percentage point of GDP by end-2017 in a medium stress scenario, and almost three times as large in a high stress scenario, Morgan Stanley said. This translates to 0.6 of a percentage point less GDP growth this year and 2.5 percentage points less next year should the worst case scenario come to pass.

As for the EU as a whole, a few days after the vote, when shockwaves started to fade, European Central Bank (ECB) president Mario Draghi said that Brexit’s impact on European economies might be smaller than first thought. Based on calculations by EU financial institutions, negative effects will count to 0.3-0.5% of the EU’s GDP, and ECB vice president Vitor Constancio explicitly said that there would be no recession in the eurozone. In the U.K., however, significantly slower growth, possibly even a recession, is expected.

No more commuting doctors?

For longer term impacts, the future of the several hundreds of thousands of Hungarians working in the United Kingdom becomes questionable too. While U.K. Prime Minister David Cameron said after the vote that foreigners already working in the country would have the same status as long as he remained in office, he also announced his resignation as of October of this year. So now it seems that the legal status of foreign workers will not change in the coming months, but there is little to know about what comes from this fall. Cameron has stated in the House of Commons that the rights of EU citizens living in the U.K. (and U.K. citizens living in Europe) will be protected as long as Britain remains in the Union. Most experts say the process of leaving will take two years from the moment Britain invokes Article 50 of the Lisbon Treaty, and Cameron has said he will leave that to his immediate successor. In theory, at least, this implies that EU citizens’ rights are safeguarded for a couple of years.

Calculations on how many Hungarians work in the U.K. vary, from the Economics Ministry’s figure of 300,000 in 2014, to the Central Statistical Office estimate of 75,000 in the beginning of 2014.