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Economic growth becomes more balanced

Although Moody’s left the country’s rating in junk territory for now, the GDP growth figures show that it is more than just one sector that is doing well. While growth here is above the EU average, our CEE neighbors are doing even better.

The country’s economic performance appears to be improving and growth is becoming more balanced, even if ratings agency Moody’s is not yet ready to acknowledge this – though the neighbors are doing even better. 

Moody’s Investors Service left Hungary’s sovereign debt rating one notch below investment grade on March 4. Although the National Economy Ministry has been saying for a while that Hungary, based on its economic performance, deserves an upgrade, the decision by Moody’s did not surprise domestic or foreign analysts, as it had only changed its outlook on Hungary’s rating to positive on November 6, 2015, and rating agencies usually wait for a longer period of time between the outlook and the actual upgrade.

Analysts expect the upgrade to become a reality in the second half of the year – Moody’s will scrutinize the country again on July 8, and then again on November 4 – and the ministry says that it expects at least two of the three largest rating agencies to elevate Hungary back to an investment grade category this year.

“Hungary’s economic achievements warrant an upgrade in 2016. Falling state debt, low fiscal deficit, subdued inflation and economic growth figures all confirm that the Hungarian reforms are working. The rate of bank tax has been reduced,” the Economy Ministry said in response to Moody’s decision to leave the country in the junk category for now.

The statement also noted that Hungarian economic policy is predictable and the country’s vulnerability to financial shocks has been mitigated.

 But while the macro data is indeed quite good, there are other, so called “soft” factors that probably contributed to Moody’s keeping Hungary’s rating where it was. Such factors include a recent decision by the government that allows budget modification without involving parliament, and the often-changed implementation date of the zero-balanced budget.

“Hungary should do more in order to create an investor-friendly and predictable legal environment, and address the fact that Hungary’s state debt is significantly higher than that of our regional peers,” Zoltán Török, senior analyst at Raiffeisen Bank said, adding that he expects Hungary to get back to the investment grade category with all three rating agencies by the end of the year.

Growth above EU-average, but below neighbors

Just a few days after Moody’s didn’t take action on the country’s sovereign rating, GDP data for the fourth-quarter of the past year came out. Hungary’s gross domestic product grew by 3.1% year-on-year in Q4, according to the second estimate by the Central Statistical Office (KSH), which is the same as the data in the preliminary reading. Quarter-on-quarter change came to 1%. The 3.1% Q4 growth comes after a 2.4% output increase in the third-quarter, and the 1% quarter-on-quarter increase is the highest figure in the last 18 months.

The most important thing to note about the year-end data is that growth was more balanced than ever before; all except for two industries – agriculture and construction – contributed to the growth.

Detailed figures reveal that the role of the state was rather big in the acceleration of the GDP growth. On the production side, manufacturing performed better, and after a contraction in Q3, construction also expanded a bit, while the contraction in the agriculture industry become smaller.

As for the structure of consumption, actual final consumption of the government grew remarkably at the end of the year, due to the increased elbowroom in spending provided by the good figures in the budget. Investments also increased, mainly because of the accelerated absorption of European Union funds at the end of the year. Household consumption also grew, due to the low inflation rate and rising real wages.

Hungary did much better than the EU average, but its regional peers outperformed the country. Seasonally adjusted GDP rose by 1.6% in the eurozone and by 1.8% in the EU compared to the same period of the previous year, Eurostat data shows. Annual average GDP growth in the EU was 1.8%, versus 2.9% in Hungary, which posted the tenth highest average growth figure of the 28 member states last year. In the Central and Eastern European region, Czech Republic posted a 4.3% GDP growth for the last quarter of 2015, while growth in Romania was at 3.8%, and reached 3.6% in Slovakia and Poland.

The European Commission, in its latest country report, underlines Hungary’s balanced, albeit modest, growth path. The report mentions that the Hungarian economy has been on a stable growth path, household consumption has grown, the labor market has recovered, the government budget deficit has declined and the amount of general government debt has also been edging down, while the country’s net external position has improved. It also notes that Hungary has made progress in the implementation of country-specific recommendations issued in 2015.

Debt decreased, inflation slowed

With the revised GDP data for the fourth-quarter of last year, it turned out that Hungary’s public debt ratio was 75.3% at the end of last year, down from 76.2% at the end of 2014. Inflation data for February was also released in the first week of March, showing that the consumer price index in Hungary had dropped to 0.3% on a year-on-year basis in February, from 0.9% in January. Core inflation slowed to 1.4% y.o.y. from 1.5%.

The end-February budget balance had a HUF 14.8 billion surplus. The central state budget posted HUF 63.7 bln deficit in January-February.

Economy Minister Mihály Varga noted that the end-February budget surplus was a historic achievement, as the balance had never been positive at the end of the second month in all the time that monthly data has been recorded.

As detailed data shows, tax revenues in the first two months of the year were about HUF 132 bln more than in the same period of 2015; every key tax type contributed to the increase, including personal income tax, value added tax, the social contribution tax and corporate income tax.

Numbers to watch in the coming weeks

After several busy weeks in terms of macro data, the upcoming period will be more relaxed. Construction figures for January will come out on March 16, followed by detailed earnings figures, also for January, on March 18, and the second estimate of retail trade for January on March 23. As for non-domestic events, all eyes will be on the March 10 rate-setting meeting of the European Central Bank, where analysts expect a moderate cut.