Employment and wages are likely to improve. Growth may slow but should continue, and inflation will creep up to a more acceptable level. These are some of the predictions that analysts gave to the Budapest Business Journal when we asked them to tell us about the year ahead.
Analysts are hoping that domestic demand can step up in 2016 to replace the boost EU-funded investments provided for the economy last year. It is estimated that EU funds generated as much a 6% of GDP in 2015, while this year their contribution will drop to about 2.5% (see box). Even though they predict domestic consumption will rise, analysts say the rate of increase in GDP should slow down this year. “We expect GDP to grow by 2.5%,” Gergely Suppan, chief analyst of TakarékBank told the BBJ. Erste analyst, Gergely Ürmössy said he expects a more significant slowdown, to 2.2%. Equilor’s estimate for growth this year was lowest of those we spoke to at 1.9%.
Of course, external threats can impact growth here, and analysts expressed concerns about fragile European growth, economic slowdown in China and the U.S. Federal Reserve’s rate hikes. The biggest worry is that these factors can take a bite out of the export market. “The European Central Bank used every possible tool to boost growth, from launching a bond purchase program to lowering interest rates below zero. Now it is up to the fiscal side to see what response it gives to the structural changes,” Erste’s Ürmössy said.
External factors, especially oil prices, are expected to have the biggest influence on the rate of inflation. “Ever more experts warn about potential deflation in Europe and in Hungary,” Mónika Kiss, head of research at Equilor Investment Ltd., told the BBJ. Bloomberg analysts estimate Hungary will have an average inflation rate of 2.1% in 2016, but Equilor forecasts a rate of 1.4% for the year, as it does not anticipate a significant rise in oil prices but instead foresees a further slide. Kiss noted that the weather can also have an impact: This year may see the most-extreme El Nino conditions on record, and that may hurt crops and cause food prices to rise worldwide. “Hungarian food exports can benefit from this, especially if this is coupled with a weaker forint,” Kiss said. In 2016, base effects – like the government-enforced cuts in household utility prices – are expected to have less of an impact on prices, while rising consumer demand is expected to provide some upside pressure. Since fuel prices account for 10% of the consumer basket, oil prices will have an underlying effect on inflation, which adds some uncertainty to any price predictions, Ürmössy noted. A weaker forint against the dollar could also have an impact, he said. While Erste expects inflation for 2015 to settle in at close to zero, Ürmössy projected that the rate will increase to 1.5% this year. “Excluding fuel, unprocessed food, administered and energy prices, the inflation in Hungary is at an acceptable level,” Ürmössy said.
With the 1% reduction in the national income tax, TakarékBank expects gross wages to grow by 4-4.5% this year. Given that it projects inflation at 2% in 2016, the wage hike would result in real wage growth of 3.5-4%. In fact the increase could be greater, said TakarékBank’s Suppan, citing several reasons: He noted that the 5.7% minimal wage hike could push wages upward, and that a severe shortage of professionals in certain fields could lead to salary increases. Furthermore, Suppan said, the government is planning to introduce more career path models, and these could increase public sector wages of some fields. He said TakarékBank projects an unemployment rate of about 6.5% this year, down from approximately 7% in 2015. “Communication indicates the government is trying to slightly change its public work scheme with the aim of enhancing education,” Suppan said. “In addition, the primary job market can further improve, creating new jobs.”
Regarding the government’s new homebuyers’ subsidy (CSOK), which promises grants of as much as HUF 10 million for families building homes, TakarékBank said it is making calculations of an impact in 2017, as the construction of new homes usually takes at least one-and-a-half years. Suppan expressed confidence that, together with the cut in VAT on home construction, this measure will help revive the sector. “The construction industry will sprint from a standing start. The development of residential parks in particular may explode: With a VAT level down from 27% to 5%, it will be profitable to develop.” Government loan subsidies are also expected to increase lending, as “banks will be more willing to lend as risks are lower”, he said. Given the lack of data on exactly who is eligible for the CSOK program, precise figures are hard to calculate, Ürmössy said. If the eligibility is broad, and the need for new homes actually doubled this year from the 8,000-10,000 built in previous years, it is still questionable whether the construction industry could keep up with the heightened demand, the expert said.
Though data is not yet finalized, experts agree that 2015 was a good year for the state budget. The government apparently outperformed its original deficit target of 2.4% of GDP, and it seems that the deficit will be more like 2%. The debt-to-GDP ratio is also expected to improve. Major changes in taxation will include a reduction in the special bank tax, which is expected to improve ties between the leadership and the banking sector, while improving the outlook for banks. Other sectoral taxes are expected to stay in place – including the tax on telecoms. The continuation of the telecoms tax, and the reduction of termination and roaming fees, hurt earning prospects for Magyar Telekom in the mid-term. In this situation, money managers have been recommending sales of shares in the blue chip.
Erste analysts expect Fitch to upgrade Hungary’s rating in the first half of 2016, which they say, may be followed by an upgrade by Moody’s and/or S&P. “Should this happen, Hungary will basically become investment grade, which could help strengthen the forint and lower government bond yields,” Ürmössy said. TakarékBank’s Suppan said he believes Fitch and Moody’s will rank Hungary as an investment-grade country this summer and fall.
When it comes to the base lending rate, analysts say it should remain at its current level of 1.35% for the coming months, but if the National Bank of Hungary (MNB) sees the need for stimulus, it has room to maneuver and could start cutting rates in April, Ürmössy said. According to Suppan, rate cuts are not the only tools the bank could use to stimulate the economy. “The central bank will use different tools, such as lowering the yields on long-term bonds, but those will likely come down eventually if Hungary’s rating improves,” he said. Regarding the base rate, a possible turning point may come in June, when Polish National Bank President Marek Belka is due to step down, according to Kiss of Equilor. Provided the Polish interest rate (standing at 1.5%) is cut, further easing is possible in Hungary as well, Kiss said.
Although the MNB is not directly intervening in the market to manage the value of the forint, it is not doing anything to stop the weakening of the national currency either, Kiss noted. That is why, despite the country’s improving external balance, low inflation, low budget deficit and possible sovereign debt upgrade, the forint will remain weaker against the euro in 2016, she said. Kiss predicted that the exchange rate will reach something like HUF 325 to the euro this year – but more than HUF 330 is unlikely because of the strong external balance position and the European Central Bank’s extended easing cycle. The Equilor analyst said she expects the EUR-USD rate to reach 1.05 within weeks, which would mean a further weakening of the forint against the U.S. dollar. Equlior’s estimate for 2016 is a rate of HUF 330 per dollar.
Analysts expect the MNB to continue pushing banks to purchase government bonds, but consumers are apparently also doing their part. Those with household savings have created significant demand for these bonds, both because they are buying the bonds directly and because they invest in pension schemes, insurance or investment funds. In an interview with Bloomberg, National Economy Minister Mihály Varga said Hungary plans to issue eurobonds this year, and the equivalent of €1 billion in FX bonds on international markets according to a December statement by the Government Debt Management Agency (ÁKK). The head of ÁKK, György Barcza, has said the share of FX-denominated debt could reach approximately 25% by 2017, but Equilor’s Kiss said she sees this as rather ambitious. According to Suppan of TakarékBank, issuing eurobonds makes sense for benchmarking reasons.
The BUX was the fourth best-performing stock market index in the world in 2015, mainly driven by the performance of OTP Bank and Richter, according to Equilor’s Kiss. She said the central bank is going to keep interest rates at record low levels, which provides a favorable environment for equities, because they can offer an attractive alternative to savings accounts. According to Equilor, the Budapest Stock Market’s performance in 2016 will be determined by two major factors. The first is the U.S. Fed’s tightening of interest rates, which should lead to a higher expected rate of return in stock valuation and a potential upgrade by credit rating agencies. The second is the moves of ratings agencies, because an upgrade of Hungary’s sovereign debt to investment grade would result in renewed interest in Hungarian stocks as well.