Report Summary
Manufacturing Continues To Drive Export Growth A spring 2007 Eurobarometer pan-EU report shows domestic confidence in the economy is lower in Hungary than in any other member state or candidate country. Although differently phrased questions were asked, this was a marked deterioration on spring 2006 and could have knock-on effects on both economic and political risk.
Hungary's gross industrial output grew by 8% y-o-y during the first five months of 2007, with industrial export sales rising by 15.2% y-o-y during the same period, bringing total industrial export sales to HUF5,108.3bn. The main driver of industrial output growth remained the manufacturing industry, although it grew more moderately in May than in April, at 3.2% y-o-y, down from an earlier 11.9%.
Manufacture of electrical and optical equipment, the largest manufacturing export sector, posted export growth of 13.1% in May. Similarly, exports of transport equipment, which account for over a quarter of manufacturing exports, rose by 10.4% y-o-y during the same period. Together, these two subsections of the manufacturing sector accounted for almost two thirds of merchandise export sales.
The continued strong performance of the industrial sector, manufacturing in particular, is a key driver of export growth for the Hungarian economy and is set to increase by almost 15% this year. As such, we are forecasting Hungary to post its first trade surplus in at least a decade of about US$300mn. Exports of machinery and transport equipment and manufacturing goods accounted for 62.4% and 26.9% of total Q107 merchandise exports, respectively. Strong export growth is particularly impressive, given the recent appreciation of the Hungarian forint. The unit strengthened by some 12.3% against the euro since last July to HUF250.00/EUR in March and headed further towards its key level at HUF245.00/EUR in July.
While imports remain robust, exports of merchandise goods continue their stellar growth. We attribute this to the strong economic performance of Hungary's main trading partner Germany, which is expected to grow by over 2% this year. Hungary's trade with Germany produced a trade surplus of about US$427mn in Q107 alone. This will go a long way in bringing down the country's current account deficit to an estimated 4.1% of GDP this year, compared to 5.7% of GDP in 2006.
The Commercial Banking Sector Many of the hard numbers that BMI has collated from Hungary's commercial banking sector indicate that the banks - and their customers - had already been responding to the challenging and potentially uncertain economic environment facing them in the coming 12 months. Nonetheless the loan/deposit ratio, which was already high compared to neighbours such as Poland, Slovakia and the Czech Republic, continues to show a rising trend at 120.6%.
In short, it appears that Hungary's bankers have been fairly cautious for some time. Collectively, they have done (a lot) more to recycle deposits as loans to the non-bank sector than have their counterparts in other CEE countries, but there remains a danger of engaging in a reckless lending spree. We also derive comfort from the fact that most of Hungary's commercial banking sector is one way or another, in the hands of very large foreign banking groups. The main exception - OTP - would probably be able to exploit its links with the Hungarian government in the event of a crisis.
We would suggest that the Hungarian banks' links to well-capitalised 'big brothers' are reflected in the structure of their balance sheets. At the end of December 2006, deposits accounted for 43.6% of total liabilities and capital; a year previously, the corresponding figure had been in excess of 46%. The Hungarian banks are getting (and are able to get) the funding that they need from major banks and other financial market participants elsewhere in Europe.
The asset side of the Hungarian banks' balance sheets also suggests that an air of caution has been prevailing for some time. At the end of December 2006, total loans accounted for around 52.6% of total assets: by the standards of other countries whose Commercial Banking sectors are surveyed by BMI, this is fairly low. The percentage hardly changed over the preceding year. Holdings of bonds fell from 13.3% of total assets at the end of December 2005 to 12.5% at the end of December 2006: this is consistent with the banks' reducing their exposure to a government beset by serious political and financial problems.
'Other assets', which consist largely of claims on financial institutions outside Hungary (and, therefore, one might suppose, of fairly low risk) rose from 32.7% of total assets to nearly 35%.
Looking forward, we would be surprised if Hungarian bankers became significantly less cautious in 2007.
The twin deficit may be moving in the right direction, but will remain at high levels. The economic environment is not consistent with bankers wishing to increase exposures or with customers being keen to increase borrowings.
Press Reports Press reports in the Hungarian and international press have been generally on three themes. Firstly, the downside of the government's measures to reduce its huge deficit came into focus. The National Bank of Hungary (MNB) stated that the government's austerity measures had created extra burdens for economic participants, meaning new risks for lenders. The MNB said the result could be a lowering of the fiscal financing requirement for 2007 and 2008, and this may lessen the external financing requirement. The fallout could be a loss of interest by global investors for risk, ultimately raising the yields on securities and weakening the forint. Retail and corporate lending would suffer markedly should this occur.
Contents
Executive Summary
Key Issues
Changes To The Commercial Banking Forecast
Hungary Commercial Banking SWOT
Latest Developments - Q307
International Context
Lending Trends And External Accounts
Total Assets, Loans And Deposits
Year-On-Year Growth Rates
Per-Capita Deposits
Macroeconomic Trends And Developments
Economics: BMI Core Scenario
Politics: BMI Core Scenario
Business Environment:
Economic Activity
Industry Forecast Scenario
Comment On The Past
Comment On Forecasts
Comment On Trends
Banks' Bond Portfolios
Competitive Landscape
Market Protagonists
“Hungary Commercial Banking Report Q3 2007” is available from Report Buyer. For more information go to: http://www.reportbuyer.com/
Piribo Product ID: BMI00482
