The MNB Is Active Again
GDP growth fell to 2.2% y/y/sda in Q3, continuing its slide. This means downward convergence to the sluggishness of the Eurozone, and to far below the growth rates of other EU CEE members. GDP growth came in even below market expectations. But we still expect 2.4% growth for full year 2015.
A structural shortage of labor has started to develop. This is likely to persist for a few years. Wages will likely be under permanent upward pressure, and potential growth will remain limited. Once global energy prices have normalized, and the inflow of EU transfers has subsided, wage inflation and/or low GDP growth will become a more serious problem.
Consumer inflation trends in October were unsurprising: the headline y/y rate turned marginally positive. More importantly, CPI inflation excluding fuel prices rose to 1.5% y/y, the highest climb since a cyclical low in November 2014. In our view, y/y inflation is still heading toward 1.6% y/y in January 2016, making the current MNB base rate of 1.35% negative in real terms.
Fiscal policy looks much tighter the 2015 budget called for. But there’s a big reimbursement lag in EU-sponsored development projects. Payments from Brussels picked up recently, but the government’s claims on the EU were still very big at the end of October. Accounting for these as revenue would make the central budget roughly balanced so far in 2015.
The government sold its 5% stake in OTP in October, and made statements on an intended early privatization of MKB. In light of the previous wave of government acquisitions in the banking sector, these events look surprising. We think they are simply parts of government efforts to generate cash.
Since its reform launched on September 22nd, the MNB has reduced monetary sterilization by HUF 771 billion. Money market rates have not been affected, as banks repaid a similarly big amount of foreign borrowings. Bond yields have risen in fact, and the EUR-HUF exchange rate remained largely unchanged. The MNB also announced a new cheap loan facility for banks, to boost bank lending to SMEs. Given the expected drying up of EU transfer inflows next year, this is a necessary step. However, we expect this program to compensate for only a limited part of the EU transfer shock in 2016.
As Moody’s has raised the sovereign debt outlook to positive, Hungary might recapture its investment grade in a year, depending upon its ability to absorb the forthcoming EU transfer shock, and to improve structural policies.
Fidesz’ domestic position was reinforced by its successful staving off of mass migration. But the risk is high that leading EU powers may force Hungary to take in large numbers of refugees, or impose financial penalties if the government resists. The November 13th terrorist attacks in Paris may increase EU member resistance to compulsory quotas, and cause more EU states to press for augmenting EU border defenses instead.
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