Wednesday, July 2, 2008

Hungary's Q1 2008 Current Account Deficit

Hungary's current account deficit came in at EUR 1,160 million in the first quarter of 2008, according to preliminary figures. This was up from a slightly downward adjusted EUR 1,094 m in Q4 2007, according to data from the National Bank of Hungary (NBH). The seasonally adjusted EUR 1,274 m current account gap is down from the 1.3billion euro deficit recorded in the fourth quarter of last year.

In Q1 2008 Hungary’s net external financing requirement (i.e. the balance on its combined current and capital accounts), fell compared with the last quarter. Hungary needed 367 million euros (92 billion HUF) and 729 million euros, or 2.2% of GDP, (after adjusting for seasonal effects) compared with 4.6% of GDP in Q1 2007. The net financing requirement, derived as the combined current and capital account balance using the bottom-up approach, amounted to EUR 1,375 million (equal to HUF 353 billion).




Current account

In Q1 2008, the current account deficit was 1,160 million euros (1,274 million euros seasonally adjusted). The seasonally adjusted deficit continued to fall compared with the previous quarter. Improvements in the combined balance on the income and transfer accounts accounted for most of this fall, and these were, in turn, mainly explained by an increase in funds from the EU. In terms of the real (rather than the financial) economy, the goods trade remained in surplus, at 681 million euro seasonally adjusted (and at 744 million euro unadjusted. The surplus on services was 269 million euros, seasonally adjusted, (and 139 million euros, unadjusted). Compared with the previous quarter, the trade balance improved and the surplus on services increased on a seasonally adjusted basis.

In terms of services themselves, the seasonally adjusted travel surplus was 294 million, while other services registered a seasonally adjusted 71 million euros deficit.

Looking at the balance on the income and transfer accounts, the seasonally adjusted deficit on income on debt amounted to 684 million euros, and negative income on equity was 1,452 million euros. The deficit on income on debt continued to rise, while the deficit income on equity fell slightly compared with 2007 Q4. A significant surplus was registered on compensation of employees, due largely to the introduction of a new methodology. I would say one of the structural difficulties with the Hungarian balance of payments is the growing detach we can see in the chart below between the growing surplus on the goods and services side and the increasing deficit on the income side.




Looking at fourth-quarter transactions with the European Union, the balance of current transfers was a deficit of 52 million euros, while capital transfers were in 795 million euro surplus. The balance of capital transfers to and from EU institutions was in a surplus of 743 million euros.

Financing

There was a net inflow of 1,699 million euros in inward and outward non-debt capital transactions. The value of outward direct investment transactions in equity capital by Hungarian residents was 84 million euros and reinvested earnings amounted to 342 million euros. Inward transactions by non-residents amounted to 292 million euros and reinvested earnings amounted to 1,366 million euros. Portfolio investment transactions in equity securities showed a net inflow of 468 million euros. Purchases of shares abroad by Hungarian residents amounted to 521 million euros (outflow) and purchases of Hungarian shares by non-residents amounted to 989 million euros (inflow). The balance of debt generating financing was 324 million euros. For other FDI – included in foreign direct investment flows – related to direct investment by Hungarian residents there was an inflow of 82 million euros and other FDI related to direct investment by nonresidents in Hungary showed an outflow of 864 million euros.

Reserves and debt

Central bank foreign exchange reserves were 16.8 billion at end-March 2000. Whole-economy gross foreign debt was up`3.8 billion euros over the opening stock reported for 2008. Gross foreign debt, including other investment capital recorded within direct investment, rose by 3.6 billion euros. Hungary’s net foreign debt rose by 1.0 billion euros, and by 0.2 billion euros including other FDI capital recorded within direct investment. Non residents’ holdings of forint-denominated government securities amounted to 11.7 billion euros at the end of Q1, down 0.9 billion euros on the opening stock for 2008.


Whole-economy net debt, excluding other capital recorded within direct investment, was 47.8 billion euros at end-March 2008 (46.8% of Hungarian GDP). Including other investment capital recorded within direct investment, Hungary’s net foreign debt amounted to 49.0 billion euros (48.0% of GDP). Compared with the opening stock calculated using the new methodology, the net debt of general government and the MNB was down 1.3 billion down at the end of Q1 2008.
Posted by Edward Hugh at 9:40 PM

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Spotlight On Hungary

Welcome to the Eastern Europe Economy Watch Blog. By clicking the older posts link (at the foot of the page) you will be able to leaf through the normal chronological blog posts. But first we have our country of the month feature where we would like to present some charts which provide background data we hope will help the first time reader better assess and get to grips with the general argument being presented on the blog. Below you will find charts for Hungarian male life expectancy, fertility, quarterly GDP growth, inflation, household demand, retail sales, and import and exports growth. Please click on thumbnails for better viewing.

On the left you can see a chart for Hungarian male life expectancy, and on the right there is one showing Hungary's population development. Just why such factors are important, and need to be taken into account along with more standard macro economic data in order to understand what is currently happening in Hungary and what might subsequently spread across Central and

Eastern Europe can be discovered by reading my Hungary analysis:Just Why Is Hungary So Different From the Rest of the EU 10?The basic arguments being advanced here are that long term fertility and life expectancy do matter, since in the long run they condition the labour force and consumption patterns, and with these inflation and internal demand.



Above left you can see Hungarian ferility, and above right the evolution of the population median age, which are also key parameters, since they influence saving and consumption, and with these internal demand growth. On either side here you can see charts for inflationand quarterly GDP.


Next on the left we have a chart for recent movements in private internal consumption (which shows us the state of internal immediate consumption demand) while on the right we can see changes in constuction activity, (which serve as a nice proxy for fixed capital formation). Finally the chart on the bottom left shows a comparison of Hungary's trade balance 2006 and 2007,


while on the right you can see the evolution in non-forint mortgages for immediate consumption purposes. Arguably these are all the data points you need to understand my lengthy post on why we face a possible recession in Hungary, and why post-recession Hungary may be converted into yet another export dependent economy.


2008 Forecasts: The OECD in December revised their 2007 Hungary forecast down to 1.8%, and 2008 to 2.6%. These numbers are very hard to accept. I will be very surprised if we see calendar year 2000 as high as 1.8%, but more to the point 2.6% seems to be assuming a strong rebound, an assumption for which there is no real substantive evidence. In particular even to get what growth we have been getting in 2007 the Hungarian govenment has been running a deficit of around 6% of GDP. This is going to tighten yet further in 2008, so there is no supportive fiscal environment. And as I keep arguing, it is very hard to see a supportive monetary one. The IMF in their October World Economic Outlook also put a similar figure of 2.7%, while the EU commission in November 2007 came in with the same 2.6% as the OECD.

Perhaps the prize for the most exaggerated prediction here must go to GKI Gazdaságkutató Zrt, who argue that Hungary should expect the incredible annual growth rate of 3.5%. My own view is much more nuanced. I think I am reasonably confident in holding to my recession forecast for 2008, although of course, "recession" does not mean negative growth for the whole year (technically it is simply 2 consecutive quarters of negative growth), so we might then go on to see what, between 0.5 and 1% growth over whole year 2008 (and the only really doubt is whether the contraction starts in Q4 2007, or in Q1 2008). But it is what happens in 2009 and 2010 that matters really, and at this point so many variables are in play (and interrelated ones to boot) that I can only say I envy those who have the courage - or the temerity - to stick their necks out). And of course, if we get a large correction in the value of the forint, then all those carefully weighed and weighted forecasts will, without a shadow of a doubt, go straight and directly off into the bin.