Monday, October 27, 2008

Hungary Agrees To An IMF Loan

Hungary has reached agreement with both the International Monetary Fund and the European Union on a broad economic rescue package, including substantial financing, to stabilize the Hungarian economy which besides being shaken by the global financial crisis now faces serious population-ageing related macro economic and structural problems moving forward.

"A substantial financing package in support of these strong policies will be
announced when the program is finalized in the next few days," IMF Managing
Director Dominique Strauss-Kahn said in a statement that did not indicate the
size of the package.

Hungary (which is a member of the European Union but not the Eurozone), has been in talks with the IMF since early October in an attempt to sort out a package which will do something to restore confidence in falling markets.

Hungary's government and the central bank have taken a series of measures to shore up the currency and financial markets, and the central bank hiked interest rates by 300 basis points on Wednesday (to 11.5 percent) and offered support to local residents who wanted to transfer their debt obligations from Swiss francs to Forint.



Hungary's problem is that it relies heavily on foreign investors buying its bonds while its banks face difficulty in securing foreign currency financing as liquidity dries up in international and local money markets. The crisis has caused credit markets to malfunction so severely that many emerging market economies cannot quickly access the capital they need. The problem has been most acute in dollar funding markets as Western banks hoard money and refuse to lend to each other.

While we still lack details of the package, we are being assured by Hungarian government sources that it will be "of convincing size and force."

"The agreement contains standby access to resources, which will significantly reduce Hungary's exposure to foreign market financing," according to one anonymous source.

With Hungary's commitment to strengthened economic policies, Strauss-Kahn said he expected Hungarian banks and other financial institutions would be able to start lending. "The policies Hungary envisages justify an exceptional level of access to fund resources," Strauss-Kahn added.
We also learned yestreday that the IMF had agreed in principle to a $16.5 billion standby loan deal with Ukraine and that on Friday it agreed to a $2.1 billion deal with Iceland.

Portfolio Hungary points to the following sentence in the IMF statement - "The policies Hungary envisages justify an exceptional level of access to Fund resources" - and read it as suggesting that the IMF financial support to Hungary could be several times the value of the country's IMF quota. This see this assumption as backed up by the fact that the USD 16.5 bn facility to Ukraine is eight times as large as Ukraine's quota.


While Martin Blum, analyst at UniCredit in Vienna, say that - at least in terms of the information released so far - the package sounds positive in that the package is designed to ensure the external private sector remains on board and:

“The IMF/Hungary package could prove significant to the extent that it seems it will explicitly include EU and some EU govt funding. This is clearly positive for the rest of the EU27 including Romania and Bulgaria. Although big underlying problems remain, we'd remain flat EUR/HUF and Hu, Ro and Bg CDS into this weeks likely Hungary IMF financing announcement. In short, the big question now is the scale of EU/EU govt funding."


This all looks very interesting, and I am absolutely convinced that if Hungary is to continue to apply a rigourous fiscal policy in its own right, then some sort of external injection of demand (read cash) will be essential to keep the patient ticking over while it is on the life support system. I simply worry that with the problem now extending right across Eastern Europe, and the fiscal issues mounting at home for the foreign bank governments in the wake of their own massive "bailouts" then that there may be a danger of overstretch here, and that we could see the fical positions (read treasuries) in some of the theoretically funding countries coming under attack next as they reveal the size of their own fiscal on-costs. Remember, basically for ageing population commitment reasons, the EU countries had all agreed to try and balance budgets before 2011 and this agreement is now likely to get lost in the rubbish bin of history.

Also, and since Martin Blum comes himself from the much troubled Italian bank Unicredit, maybe we also need to be including the Libyan government in any multilateral support system, since their government now seems to be the second largest shareholder in Unicredit, and the bank seems to be maintaining its Tier I capital ratio only thanks to Libyan support.


Difficulty Selling Bonds

News of the Hungarian and Ukraine loans does not seem to have done much to unblock liquidity at this point, since Hungary's Government Debt Management Agency (ÁKK) have had to withdraw HUF 40 bn worth of discount T-bills (the auction was cancelled) which they offered for sale at a liquidity auction this morning, since they received no more than HUF 5.09 billion worth of bids. Last week the issuer was forced to do the same with a 6-m T-bill and a 3-yr bond auction.

The ÁKK scheduled a 3-m and a 12-m discount T-bill auction for this week, offering HUF 40 bn of the instruments on both occasions. Hungary's BUX Index slid 11 percent on opening this morning too, the seventh straight day of loses.

The National Bank of Hungary (NBH) has also announced it bought HUF 50 billion worth of government bonds at an auction today, the full amount on offer, according to a staement released on its website. The yields were extraordinarily high. The NBH purchased HUF 20 billion 2009/F bonds at an average yield of 14.05%, HUF 20 billion 2010/C bonds at 14.21% and HUF 10 billion 2011/C bonds at an average yield of 13.77%. At the last auction held on 17 October, the average yield on HUF 25 billion 2011/C bonds came in at 12.06%.


Also Ukraine's hryvnia fell to near a record low against the dollar this morning as the $16.5 billion International Monetary Fund loan failed to restore confidence in the country's ability to weather the global financial crisis. The hryvnia slid 1.3 percent to 5.9500 per dollar by 9:48 a.m. in Kiev, from 5.8750 on Oct. 24. It traded as low as 6.0812 last week, according to Bloomberg this is the hryvnia's weakest level since at least 1994, when they began tracking Ukraine's currency.

Christoph Rosenberg, Senior Regional Representative for Central Europe and the Baltics (who I respect as a really serious economist) is quoted by Reuters this morning as saying “It's a really good policy package." We'd just better hope it is, since we have no details yet. And Chris, if you are listening out there somewhere, any package which has as its kernal a tight fiscal stance simply won't work due to the depth of the recession it will produce. The Hungarian government need to put their own books in order (to keep the investment community happy), but they will need support from the EU or elsewhere to be able to increase spending in some way or another, otherwise..... weak exports (external european environment), plunging domestic consumption (no forex loans) and cut-backs in public spending only add up to one thing: a substantial deflationary recession, and more financial crises as we move forward. Hungary needs the forint down and spending in some part of the economy UP - a mix of greenfield investment and public spending in support of this would perhaps be the best option, and a cheaper forint would make wages in the export sector more competitive at a stroke.

News like the following are what we need, and the investors are going to need incentives in this environment:

Daimler has on Monday signed an agreement with Hungary's government to invest around EUR 800 million in a new plant in Hungary that will manufacture over 100,000 compact cars annually from 2012, and create up to 2,500 jobs. “Mercedes-Benz is building the plant in order to create additional production capacity in the compact car segment, where the model range will be expanded from two to four vehicles. The plant contributes to the profitability of the product portfolio extension," Daimler said in a statement.
Posted by Edward Hugh at 9:50 AM

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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.