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Tuesday, November 4, 2008

Hungarian Business and Consumer Sentiment Fall Sharply In October

Well, you don't need to be especially adept at reading tealeaves to know which way things are about to move now on the Hungarian economy front. But just in case any of you did have some last, lingering doubts, the latest edition of the GKI sentiment index should have wiped them smartly away. In fact the GKI economic sentiment index declined in October to a record low as the financial crisis made businesses and consumers "dramatically more pessimistic'' (according to the institute) about Hungary's growth outlook.

The overall index fell to minus 25, the lowest since measuring began in 1996, from minus 17.9 in September. Business confidence declined to minus 14.8 from minus 9.3, also a record.

``Businesses of every kind and consumers became dramatically more pessimistic about the outlook of the Hungarian economy as the international and domestic financial environment deteriorated by the day...... The industrial confidence index fell ``significantly'' on the predictions for orders, specifically for exports, while the estimate for industrial production ``visibly deteriorated. Expectations for employment also fell significantly.

Consumer confidence also dropped, falling to a six-month low of minus 54.0, from minus 42.5 the previous month. Consumer sentiment has in fact been plumming the bottoms since the middle of 2006, when Prime Minister Ferenc Gyurcsany had to raise taxes and cut state subsidies under the impact of a financial crisis which forced him to narrow what was at the time the largest budget deficit in the EU. Since that time the Hungarian economy has effectively been limping forward.

Sentiment In Europe Also Turns Down

European economic confidence saw its biggest ever fall during October as the global bank crisis generated the bleakest business outlook since the early 1990s, according to the findings of this months European Commission economic sentiment survey. The survey results give us just one more dramatic glimpse ino the devastating impact the financial turmoil is having on the real economy. Pessimism across Europe has risen dramatically on all fronts - from manufacturers' expectations about exports to consumers' fears about unemployment.

These gloomy results now make it almost a certainty that the European Central Bank will cut its main interest rate by at least half a percentage point to 3.25 per cent when it meets later this week. The European Union executive's "economic sentiment" indicator for the 27-country bloc fell by 7.4 points in October to 77.5 points. The latest index reading was the lowest since 1993 and marked the largest month-on-month decline ever recorded. Readings were down right across the individual EU economies.

And as the external environment deteriorates, sentiment inside Hungary not unnaturally falls right behind it.

Manufacturing Contracts In October

The most obvious area where the deteriorating export potential is to be found is in industry, and as was to be expected Hungary's manufacturing industry contracted sharply in October, according to the latest manufacturing purchasing manager index (PMI) reading, which dropped 5.2 points to hit 44.7 in October - a historic low, and 0.8 points below the previous worst which was registered in October 1998, according to the latest data from the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM), the publisher of the index, has reported on Monday. On these indexes any reading below 50 indicates contraction.

More Budget Details

The Finance Ministry has now made available the latest version of next year's Hungarian budget - which is based on an anticipated 1.0% GDP contraction in 2009. The forecast assumes that wages in the private sector will not grow by more than 1.6% on average during the year, while there is to be no increase in the public sector. The combined result is a 2.6% average decline in real wages. Wage-related austerity measures and an expected 0.6% decrease in employment are projected to lead to a 3.7% contraction in household consumption.

Exports are expected to grow by 3.9% and imports by 2.4% (in both cases revised down from an earlier 4.1%). Based on the above, the government expects the public sector deficit (ESA-95) to come to 2.6% of GDP instead of 2.9%.

Swiss Franc Mortgages Hit Record High In September: The Rise Before The Fall?

Forex borrowing by Hungarian households hit a historic high in September, the month before the crisis, and before the termination or restriction of this practice by a number of significant banks, so this was in all probability one last fond farewell by Hungarians to the practice of local FX borrowing. The monthly statistics of the National Bank of Hungary (NBH) published on Friday also represented, as Portfolio Hungary comments - the calm before the storm in the area of FX loan costs. The average APRC (annual percentage rate charged) on forint loans to households was up, but very slightly slightly overall, while the average APRC on Swiss franc loans remained broadly unchanged compared with August. Next month we will see the result of the substantial (3%) rate hike by the central bank in the middle of the month enter the data.

The seasonally adjusted volume of new loans to companies and households continued to rise in September with both forint and Swiss franc housing loans rising slightly. Also worthy of note was that while the monthly average interest cost of CHF-based household consumer loans remained stationary in September, the value of new loans has risen moderately

Total loans of households rose HUF 296 bn to reach HUF 6,8880 bn in September. But it is important to note that HUF 175 bn of this was the result of the weakening in the forint, and only HUF 121 bn was the result of new transactions, with these being almost exclusively in FX loans. The forint fell by 2% versus the euro, 3.7% against the CHF and 9% against the JPY in September.

As a result of the revaluation effects produced by the forint depreciation the ratio of FX loans to total loans rose hit a record high of 62.3% in September.

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