Economic predictions for 2011-2013

As the Hungarian government is edging toward a Putin-style nationalized energy business, one cannot help thinking that Viktor Orbán is a born gambler. He is spending billions of euros to purchase businesses with money he doesn’t have because he is betting on a spectacular economic growth in the near future that will fill the state’s coffers.

However, Hungary’s economic well being is almost entirely dependent on the state of the world economy. And as we look around, whether in Europe or in North America, there are mighty few signs of a rapid turnaround and robust economic growth any time soon. And without such growth Hungary is in deep trouble. Some of the moves that the government made lately might in fact be impediments to recovery. I’m specifically thinking of the extra levies on the banking sector which the Orbán government is planning to continue even after 2012.

The austerity program leaves fewer forints in people’s pockets and as a result domestic consumption has fallen. The Swiss franc, in which most Hungarian families took out mortgages, has been steadily strengthening against the forint. While in the early 2000s 1 Swiss franc could be purchased for about 160 forints, by now a Hungarian borrower has to pay 233 forints for 1 franc. Thus Hungarian borrowers’ monthly mortgage payment have skyrocketed and there are thousands and thousands of families who are unable to meet their obligations.

 

The government’s promised help is merely a temporary band-aid: for borrowers who participate in the plan the exchange rate will be fixed at 180 forints to 1 Swiss franc for two or three years, after which the borrower will have to pay back the difference with interest. So only who are absolutely desperate take advantage of the assistance. The rest–and there are well over 100,000 families who are in trouble–struggle to make the ballooning mortgage payments. They certainly cannot assist in boosting domestic spending.

As for the rumored purchase of E.ON’s gas business, I have learned a few interesting details since yesterday. E.ON bought the company from MOL when, during tenure of Viktor Orbán (1998-2002), the government set the price of gas so low that MOL suffered considerable losses. MOL therefore sold the business to E.ON. For the past ten years E.ON managed to make the business profitable, but last year it suffered a blow when the second Orbán government froze the price of gas. As a result, E.ON lost money. Thus, it is not at all surprising that the Germans want to sell. After all, the Hungarian government can squeeze them as hard as it wants. It is better to bail.

Surely, the Hungarian gas business can be profitable only if gas prices are brought up to a reasonable level. That means that the price of gas to the consumer will be much higher than it is now. If prices are kept artificially low, not even the Hungarian government can survive in this business. And I’m not even talking about the tons of money János Lázár and his friends want to make in the energy sector. But if the price of gas is considerably higher than it is now, the purchasing power of Hungarians will be further reduced. All in all, it’s hard to imagine a robust recovery in domestic consumption.

The Orbán government puts a lot of emphasis on developing domestic small- and middle-sized businesses with the money provided by the European Union for that purpose (Széchenyi Plan). Yet there are relatively few people who are applying for these grants. The reason: the applicant must put a sizable amount of his own money into the future business venture. Hungarian small business people have little capital and the banks are reluctant to lend because they are also losing money thanks to the government’s extra levies.

A few days ago GKI Gazdaságkutató Zrt. came out with their predictions for 2011-2013, which are quite gloomy. The recovery in the European Union is slow (1.8% growth in 2010 and in 2011). Even Germany, the engine of the European economy, which had a spectacular growth of 3.7% in 2010, by now is experiencing only a 2.6% growth. And that adversely affects Hungary’s economy because Hungarian exports in large part end up in Germany.

Here is a telling graph showing the economic growth of six East-Central European countries between 2000 and 2013. As you can see, Hungary is languishing. Slovakia is the clear winner; Poland (Lengyelország) is second. Note, by the way, that Poland was the only country to survive the financial crisis without a pullback in growth.

 

Although as a result of the nationalization of private pension funds the deficit will most likely be low, under 3%, at the same time government expenses will grow. For example, 400 billion forints will have to be spent on MÁV (Hungarian Railways) and BKV (Budapest Transit System) to save them from bankruptcy. Because of these additional expenses the actual deficit (without the extra money from the pension funds) is 7%.

As for economic growth after 2011 GKI predicts a yearly growth of 3%, mostly as a result of industrial exports. In plain language the cars Audi, Mercedes, and Suzuki will produce. Unemployment, thanks to the modest economic growth, should ease somewhat.

Standing in the way of growth in domestic consumption is the economic policy hammered out by György Matolcsy, who is a firm believer in tax relief as the solution to the ills of the Hungarian economy. The flat tax that was introduced this January benefits only the top one-third of Hungarians. The great majority of actively employed people actually lost a few thousands forints on the deal, which now the Hungarian government is trying to remedy by forcing employers to raise salaries. Not surprisingly, employers loudly object to state interference in salary negotiations that are not the business of government. Those days are over, they insist. The sparring continues, and I have no idea who will win this round.

Parliament also passed some legislation that makes strikes by public employees almost impossible, and the government is eliminating several rights that employees currently have. Thus social tensions are growing with unpredictable results.

GKI’s conclusion is that there will not be another economic crisis in Hungary, but there will be no spectacular recovery either. As they described the state of affairs: “Hungary will flounder” in the next few years. A year was wasted. The Hungarian economy is no better off today than it was when Viktor Orbán became prime minister.

 

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Minusio
Guest
Recent studies have shown that ALL economic predictions are worthless. Economics is not a science, but its methods are very useful for historical analysis, post festum that is. The models on which economic forecasts are based only work ‘ceteris paribus’, but as it happens the global economy has too many shifting parameters. In addition some fundamental tenets had to be given up – such as: banks know what they are doing or markets can regulate themselves. The charm of growth rates depends a lot on the level of development of any given economy. The Chinese economy has to grow at least 7 or 8% a year, just to keep its social frictions under control. A developed economy like Germany’s begins to overheat when growth is much higher than 2%. Hungary is characterised by a dual economy. Foreign Direct Investment (FDI) in foreign subsidiaries is keeping Hungary’s balance of trade and payments tidy. These foreign-owned companies generate all the growth there is, and that is closely linked to Germany’s growth which again has to do with the fact that Germany never gave up its industrial base (as the UK largely did) and produces investment and consumer goods which are in high… Read more »
Paul
Guest

Those bastard foreigners, eh? Buying up Hungary, making huge profits out of our work, taking our money out of the country. We’d be much better off without them. OV should tax them so heavily that they pack up and leave – and leave Hungary for the Hungarians.
When I’ve calmed down, I’ll go out and vote Fidesz.

Ron
Guest

The Swiss Franc against the Forint may cross the 240 border. If that happens the situation might be critical. Not only for the borrowers, but also for the banks.
http://www.realdeal.hu/20110713/swiss-franc-close-to-critical-level-against-forint-for-borrowers
So basically, Hungary is dependent on the EU and how they solve the crisis. As to Germany, France and the UK they are the main money lenders to Club Med plus Ireland.
https://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html
I am pretty sure that VO does not like this.

Member

Ron, to be fair no one would like this. I am only hoping that Fidesz has a backup plan in case MOL and the other ideas do not work out. I am not even sure what can be done about all the mortgages. I am not an economist, but maybe some of you could answer to the following. Would it be possible for Hungary to buy out all the debt held in Swiss Francs w/o penalty and then refinance the mortgages to the mortgagee for Forint?
Let say, someone still holds SF 20,000 for ten years, some of it is principal, some of it is the interest. Let say 15,000 to 5,000. Can Hungary buy out the 15,000 at this point. I understand the bank would not make any money bit would not loose either. If the mortgagee would default, on the current market the bank would not make even 10,000. Is this a possibility or it is very far fetched?

Guest

Not only houses were financed with Forex mortgages, also a lot of cars, tvsets, you name it – because the conditions seemed so attractive, nobody wanted to consider the risks …
A typical situation (one of my neighbours):
They live in the old farmhouse which they inherited from the wife’s parents -now the wife’s brother wanted his half paid – or he might rent it to a Gypsy family …
So they paid him from a loan and also bought a little Suzuki. Now after four hard years they managed to repay everything,but really had to economise, both have extra jobs over the weekend, no holidays for them. They told us just now that as soon as possible they’ll start insulating the walls – now they use too much wood for heating and they can’t afford gas heating, though gas is available in our village.
Other families are not as lucky – or not as hard working …
If there really are more than a million loans and mortgages at let’s say 10.000 CHF on average that would mean a lot of money for the state.

Minusio
Guest

The forex crunch could have been totally avoided if at the least the banks had not been so stupid. Every internationally operating company insures itself against forex risks by concluding forward contracts. The banks could have done that for the bulk of their lendings at favourable conditions and passed on the minimal costs to their debtors.

Ron
Guest

Some1/wolfi It is possible to solve this problem, but it requires help from banks, the government and the people. Each has to pay, if not now, than in the future.
I believe the banks are happy to cooperate, if some of these extra taxes disappear. Besides they are not the only ones to blame for this. Each party is equally responsible for this situation.
Some time ago, I was thinking to start a collective court case claiming damages, for not pointing out the risks involve in this product. Unfortunately, although such case is possible, for each round in court you need to pay 6% of the total claim, which will be refunded once you win.
However, the Hungarian law does not recognize this consumer protection, and therefore, you need to the European Courts in order to solve this, which would take approximately 7 years.

Ron
Guest

Another problem regarding the mortgage crisis. Is the situation that in Hungary a natural person cannot go bankrupt, and start all over again.
Therefore, this new bankruptcy law which Fidesz plans may solve this problem as well, if they include this in this law.
Lots of people will go personal bankrupt and the banks can write off the loans. The government will receive for one or two years less income.
But if people make money again the situation may be restored.

Kirsten
Guest
some1, I have only limited information about the indebtedness in SF but I would think that these loans are on the books of banks that operate in Hungary (Hungarian-owned or foreign owned), these have apparently hedged their risks a bit in that they are not affected by these exchange rate risks (fully borne by the borrower). If the borrower cannot repay, it is a non-performing loan and then also a problem of the bank (also of the family that cannot pay for its mortgage). In a number of countries in the past few years the governments have stabilised banks because the number of non-performing loans from for instance mortgages rose sharply (and have been punished for this afterwards by the financial markets). Hungary either cannot do that (sovereign debt is too high already) or does not see the need to do that (most banks are owned by foreign banks so there is a question whether the Hungarian government is responsible for recapitalising them; implicitly the absence of an additional tax on the domestic banks could be seen as some kind of support). The chosen strategy seems to be a compromise for me, I am afraid that the government in two… Read more »
Member

Well, somebody has to pickup the tab. The FIDESZ government is pumping tax payer money onto the fire to avoid mass foreclosures and the related uproar. Same Hungarian political trickery: let’s give out money so we can be re-elected. I hope with the new bankruptcy laws they will let the homeowners default and lose the houses. I would rather expect short sales considering the gloomy real estate market.
I just read somewhere that the home ownership (% owner occupied) is 92% in Hungary? This is very high.

Ron
Guest

Although these FX loans for non-corporate loans in general were introduced in 2000 (During Fidesz), the actual increase happened during the FG government.
Interesting is that +90% of the people borrowing were warned regarding the FX exchange risk, and some of them were considering insurance against this, but nobody seems to act on it.
For the entire analysis please find the pdf file on:
http://www.finess-web.eu/publications/wp/FINESS_D_5_4_Pellenyi_Bilek_Nov_09.pdf

Kirsten
Guest

Mutt: “I just read somewhere that the home ownership (% owner occupied) is 92% in Hungary? This is very high.”
One explanation I have heard was that in the early 1990s instead of investing public money into the reconstruction of the flats e.g. in Budapest, the people who lived in the flat could “buy” it for a reasonable sum of money. (That is just what I heard and if you say this is entirely wrong I will certainly not argue.) I thought it is an easy way to privatise but a complicated way to refurbish the buildings.

Ron
Guest
Kirsten: What I hear from my wife’s family. They own their houses, bought it from the State or the City Council during the sixties. So a lot of families own their house or the vacation house before the change. After the change (only Budapest, the rest of the country I do not know), people could buy very cheaply their house, which they rented from the City Council. The only thing was that a lot were neglected and it was up to the people to refurbish it. Another problem was that under the old apartment law people could only re-do their flat if 100% of the owners agreed. Later on it was changed to 75%. So basically nothing happened in the early nineties. When mortgage was introduced into Hungary (around 1998) not a lot of people went for it, and the interest rates were very high, and banks demanded at least own finance of 30%. It changed in 2000 when people could loan FX amounts at low interest rate, and in combination of changed apartment law people started to refurnish their apartments, build new houses, etc. In that period house prices went right through the roof, also in that period the… Read more »
GW
Guest

Also this news: the Hungarian Parliament has set the salary of the President at 39 times that of basic civil servants. To see how out of line this is, consider that the lowest possible civil servant pay in the US, GS1, step 1, pays USD 17,803, while the President is paid 400,000, a ratio of around 22.5:1.

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