Hungary: Imbalances growing - BBH

Analysts at BBH suggest that the ruling Fidesz is likely to win another term, as the opposition remains weak and divided and while the economy is robust, they think imbalances are growing and warrant caution.  

Key Quotes

“Tensions with the EU have ebbed but remain on a slow simmer.  Similar to the current EU-Poland tensions, so too has Hungary locked horns with Brussels.  The biggest disagreement was with the EU’s refugee policy and its quota system for member countries.  Then, it was legislation that sought to crack down on NGOs such as Transparency International, as well as foreign-run universities.”  

“The economy remains robust.  GDP growth is forecast by the IMF to accelerate to around 3% in both 2017 and 2018 from 1.9% in 2016.  Private sector forecasts are more optimistic, as are the central bank’s forecasts of nearly 4% in both years.  GDP rose 3.2% y/y in Q2, down from the Q1 rate of 4.2% (the strongest rate since Q2 2014).”  

“Price pressures bear watching, with CPI accelerating to 2.6% y/y in August from 2.1% in July.  This was the highest since March.  September CPI data is due out October 10 and is expected to rise 2.7% y/y.  If so, it would be near the cycle highs but still within the 2-4% target range.”

“Yet the central bank eased again last month.  It kept the main policy rate steady at 0.9%, but cut the overnight deposit rate deeper into negative territory to -0.15% and lowered the cap on 3-month deposits to HUF75 bln at the end of Q4 vs. HUF300 bln at the end of Q3.  The bank has been loosening policy every quarter, and so the December meeting will offer the next opportunity to ease.  With price pressures rising, it seems risky to remain so dovish.”

“The forint has traded in a narrow 302-314 range all year.  The pair is on track to test the April high near 314 and then the December high near 315.50.  After that is the June 2016 high near 322.  We maintain a negative bias on the currency, as one of the desired effects of Hungary’s unconventional easing is a weaker forint.  Our EM FX model shows the forint to have WEAK fundamentals, another reason for our negative bias.”

“Hungarian bonds have outperformed this year.  Lowering the 3-molnth deposit cap pushes more money into government bonds, thereby lowering borrowing rates.  The yield on 10-year local currency government bonds is -48 bp YTD.  This is one of the best performers in EM, behind only Brazil (-155 bp), Indonesia (-142 bp), Peru (-109 bp), Russia (-79 bp), and Colombia (-60 bp).  With inflation likely to continue rising and the central bank still dovish, we think Hungarian bonds will start underperforming more.”

“Our own sovereign ratings model shows Hungary’s implied rating steady at BBB-/Baa3/BBB-.  This matches its actual ratings, and suggests upgrades are unlikely for now after it regained investment grade status from all three agencies in 2016.”