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Euromoney Conference 20-21 January 2009, Vienna

Hungarian outlook in nutshell. Euromoney Conference 20-21 January 2009, Vienna. Gergely Tardos Head of research, OTP Bank,. What has happened in Hungary during last few month:. 100. After the fall of Lehman :.

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Euromoney Conference 20-21 January 2009, Vienna

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  1. Hungarian outlook in nutshell Euromoney Conference 20-21 January 2009, Vienna Gergely Tardos Head of research, OTP Bank,

  2. What has happened in Hungary during last few month: 100 After the fall of Lehman: • Capital flight from the HUF bond market (nearly EUR 4 BLN), drying up of the bond market 2. Drying up of the FX swap market (used by banks to finance FX lending) 3. Capital flight, attack on the HUF: strong depreciation pressures 4. IMF package (increasing reserves, but the main reason is to finance the maturing government debt) 5. Slowdown – or sudden stop ? - in (especially FX) lending 6. Bad economic data for 2008.Q3, low growth, high C/A deficit, falling industrial production

  3. Why Hungary was the first turn to the IMF in the region? 100 • Very bad fiscal track record, coming elections 2. Stock problems (high external government and private debt) 3. Relatively high currency (real sector) and maturity (banking sector) mismatches in the balance sheets 4. Low potential growth rate (3% in Hungary vs. 4.5-5% regional average) 5. Contra cyclical measures in the Euro zone (bank rescue packages, of ECB eligible assets ) had adverse effects on non EMU countries, especially where foreign holdings of local currency bond was high

  4. Domestic credibility of the HUF is exceptionally strong 100 Net HUF demand of the household and the corporate sector (EUR BLN.) :

  5. What can be expected for 2009? I. 100 • HUF will remain under the control of the National Bank (inflation target, growth, financial stability) 2. Fiscal target of 2.6% of GDP will be reached as a consequence of additional fiscal restriction. • 3. Real GDP: Recession can not be avoided • Recession in the Euro zone: stagnating or even decreasing export-demand • With much lower external financing components of domestic demand (investment and consumption) should fall (Baltic example) 3. Drastic adjustment in the current account deficit 5. Sharp drop in real wage dynamics, moderate decrease in employment

  6. What can be expected for 2009? II. 100

  7. The Baltic example I.: Slowdown due to falling components of domestic demand Consumption expenditure of households (SA, yoy, %) Real GDP, SA, yoy, %) Imports (SA, yoy, %) Gross fixed capital formation (SA, yoy, %) Source: Eurostat, National Banks

  8. The Baltic example II.: Decreasing net external financing requirement Indicators of credit growth (%) Current account balance (to GDP, %; SA) Financial accounts, corporate sector (flow to GDP, %) Financial accounts of households (flow to GDP, %) Source: Eurostat, National Banks

  9. The main questions: will real divergence emerge and what will mother banks finance their regional subsidiaries? 100 Channels of secondary effects: International trade: Will real-divergence take place during the crisis? When life will return to the wholesale markets? Capital markets: • Soft lending, sudden stop or credit crunch? Rolling over the maturing debt of the banking system effects lending and the FX swap market… • Will mother banks provide additional financing? (soft landing) • Or will they only roll over the total maturing (inter- and extra group) debt of their Hungarian subsidiaries? (sudden stop) • Or will they only roll over the maturing intra-group debt of the subsidiaries? • Will mother banks withdraw all available funds? (credit crunch) Mother bank financing:

  10. Thank you for your attention!

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