Hungary: Well That Didn’t Take Long!

It was only just over two weeks ago (two weeks, which following the logic of a historical time which seems far from uniform, now seem like half a lifetime) that guest poster P. O’Neill, said this:

For understandable reasons — the addition of 10, and soon to be 12, new member countries, and the constitutional crisis, the European Union has been preoccupied with foundational questions in recent years. But an older concern is working its way back onto the agenda: how to handle an economic crisis in a member country……However, the risk of the latter type of crisis in a member country is now quite high.

The warning lights are flashing again – this time in eastern Europe, and especially in the recent or imminent member countries of Hungary, Romania, and Bulgaria. Poland is also a source of concern. Some combination of profligate governments, political uncertainty, EU spending booms, and capital inflows have created precarious economic positions for these countries.

Well, well, well, scarcely three weeks later, and here it is, all on the table. Sometimes, in the field of interest of what is sometimes erroneously termed the dismal science, things do indeed move quickly.

Now before going any farther I do want to make plain, the headline in the linked article – Hungarian economy takes a dive amid worst unrest since end of communism – is sensationalist, and this is *not* the begining of the end for Hungary. It is however quite a serious situation, the stock market’s main BUX index fell 6.6% in one week – losing 1,500 points – and the forint once more fell against the euro, to 277 from 272 one week ago (this is not a hge fall, but remember that the forint was already weak after the early summer drop, and, of course, there may be more to come). In addition the credit-rating agencies have been active: Fitch changed the outlook on Hungary’s credit to negative from stable, while Moody’s placed the country on review for a possible credit downgrade, and both of them cite fears that economic reforms could be diluted.

So Gyurcsany is now in a double bind, and everyone knows this. If he goes through with a hard set of reforms the Hungarian economy will shrink (yes shrink, just like Portugal did at the end of the 90s, by shrink here I mean have an important recession) and his government will tremble, while if he doesn’t reform as stated (and he will do so even more now, since the situation is worse) then the economy will crash anyway, since there will be capital flight.

And now the situation is complicated, quite simply because there is contagion risk, and top of the list I would say are Poland, Bulgaria and the Baltic States. As Vlastimil Tlusty – the Czech Republic’s finance minister – is quoted as saying:

In today’s situation, where from a foreign viewpoint due to the situation in Hungary we are perceived as an unstable region, a similar critical state of public finances can have far reaching results

I would go further, the issue isn’t just one of political stability (this can be addressed) it is the state of the underlying demographics: the day the global markets wake up to this, “que dios nos salva!”.

All of this also needs contextualising a little. The US economy is undoubtedly slowing (2007 is going to be a difficult year all round). This is producing a steady outflow of funds across the ’emerging markets‘:

Asian currencies weakened, paced by Indonesia’s rupiah and the Philippine peso, on speculation investors will sell emerging-market assets as U.S. growth slows.

A report on Sept. 21 on Philadelphia manufacturing provided further evidence a two-year cycle of interest-rate increases is cooling the U.S. economy. Asian exports may suffer on a decline in consumer demand in the U.S., one of the region’s biggest overseas markets. The rupiah posted the worst week in a month, while the peso snapped a three-week rally.

“A lot of money has gone into Asian and Latin American markets and now people may be unwinding their holdings, pushing down the currencies,” said Nizam Idris, a currency strategist at UBS AG in Singapore. “Investors are more averse to risk following yesterday’s poor U.S. numbers.”

The rupiah lost 0.7 percent this week to 9,188, the worst- performing of 15 Asia-Pacific currencies tracked by Bloomberg. The peso, the poorest performer yesterday, declined 0.2 percent to 50.35 for the week, according to the Bankers Association of the Philippines

So first we go up (win-win) and then we come down (lose-lose), the dismal science is just like this.

In conclusion, and just to show that ageing populations are not simply a European problem, my friend the Singapore economist Eddie Lee (Eddie is, naturally, a specialist on the ‘Asian tigers’ and on China) wrote me this morning about Taiwan:

Domestic consumption dip a problem:

Taiwan’s economy is faced with “booming exports and a cooling domestic market, ” a problem caused by such structural factors as falling birth rates and the exodus of entrepreneurs and complicated by the credit card storm, economists said yesterday.

Liang Kuo-yuan, director of the Polaris Research Institute, said Taiwan’s birth rate began to fall in 2000, while at the same time businessmen accelerated their moves to foreign countries. “Smaller population and the absence of a fair portion of rich consumers certainly cooled off domestic consumption,” Liang said.

The government in August adjusted its economic forecast for 2006 from 4.31 percent to 4.28 percent, in part to reflect the annual domestic consumption growth of 1.71 percent — the lowest in three years.

In August, Taiwan’s surplus in international trade was NT$1.21 billion, a 10.5 percent growth from the same month of last year, and the total surplus for the first eight months of this year accumulated to NT$10.77 billion, a whopping growth of 71.7 percent from last year, indicating booming exports.

Pointing out that the domestic market is cooling to a “severe” extent, Liang cited figures that he said gave him no reason for optimism, such as the average growth rate of 6 percent in domestic consumption between 1991 to 2000, a figure that has fallen to 2 percent since from 2001 to 2006.

He attributed the decline to structural factors that were compounded by the credit card and cash card storm that appeared in the last quarter of 2005, forcing the banks to cut consumer loans, leading to NT$40 billion in “restrained” consumer spending.

Over the long term, he said, the cooling domestic consumer market will be “heavy, bad” news.

And as Eddie points out to me in his mail “this seems to be getting some media attention in the tiger countries …. “.

Also some more from Eddie’s mail (please remember these are ‘off the cuff’ comments, but very relevant nonetheless, Eddie used to be economics editor for the Straits Times):

It seems to me also that, following rostow’s stages of development, the peaking of the mass consumption stage coincides with a final over-extended flourish in the property market (japan circa 1990s, tigers circa 2000s)

that makes me somewhat concerned about the US, though obviously they have the ability to renew their populatino thru migrants. so it’s a question of how well that is managed.

Yes. 2007 will be interesting. I’d agree that the US & the rest of the developed economies, plus the tigers who clearly will become even more export-dependent, must look forward to the newly emerging economies to drive growth.

Both US & China could fall badly in 2007, but I would guess that China has the ability to pick itself up quickly, that’s what the demo dividend is about. That would be the key.

but whether it’s china/india, or migrants in US/UK … it’s the emerging countries that’s increasingly driving growth.

So here we go everyone, and plenty of food for thought.

6 thoughts on “Hungary: Well That Didn’t Take Long!

  1. It gets better, a lot of loans to businesses and households in Haungary are in foreign currencies. If the forint takes a large dive it will have serious repercussions for mortage holders.

    http://www.telegraph.co.uk/money/main.jhtml;jsessionid=XCDYOPZMOE1X3QFIQMFCFFWAVCBQYIV0?xml=/money/2006/09/19/cchungary19.xml


    Over 60pc of total loans to businesses and households are now in foreign currencies, and damn the exchange risk. Though Hungary is the region’s pioneer with some $2bn a year in Swiss franc loans, Poland, Croatia, Romania, and lately Turkey are catching up fast. This is Europe’s “carry trade”, every bit as creative as the better-known yen trade that has juiced the world’s asset markets with liquidity at near zero interest rates from the Bank of Japan.

    “It’s a train wreck waiting to happen, especially when novices are at the controls,” said Prof Steve Hanke, a currency expert at John Hopkins University. These mom-and-pop borrowers must service their Swiss franc debts with incomes in Hungarian forints, creating a dangerous currency mismatch,” he said.

    The International Monetary Fund has begun muttering about the dangers, mostly sotto voce so far. An internal IMF paper this summer warned that Europe’s ex-Communist bloc is starting to look as vulnerable as Thailand, Indonesia, Malaysia, and South Korea a year before the Asian crisis in 1997 – if not worse, by most criteria.

    Entitled “Asia 1996 and Eastern Europe 2006 – Déjà vu all over again?”, the report has yet to be published. The lure of foreign loans, of course, is cut-price credit. Payments on Swiss franc mortgages average 5.5pc, while forint loans cost 12.3pc – at least until the game changes, as it did abruptly in the worldwide rout of emerging markets this May.”

    This spells trouble, regardless of what reforms Hungary is planning.

  2. I agree … the US is slowing as investors are becoming risk averse. This will be an important testing time for many emerging markets.

    Hungary is one to watch for sure, Poland is as well, and Ecuador actually is interesting to watch as well with all those maturing bonds around the corner. People are beginning to whisper ‘default’ …

  3. Interesting thoughts. There is a not entirely unrelated piece in the FT this morning on Romanian accession (see below).

    Basically I don’t think the worry here is in the UK (or Ireland), or in Italy or Spain, but in Romania itself. If there is a growth slowdown in the East, then Romania (and other Esatern countries) may be very negatively affected in the longer term by a sudden outflow of people in the short term.

    Romania dismisses EU emigration fears

    Romania will win approval on Tuesday to join the European Union on January 1, but the country’s prime minister has denied that it will spark a massive wave of emigration from the Black Sea state.

    Calin Tariceanu claims his country is in the middle of an economic boom that could see its gross domestic product double within 12 years, drawing migrant workers to Romania.

    Speaking to the Financial Times, Mr Tariceanu also appealed to the British media and public – racked by a debate about the recent arrival of hundreds of thousands of migrant workers from Poland and other new EU member states – to remain calm: “People with higher educational levels might go to the UK but I don’t see too many.”

    He said most poor Romanians would head to Italy and Spain, where they would have less trouble with the language, and only those with better schooling would go to the UK.

  4. I’m going to live dangerously and predict that this is a speed bump, not a car crash.

    Edward, you may have missed it, but in an earlier thread I predicted that Hungary would *not* suffer a serious correction in the next fifteen months, and I offered to bet ten euros on same.

    I’ll stand by it.

    (The markets are opening across Europe as I write, so if I’m very wrong, we should know soon.)

    Doug M.

  5. “I’m going to live dangerously and predict that this is a speed bump, not a car crash.”

    And I’m going to hedge and say, it depends…

    Basically it depends on what happens elsewhere in the global economy, and this depends in large part at this point on what happens to growth in the US. The slowdown there is developing at a rate which is a little too quick for comfort. The speed of the oil price drop is one indicator which troubles me.

    “The markets are opening across Europe as I write, so if I’m very wrong, we should know soon”

    No. It’s not quite like this. I don’t think we are standing on the edge of a precipice (my name is *not* Nouriel Roubini). I would be looking out into 2007, this is when the shots are going to be called (maybe a little sooner, but I would still be looking forward a bit). As I say, Hungary has already corrected to some extent, the issue is can it hold to the path of cutbacks. This is going to be more a political issue than anything else at this point. I am reminded so much of De la Rua here.

    The first test of the water will be the municipal elections at the start of October. Then we will take it from there.

    In the other Eastern markets again the attrition may well be slow, since no-one wants to provoke a crash (as then they would all lose money) by having a rush for the door. What you are more likely to get is a discreet and ongoing ‘re-positioning’.

    “Edward, you may have missed it…”

    No, I did see this, and here for the record is the reply I posted (incidentally, maybe I have toughened-up my position in the last few days. 2007 is now going to be a very difficult for Hungary. I think looking what happened to Portugal around 2,000 can be helpful here. Really the portuguese economy has not recovered any momentum at all. There are other issues here, since Portugal has the ‘high euro’ while Hungary has a flexible currency, but on the other hand the demographic dynamics in Hungary are potentially a lot worse):

    “I got ten euros. Who wants a piece?”

    Sorry I took my time getting back, obviously I’m not prepared to put my money where my mouth is :).

    No. It isn’t exactly that, the issue is that at the end of the day I don’t disagree. Hungary has already had a ‘correction’ and I doubt there will be another big one next year. Since they let the currency drop in many ways this makes the correction softer.

    Another question is whether Hungary will have a recession or not in 2007. This is much harder to call. I think it might, but this depends in large measure on what happens to housing in the US, and this is far from clear. To quote Dave Altig yesterday.

    “What does this all add up to? Pretty simple,really. The economic environment is a total murk, and everyone is just guessing. In other words, nothing unusual.”

    This reticence isn’t simply being shy, these things are really hard to call, and anyone who thinks otherwise doesn’t understand much about economics IMHO.

    On the other hand what we have are such a diverse set of countries. Bulgaria and Romania are likely to get ‘coupling impetus’ from EU membership (assuming that comes) so should be fine in the short term, but since Bulgaria has the Lev peg, when any correction does come it could be significant.

    Czech Republic looks not bad to me. Baltic states look to be problematic, but not tomorrow.

    I think here there are going to be winners and losers. I think those who can attract labour will do comparatively well, and those who lose it will not. Obviously those who get into higher level economic activities can leverage their price differential with places like France and Germany for some time to come. You won’t make a fortune out of either textiles, or electrodomestics, or cars.

    Poland and Hungary are clearly the ones to watch say 2006 – 2010 in my book.

  6. This Times (UK) article from last week argues that the EU is part of the problem in these crises in the sense that it provides a safety net for how bad things can get — so the politicians fight more as a result. So there is a kind of moral hazard in EU membership.