Hungarian investment in free fall

Hungarian investment in free fall
By bne IntelliNews September 1, 2016

A rebound of GDP growth in the second quarter had raised hopes that the Hungarian economy can regain some momentum in the second half of the year, but plummeting investment threatens to derail that optimism. Falling 20.3% year on year, overall investment dropped to its worst quarterly result since 2000 in April-June, data from statistics office KSH showed on August 31.

The plummet illustrates just how heavily dependent the Hungarian government is on Brussels. Despite the harsh criticism thrown at the bloc, Budapest will have to wait for a renewed inflow of EU-funds to revive investment, while hoping that a recent upturn in corporate lending signals a long-awaited recovery that could help boost private investment further down the line.

Following investment growth of 14% in 2014 – the strongest result in nearly two decades – and a 0.6% increase last year, Hungarian investment has been hit drastically in 2016 as the volume of EU-funded projects has faded. A KSH report in May showed a contraction of 9.6% y/y in the first three months of the year, and the already feeble investment data for January-March was revised to -12.6% on August 31. Compared to the first quarter, investments dropped 0.8% in April-June, pointing to a continued free fall. 

"The decrease was – similarly to the previous quarter – the outcome of the completion of developments financed from EU funds, which affected most the investments of budgetary units,” the stats office explained. 

The sharpest drop - 71% - was recorded in the water supply, sewerage and waste management sector. The completion of EU-funded road construction projects in 2015 - the last year to claim financing under Brussels' 2007-13 budgetary window, produced a 65% decline in investment in transportation and storage.

Overall, the public sector saw investment plunge 53.5% y/y in the second quarter following a 49% contraction in the first. The ruling Fidesz party - an increasingly outspoken critic of the European Union – seems to have little choice but to hope that the pipeline of EU-funded projects soon starts flowing once more.

Only temporary

Hungary says it is pushing to accelerate the process of fund absorption under the 2014-20 budgetary window in order to soften the impact on the economy. However, that effort seems yet to show any results.

The government hopes that will soon change. "In the second quarter, disbursements of the new cycle have started and have improved results,” the economy ministry claimed in a press release, adding that further expansion is expected for the rest of the year. Budapest also repeated the mantra used when evaluating the feeble GDP growth in the first quarter: the fall in investment "is only temporary" the ministry insists.

In case of investment, however, the government might need to prepare for even more dramatic figures through the rest of the year, taking into account the high base that the rush for the last scraps of EU cash created in the second half of 2015.

However, while the contraction of public investment was anticipated, the continued fall in private investment appears more alarming. Following a 5.1% drop in corporate investment in the first three months of the year, the segment saw an even sharper annual decline of 18.3% in April-June. That is in spite of the fact that corporate lending – which has been struggling to revive since the global financial crisis - took a positive turn in the second quarter, showing a 0.3% increase compared to a disappointing result earlier in the year.

The rise was welcomed by the Magyar Nemzeti Bank, which has persistently called on banks to make more credit available to the real economy. In particular, the central bank has pushed the SME segment via its 'Funding for Growth' scheme (FGS) over the past few years.

“The end of deleveraging in the Hungarian banking market is a good thing and is definitely supported by policy measures, such as the FGS, the ultra-expansionary monetary policy and a somewhat more constructive stance towards domestic banks,” Gunter Deuber, head of CEE research at Raiffeisen Bank International tells bne IntelliNews.

It is yet to be seen, however, whether the latest corporate lending figures can offer hope for turning the corner, and whether an increase in lending will be able to help boost investment activity in the long run. "One has to be very cautious,” Deuber warns, pointing out that the overall corporate loan stock declined from some HUF8,000bn in 2008 to around HUF5900bn at the end of 2015.

“For a clear indication that we are currently seeing a sustainable turn-around in the lending cycle we need and least one to two years of decent corporate loan growth,” he adds.

Yet optimism persists. Looking ahead, analysts insist there are encouraging signs even within the second quarter investment data. They note, above all, that manufacturing - which accounts for more than one third of all private investment in Hungary - registered a 11% y/y increase in April-June, and Audi, Daimler and Samsung have all since announced large new investment plans for the country. In real estate sector, meanwhile, it's hoped that the government’s housing programme will offer some relief.

Analysts also note that a forthcoming economic stimulus package promised by the government could also contribute to reviving investment. "Thanks to the favourable budgetary situation, the government is expected to launch some state investment projects as of September,” Peter Virovacz at ING Bank writes in a note. However, he still expects an annual contraction of up to 20% in investment for the full year.