Hungary's economy grounded

By bne IntelliNews February 22, 2012

Kester Eddy in Budapest -

When Ryanair flight FR8393 to Barcelona lifted its 142 passengers into the snow-filled skies above Budapest a little after 07:00 on the Friday morning of February 17, it was a fortnight - almost to the hour - since Malev, the Hungarian flag carrier, had announced it was grounding all flights.

In that time, management of the Irish no-frills carrier had cajoled, argued - some say bullied - their way into opening 27 additional new routes from Budapest (including Barcelona), in addition to the five new routes that they had announced in January. Ryanair is also establishing an operating base at the airport, with a planned allocation of four Boeing 737s, and is busy recruiting up to 250 former Malev pilots, cabin crew and engineers. Little wonder management of the Irish no-frills airline were patting themselves on the back. "And off we go - the flight had 142 on board, a load factor of 75%. A great day and a fantastic achievement in just two weeks. It's large Jameson whiskeys tonight, I can tell you!" Stephen McNamara, the carrier's press chief, told bne once FR 8393 was airborne.

Ryanair's zeal to fill the void left by Malev's collapse, along with expansion efforts by other airlines serving Budapest - most notably low-cost rival Wizz Air - must be a relief for Liszt Ferenc Airport in particular, and Hungary in general: Malev carried 3.2m passengers last year - roughly 40% of the airport total - traffic that Hungary's commercial sectors, particularly tourism, badly needs.

The two budget carriers alone are now targeting some 3.5m extra travellers through Budapest this year - a rare piece of good news in what is an increasingly gloomy economic outlook for Hungary.

Cloudy skies

True, preliminary data put economic growth in the last quarter of 2011 at a surprising 1.4%, boosted by a strong recovery in agriculture, up 28% on 2010 figures. This performance lifted the expected GDP growth for last year to 1.7%. The government also insists it is keen and serious concerning a deal with the EU and International Monetary Fund (IMF) to secure a "safety net" stand-by loan seen as essential for restoring confidence in Hungary's state financing (Hungary on February 17 sent its answers to the European Commission regarding Brussels' concerns about the central bank law, data protection and the mandatory retirement age for judges). This has helped the forint, which had tumbled to a record low of HUF324 against the euro in early January due to the perceived chasm between the government and EU/IMF regarding a new facility, recover to around HUF290.

Overall, though, the signs are not good. Hungary's government appears to be scaling down its projection of 0.5% economic growth for this year, with Mihaly Varga, Prime Minister Viktor Orban's chief of staff, telling newswires on February 20 that it only now expects the country to probably avoid recession, so somewhere between stagnation and 0.5% growth.

Most independent analysts had regarded the 0.5% growth forecast as overly optimistic; the European Bank for Reconstruction and Development (EBRD), in its January report on Emerging Europe, was very cautious overall due to turmoil in the Eurozone and worries about sharply reduced bank credit. It was particularly bearish on Hungary, predicting a 1.5% contraction - partly out of uncertainty over the hoped-for EU/IMF programme. "Bank-related balance of payments flows show... substantial outflows in Hungary (an annual outflow of about 3% of GDP), as banks normalise their funding patterns. In Hungary, domestic risks will likely re-enforce this trend in the absence of international assistance, and credit to both household and corporate sectors contracted by about 2% of GDP last year," the EBRD stated in its report.

Certainly, agriculture won't come to the rescue again this year, says Gyorgy Rasko, a farmer and former deputy minister of agriculture. "Last year's spectacular growth is unsustainable. This year prices will decrease by 10-15%, we have substantial winter kill [due to autumn drought], and now floods are expected," he says.

Laszlo Akar, vice-president of GKI, a Hungarian economic research unit, says that without agriculture's contribution, "core growth was only about 0.5%, driven mainly by industrial exports."

In its last regular commercial survey, the GKI business confidence index had slumped from to -16.3 in January, a level last plumbed in late 2009 and down from +2.4 in February 2011. The study found that while expectations in industry and construction were unchanged compared with December, "companies in trade and services had turned markedly more pessimistic." And in a report issued in February, a survey of 800 Hungarian companies revealed that a mere 4% planned to raise their headcounts this year, while 29% expected to reduce staff levels. GKI said that tax and regulatory changes introduced in January had, unsurprisingly "not improved the mood of corporate leaders." Like the EBRD, GKI predicts a 1.5% contraction in the economy for this year.

The auto-engineering sector remains a bright spot, with expansion of the Audi plant at Gyor continuing, and serial production at the new Daimler-Mercedes plant in Kecskemet now imminent. In addition, media reports in Austria say that the German carmaker may transfer production of Mercedes G-Class SUVs from Graz to Hungary next year.

But according to most analyses, it will take more than a growing auto sector, along with the revival of Budapest Airport, to lift the Hungarian economy into positive territory this year.

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