Periscope Hungarian Development Bank s monthly report

Transcription

1 Periscope Hungarian Development Bank s monthly report February 218 FOCUS The Hungarian credit gap according to the autumn 217 MFB INDICATOR survey At the end of 217 Hungarian companies with good prospects had a credit gap of approx. HUF 7 billion filling this gap could improve their competitiveness and contribute to economic growth. About four-fifths of the gap results from the fact that companies fearing rejection do not even try to approach financial institutions with their borrowing requirements. In the credit financing gap the service sector and micro enterprises, and in a regional breakdown the Central Hungary Region is dominant. The estimated size of the gap shrank by about one-fifth over a year, which was the result of the simultaneous occurrence of several favourable circumstances. The credit gap was reduced by the improving profitability of financial institutions, banks increased willingness to provide, the growing volume of loans granted, the increasing dynamism of development institutions, falling interest rate levels and the easing of banks lending conditions. The size of the credit financing gap in Hungary The responses processed in the course of the Hungarian Development Bank s representative corporate questionnaire survey (MFB INDICATOR) conducted in the autumn of 217 made it possible to estimate based on the development rate of businesses, their lending experience gained in the preceding one-year period and their borrowing plans the size of the financing gap the filling of which could improve the competitiveness of companies and contribute to economic growth. This gap arises among firms with good prospects because their loan applications are rejected, either in whole or CONTENT in part, or the companies themselves refused the loan offer received as they find its terms unfavourable, or they do not even turn to financial institutions with their borrowing needs for fear of their applications being rejected. (Companies are considered to have good prospects if their equity is positive and they posted steady sales in their domestic and foreign markets in the last 12 months or their sales increased in at least one market.) The breakdown of the respondent firms is presented in Chart 1. Looking at the responses received in the course of the survey and based on Hungarian company databases, taking into account the composition of Hungary s corporate sector it is possible to estimate the size of this gap by company size, region and industry sector as well as at national economy level. The group of companies with a perceptible credit gap comprises 38, businesses in total, including about 34, micro enterprises, almost 4, small businesses, around 5 medium-sized enterprises and about 1 large companies (). About 1, businesses are squeezed out of the credit market due to the partial rejection of their loan applications and 4, due to complete rejection, while 4 are forced out because they refuse the loan offer received, and 32, because they do not even apply for a loan. If we also take into consideration the percentage of the required loan that is actually granted to partially rejected companies, the estimated size of the financing gap is about HUF 727 billion, which equals 11. of the total volume of corporate loans at the end of 217. The biggest proportion, about 8, of the gap results from the fact that companies do not even try to submit a loan application due to fear of rejection. Complete Exports, industry and the construction sector saw continued growth in the last months of the year... page6 The consumer shopping spree continued in the last month of page 7 The Hungarian labour market maintained its dynamic growth rate in Q4 217 page 8 There is still no inflationary pressure on the Hungarian economy... page 9 Corporate loan growth hit a ten-year record in page 1 Stable start for the forint in the new year... page 11 The general government deficit to GDP was around 2., well below the 2. target in page 12 Data close: AUTHORS: Judit Mádi (Madi.Judit@mfb.hu) Zsolt Szabó (Szabo.Zsolt@mfb.hu) PUBLISHER: MFB HUNGARIAN DEVELOPMENT BANK PRIVATE LIMITED COMPANY EDITOR IN CHIEF:Szabolcs Vida CONTACT: Cím: Nádor utca 31. H-151 Budapest. Tel.: Web: The views expressed in the analyses published by MFB Plc reflect the authors personal views and do not correspond in any circumstances to the Bank official views. The analyses are based on data obtained from credible sources but the authors do not take responsibilities for their authenticity. MFB Plc and the authors are not responsible for the accuracy of the forecasts.

2 Chart 1 The structrure of the gap (number of companies estimated by the results of the corporate questionnaire csurvey) Corporations ( 3 thousand) Sources: MFB calculations based on data of MFB INDICATOR (Autumn217) corporate survey Corporations having problems ( 14 thousand) Corporations with good outlook*( 16 thousand) Companies not having financing gap ( 115 thousand) Companies having financing gap**( 38 thousand) Unknown ( 7 thousand) Received the full amount of applied loan ( 45 thousand) Did not apply for loan as it was not needed ( 7 thousand) * Companies whose equity is positive and posted steady sales in their domestic and foreign markets in the last 12 months or their sales increased in at least one market ** Did not manage to receive bank loan Applied for a bank loan ( 1 thousand) Refused the proposed bank loan because of the conditions ( 1 thousand) Loan application was rejected ( 4 thousand) Loan application was partly rejected ( 1 thousand) Did not apply for a bank loan ( 32 thousand) Did not apply for a loan for fear of rejection ( 32 thousand) rejection accounts for 1, partial rejection for about, while results from loan offers being turned down by the applicants themselves (). Overall, the largest part of the gap is latent, i.e., invisible to banks. Getting discouraged from applying for a loan is a problem that affects 32, companies, which equalled one-tenth (11.9%) of all businesses with at least one owner in October 217. Based on a survey of the European Central Bank (ECB) and the European Commission (EC) covering all member states, in the 6 months preceding the 217 EU research study 7. of Hungarian businesses passed up on a commercial loan, 4. on a working capital loan or investment loan, 3.7% on an overdraft facility and 2.9% on some other financing opportunity because they feared that their application would be rejected. There are overlaps between the companies that answered the three questions of the ECB and the EC, but the recent analyses of the MFB as well as those of the European Central Bank and the European Commission indicate that getting discouraged is not negligible, as it affects about one-tenth of the corporate segment (). In comparison with other EU countries in 217, Hungarian businesses were somewhat less characterised by such loss of courage than the EU average when it came to applying for investment loans and working capital loans, but the phenomenon was markedly more visible Microfirms 7. The structure of financing gap by company size Small companies The structure of the financing gap by the origin of the gap () Amount of loans () 32.1 Medium companies Large companies 63.1 Proportion of discouraged borrowers in 217 Hungary Trade credit European Union % Bank loan (excluding overdraft and credit lines) Microfirms Small companies Medium companies Loan application was partly rejected Loan application was rejected Corporations (thousand) Sources: MFB INDICATOR corporate survey (Autumn 217) Large companies Refused the proposed bank loan because of the conditions Did not apply for a loan for fear of rejection Sources: MFB INDICATOR corporate survey (Autumn 217) 3. Credit line, bank overdraft or credit cards overdraft Survey of ECB and European Commission* Sources: ECB, European Commission, MFB INDICATOR corporate survey (Autumn 217) * within 6 months prior to the survey ** within 12 months prior to the survey 2.9% 3. Other external financing 11.9% Total loans MFB INDICATOR corporate survey** Periscope Periszkóp december February 218

3 than in Poland or the Czech Republic, other members of the Visegrád group (). The service sector accounts for more than half (59.) of the gap, industry accounts for one-third (37.), while agriculture makes up 3.. In terms of size, the gap is concentrated in the segment of micro enterprises (69.), while micro, small and medium-sized enterprises together represent 97.. Region-wise, Central Hungary has an outstanding share (59.), Transdanubia has 14.9%, while the part of the country east of the Danube accounts for onefourth (25.7%) of the gap. About the MFB INDICATOR survey The Hungarian Development Bank launched its regular, representative corporate questionnaire poll, the MFB INDICATOR survey in summer 29. The aim of the data gathering is, by analysing the responses, to acquire a comprehensive picture of the most important macro-economic and market trends affecting the Hungarian companies as well as of companies resource and investment needs, their experiences, future plans and limits on these fields. Results enable us to evaluate the direction of changes, dynamics of the processes granting useful information to the decision making of the Hungarian economic policy as well as to forming the products of the MFB according to market requirements. The most recent, 14th survey was carried out in autumn 217; data gathering was conducted between the 19th October and 24th November 217. The questionnaire was delivered to the companies online and via post as well; and they could send it back also electronically or via post. Participation was voluntary and data has been processed by retention of anonymity. This time the questionnaire was filled in and sent back by 214 companies. Due to incompletely filled-in questionnaires the responses of 1385 companies to 76 questions were considered and evaluated. Companies taking part in the survey represent the Hungarian corporate structure as per size, regional position and sectoral distribution fairly well thus we can make conclusions based on this information as well. Change in the size of the credit financing gap Based on the MFB s corporate surveys conducted in the autumn of 216 and the autumn of 217, the gap shrank by HUF 166 billion in a year. The contraction of the credit gap resulted from the simultaneous presence of several favourable factors, such as revved up lending, loan interest rates nearing record levels, the easing of lending standards and the improving profitability of banks. According to the National Bank of Hungary (NBH), the total volume of loans in the corporate sector was HUF 52.1 billion more in November 217 than a year earlier, which also means that one in every three forints of the 12-month loan volume growth helped reduce the gap. Corporate loans increased by HUF billion in 217, the biggest growth since 28, i.e., the corporate sector received new loans in a volume not seen for a decade. Nevertheless, the rate of change in the gap varied from one sector to another and also by company size: in the case of micro enterprises the decrease in gap size (-HUF billion) was similar to the balance of the net credit transactions calculated for the one-year period (+HUF 18.2 billion), while for larger companies the gap increased slightly despite the growth in loan volume (). As far as sectors Greece Cyprus Discouraged borrowers regarding bank loans (excluding overdraft and credit lines) in 217* in EU Members States Croatia 18 Ireland -247 Latvia Portugal 44 Slovakia Netherlands Lithuania 15 Romania Sweden France Bulgaria Denmark Italy EU Spain Belgium Hungary Sources: ECB, European Commission, MFB Slovenia * within 6 months prior to the survey The size of the gap and the changes in corporate loans (Autumn Autumn 217) by company size and sector Sources: NBH, MFB INDICATOR corporate surveys Net loan transactions (September September 217) Changes in gap (Autumn Autumn 217) Microfirms Small Medium Large companies companies companies Austria Malta 194 Poland United Kingdom 82 Germany Estonia Finland 373 Czech Republic Luxembourg Changes in total amount of corporate loans (September September 217) Changes in gap (Autumn Autumn 217) Agriculture Industry Services sector Periscope Periszkóp december February 218

4 are concerned, the decrease in the credit gap was driven by the service sector: last September the total amount of loans of service providers exceeded the yearearlier figure by HUF billion, which contributed significantly to the HUF 246 billion contraction in the tertiary sector s gap in a year. Development institutions also contributed actively to reducing the gap. The total amount of loans that the MFB granted to the corporate sector in 217 using its own funds was more than twice the previous year s figure, while in respect of EU-funded loans the increase was more than sevenfold year on year. In addition, the MFB also lent its subsidiaries (MFB Ingatlan, Magyar Követeléskezelő) more than twice as much as a year earlier, which indirectly also helped the corporate sector access funding. For Hungarian companies it also improved the conditions of access to funds that Garantiqa, another member of the MFB Group, supported lending to micro, small and medium-sized enterprises last year with guarantee products worth almost 7 more than in 216, while venture capital firm Hiventures began making venture capital investments in start-ups and developing businesses in the range of a billion forints (Chart 7). The decrease in the gap over a one-year period can also be illustrated by how much the volume of corporate loans falls short of the pre-crisis level: theoretically, the smaller the volume of corporate loans is, i.e., the bigger the difference is from the pre-crisis level, the more companies with otherwise good prospects may suffer from a shortage of loans. While in September 216 the volume of companies loans was almost HUF 1,9 billion less than eight years before, a year later the shortfall from the September 28 level was only about HUF 1,4 billion, so in both the autumn of 216 and the autumn of 217 the credit gap was approximately half of the difference between the volume of loans at the time and the level seen in the autumn of 28 (Chart 8). In other words, as total loan volume grows, some of the companies affected by the gap can also obtain loans. It should also be emphasised, however, that the HUF bilion Chart Chart Chart The activity of the MFB and some members of the MFB Group in 217 (216 = 1) MFB loans* offered to corporate sector using own funds Total amount of corporate loans compared to the value of September 28 and the size of the gap September 215 September 216 September ,6 3,4 3,2 3, Total amount of corporate loans compared to the values of September 28 (LHS) Size of loan gap (LHS) Loan gap as proportion of the difference between total amount of corporate loans compared to the value of September 28 (RHS) Sources: NBH, MFB INDICATOR corporate surveys Annualised agreed rate of corporate loans to non-financial corporations* * and the evaluation of interest rate as lending barrier judged by companies 4,2 Bank overdrafts * weighted by the amount of new business 4, ** scale of 1-5, 1 - the least important barrier, Loans up to an amount of, the most important barrier 3,8 million EUR Sources: NBH, MFB INDICATOR corporate surveys EU supported loans offered to corporate sector by MFB organic changes in the corporate sector (e.g. the termination of companies and the formation of new ones, the disappearance of old industries and the emergence and strengthening of new ones) gradually increase the ratio of the gap to the change in loan volume since 28 (autumn 215: 36.; autumn 217: 51.). This means that the continued growth in corporate loans and reaching the pre-crisis level will probably not eliminate the gap, only reduce its size, as the number of companies that cannot obtain loans for some reason will be reproduced. MFB loans to subsidiaries** * without refinancing loans ** Magyar Követeléskezelő, MFB Ingatlan Loans over an amount of.25 million euro and up to 1 million EUR Loans over 1 million EUR 3-month BUBOR Increase of guarantee products (Garantiqa) Sources: MFB Level of interest rates* as lending barrier** (RHS) It increased the accessibility of corporate loans and contributed to reducing the gap last year that the rates of interest charged on corporate loans, which had been on a descending path for years, hit a historic low at the end of 217 (Chart 9). Hungarian companies also welcome falling interest rates according to the MFB s corporate questionnaire surveys, and in recent years the level of interest rates has lost a lot of its weight among borrowing constraints. Based on the NBH s lending surveys, since the middle of 214 the majority of Hungarian financial institutions Periscope Periszkóp december February 218

5 have eased their lending standards, including collateral requirements. The feedback from banks suggests that the loosening of borrowing requirements has had a particularly positive effect on micro and small enterprises (Chart 1). The responses of financial institutions concur with the signals received from companies: according to the MFB s surveys, the smallest companies experienced a significant improvement in collateral requirements the main obstacle to borrowing in 215, then in 217 unlike larger firms micro enterprises felt another, albeit less pronounced, positive trend (Chart 11). In addition to the NBH s loose monetary policy, banks improving profitability also played a part in decreasing loan interest rates, and their increasingly robust earnings and higher risk tolerance prompted the representatives of the sector to step up their willingness to lend and ease their lending standards. Among the banking sector s key earnings ratios, both return on assets and return on equity may have hit a nine-year high last year (Chart 12). Chart Chart Changes in credit standards* in the last 6 months by the size of the borrower (* net change indicator, positive = tightening, negative = loosening) ROA* and ROE* in the banking sector * after tax Sources: NBH, MFB ROE - 4-quarter rolling average (LHS) ROA - 4-quarter rolling average (RHS) Large and medium-sized enterprises Small and micro-sized enterprises Q1 29 Q2 29 Q3 29 Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 * maximum maturity, maximum size of credit line, costs, spread on interets rates, risk premiums, collaterals, required credit score, other requirements, etc. Chart 11 4,1 4, 3,9 3,8 3,7 3,6 3,5 3,4 3,3 3,2 3,1 3, Sources: NBH lending surveys, MFB The evaluation of the size of collaterals as lending barrier* by the companies Sources: MFB INDICATOR corporate survey (Autumn 217) Spring 213 Large companies Medium-sized companies Small-sized companies Mirco firms Autum 213 Spring 214 Autum 214 * scale from 1 to 5, 1 - least important barrier, 5 - most important barrier Autum 215 Autum 216 Q1 28 Q2 28 Q3 28 Q4 28 Q1 29 Q2 29 Q3 29 Q4 29 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Q3 211 Q4 211 Q1 212 Q2 212 Q3 212 Q4 212 Q1 213 Q2 213 Q3 213 Q4 213 Q1 214 Q2 214 Q3 214 Q4 214 Q1 215 Q2 215 Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Autum 217 2, 1, 1,,, -, -1, -1, -2, Periscope Periszkóp december February 218

6 FOREIGN TRADE, INDUSTRY AND CONSTRUCTION The latest data suggests that exports, industry and the construction sector saw continued growth in the last months of the year The volume of Hungary s exports and imports increased by 5. and 6., respectively, in November (y/y). As a result of vigorous investments and consumption, the growth rate of imports continued to exceed that of exports (Chart 1), while the trade surplus of the first 11 months of last year (HUF 2,392 billion) was 16.9% less than in the corresponding period of the preceding year. The outlook for Hungarian exports is positive for the coming months, as export orders in Hungary are picking up and are at multiyear highs both in Germany the number one market for Hungarian products and in the European Union (). According to the data for December adjusted for both seasonality and the calendar effect Hungary s industrial production increased by 1. m/m and 4. y/y (Chart 3). Based on raw data, manufacturing output dropped by billion HUF Chart External trade volume in Hungary Trade balance (LHS) Export volume (y/y, RHS) Import volume (y/y, RHS). in December (y/y), as there were two less working days last December than a year earlier. Performance varied considerably from sector to sector: the pharmaceutical industry posted 15. growth, while the engineering industry saw a 22. plunge. The vehicle industry, which accounts for a quarter of total industrial production, reported a 4. increase in output (). It drives production in manufacturing that the volume of new industrial orders both foreign and domestic is increasing (). The construction sector kept its momentum in November: the volume of production rose by 35. in 12 months. All three subsectors contributed to the overall growth in the sector (). At the end of the year the order book exceeded the year-earlier figure by 129., which will support this year s construction industry growth Export orders in the European Union, Germany and Hungary Sources: European Comission, MFB EU Hungary Germany Industrial production* in Hungary *seasonally and calendar effects adjusted data Month/month (RHS) Year/year (LHS) Industrial production and new ordes of main branches of manufacturing (y/y) * 3-month moving average Domestic orders* (LHS) Industrial production* (RHS) Export orders* (LHS) Production* of the manufacturing sub-sectors (December 217) Manuf. of pharmaceuticals Rubber and plastic prod. Metal prod. Transport equipment Electrical equipments Textiles, leather prod. Food, beverages, tobacco Wood and paper prod. Computer, electronic prod. Chemical prod. Manuf. of machinery MANUFACTURING TOTAL Volume indices of production in construction by divisions (y/y) Division construction of buildings Division construction of civil engineering works Division specialised construction activities Construction total % % Periscope Periszkóp december February 218

7 CONSUMPTION The consumer shopping spree continued in the last month of 217 Hungarian consumers maintained their optimism reaching a level not seen since 22 in January 218. The positive sentiment also applied to business expectations and growth prospects, two indicators listed since 1996, both of which hit historic highs (Chart 1). Following last November s outstanding, 6.7% momentum, the volume of retail trade showed further dynamic growth in December, exceeding the previous year s corresponding figure by 5.9% when adjusted for the calendar effect according to the raw data, the increase was 4.7% due to the fewer business days (). So in 217 as a whole, retail trade grew by 4. y/y. Food sales increased at a slowing rate (+2.1%) in December 217, non-food products maintained the previous month s impressive pace (+1.), while fuel sales rose faster (+4.1%) y/y based on preliminary figures (). The performance of the retail sector was supported by several factors at the end of the year, including employment growth as well as rising real wages, the combined result of wage hikes and low inflation (). In addition, favourable loan terms also boosted consumption in December: the average interest rate on overdraft facilities and forint housing loans fell to 22.61% and 4.5, respectively, while that on consumer loans remained flat from the previous month (7.) (). It also indicates consumers favourable financial position that households increased their financial assets by HUF 363. billion in December as a result of the transactions (). Chart 1 Sentiment indicators and economic growth in Hungary Retail trade volume* in Hungary % % Sources: GKI (GKI Economic Research Co.), HCSO, MFB GDP growth* (y/y, RHS) Business sentiment (LHS) * seasonally and calendar effects adjusted data Consumer confidence (LHS) Economic prospect (LHS) Retail trade by the main product groups (y/y) (volume index adjusted for calendar effects) * adjusted for calendar effects Non-food products Food products Fuels 1 1 9% % Month/month (LHS) Year/Year (RHS) * seasonally adjusted and adjusted data by working days Retail trade and net wages in Hungary (y/y) Retail trade volume * with fostered workers Net real wages* Monthly average agreed interest rate of HUF loans to households (weighted by the amount of outstandings) Sources: NBH, MFB Bank overdrafts Housing loans Loans for consumption and other purpose Households' financial assets (by tranzactions) Sources: NBH, MFB Cash (HUF denominated) Domestic bank deposit Domestic investment fund shares Total financing assets** (RHS) *government and other securities ** 12-month rolling average Cash (foreign currency) Domestic debt securities* Domestic quoted shares Periscope Periszkóp december February 218

8 LABOUR MARKET The Hungarian labour market maintained its dynamic growth rate in Q4 217 Hungary s activity and employment rates were 62.1% and 59., respectively, on average in Q4 217, which means an increase of.6 and 1. percentage s, respectively, year on year. The unemployment rate stagnated at 3. in the October-December 217 period, which is.7 percentage s less than the figure for the year-earlier period (Chart 1). Hungary s unemployment rate, which has been decreasing continuously for 66 months now, is the fourth lowest rate in the European Union (). The number of employees exceeded the year-earlier figure by 1.1%. Similarly to the preceding almost 1.5 years, the growth resulted from the expansion in the primary labour market: while the number of fostered workers dropped by 3.9%, that of private sector employees rose by 2. y/y (). The dynamic wage growth continued in November: salaries rose in every market sector year on year. The 13. increase in average gross wages seen in the second last month of the year was the combined result of the wage growth in the private sector (+12.) and the public sector (+14.) (). The unemployment expectations of Hungarian households and employment plans both suggest a further increase in the number of employees in the coming months (Charts 5-6). Chart Activity rate, employment rate and unemployment rate in Hungary (population aged 15-74) Unemployment rate (LHS) Employment rate (RHS) Activity rate (RHS) Education Accommodation, food service act. Construction Industry Transportation, storage Wholesale and retail trade ICT Health care Agriculture Administrative & support service act. Financial intermediation Public administration Real estate activities Social work activities Budgetary institutions Business sector TOTAL Changes in number of employed persons (November 217, same period of the previous year = 1) Unemployment rate and Households' expectations regarding unemployment rate* * over the next 12 months % 96.1% improving expectations Expectations regarding unemployment (LHS) 99.9% % % 16.9% 14.1% % 11.7% Sources: European Commission, HCSO, MFB * population aged % 1 9% 7% Unemployment rate (RHS) 11 21% % Unemployment rate in EU member states (November January 218) * October December 217 ** September November % % % % 8.1% 8.1% % % Czech Republic Malta Germany Hungary* Netherlands United Kingdom** Poland Romania Austria Estonia* Denmark Luxembourg Sweden Ireland Bulgaria Belgium Slovenia European Union Slovakia Portugal Lithuania Latvia Finland Euro area France Croatia Italy Cyprus Spain Greece* Changes in gross wages* (November 217, same period of the previous year = 1) Social work activities Real estate activities Administrative and support service act. Transportation, storage Accommodation, food service act. Wholesale and retail trade Health care Construction Industry Sources: Agriculture HCSO, MFB Public administration Education ICT Financial intermediation Budgetary institutions Business sector TOTAL * pross earnings without premiums and one month bonuses % % Sources: Eurostat, MFB 11 Employment expectations and number of employees in the manufacturing sector (y/y) employment expectations: Sources: European Commission, HCSO, MFB Employment expectations (LHS) Employment in manufacturing (y/y, RHS) thousand people Periscope Periszkóp december February 218

9 INFLATION Despite rising global raw material prices and increasing domestic wages, there is still no inflationary pressure on the Hungarian economy The price of Brent crude increased by 1. in January, which means seven consecutive months of rising oil prices. In addition to the cooperation of the OPEC member states to curb production, this time the price hike was mainly driven by the 3.7% weakening of the US dollar against the euro (Chart 1). Producer prices continued to increase in Hungary at the end of last year: they rose by 7.7% in agriculture and by 3.9% in industry in November (y/y) (). Consumer prices in Hungary rose by. January (m/m); the impact of higher food, non-food and fuel prices was offset by the fall in the price of services and because of winter sales of clothing and apparel (). Consumer Chart 1. ábra1 1,45 1,4 1,35 1,3 1,25 1,2 1,15 1,1 1,5 1,,95 USD/EUR exhange rate and the world crude oil price Sources: Reuters, MFB USD/EUR (LHS) USD strengthenening Brent Crude Oil (RHS) $/barrel prices increased by 2.1% on average in a year; as far as the main product groups are concerned, alcohol and tobacco (+6.) and food (+4.) prices went up significantly, while the price of consumer durables dropped by. (y/y). The 12-month core inflation rate sank to its halfyear level, 2. in January (). It will support a continued low inflation rate in the first months of this year that sticky prices which are a good indicator of expected inflation trends only rose by 2. in January (y/y), households inflationary expectations remain moderate, the rising wages have not put a significant pressure on consumer prices yet, and the VAT rate of more products was cut this January (Charts 5-6). Producer price index of industry and agriculture, export price index and import price index in Hungary (y/y) Producer price index of agricultural products Producer price index of industry Import price index Export price index. ábra3 Changes of consumer prices by the main groups of products and services (January 218, m/m). ábra4 Core inflation, monthly and annual changes of consumer price index in Hungary Food Other goods, including motor fuels Alcoholic beverages, tobacco Fuel and power Consumer durable goods Services Clothing and footwear Total -3, -2.9% -2, -2, -1, -. -1, -, %..,, 1, 1, Sources: HCSO, NBH, MFB CPI (m/m, RHS) CPI (y/y, LHS) Core inflation (y/y, LHS) 2, 2, 1, 1,,, -, -1, 1% Underlying inflation indicators (y/y) Sources: NBH, MFB *excluding changes in processed food prices from core inflation adjusted for tax changes Demand sensitive* inflation Core inflation excluding indirect taxes Sticky price inflation % Consumer price index and consumer expectation regarding inflation Inflation expectations (LHS) Consumer price index (y/y, RHS) Sources: European Commission, NBH, MFB rising expectation regarding inflation over the next 12 months Periscope Periszkóp december February 218

10 CORPORATE FUNDING Corporate loan growth hit a ten-year record in 217. Adjusted for changes in exchange rates, the volume of corporate loans increased by HUF 28.5 billion in December 217 (+.), thus the year-end loan volume exceeded the figure seen at the end of 217 by HUF billion (9.) and came close to the level of February 215. The volume growth registered last year has been the most significant since 28 (Chart 1). Regarding the loans by maturity, the volume of loans with a maturity of 1-5 years showed the biggest growth (+HUF 24. billion) in December. The balance of disbursements and repayments (i.e., transactions) meant that forint loans increased by HUF 16.6 billion, while foreign currency loans increased by HUF 38.8 billion in December, bringing the total growth to HUF 55.3 billion in the last month of last year (). For about six Chart 1. ábra Total amount of corporate loans at the end of the year and the annual changes of corporate loans Sources: NBH, MFB Annual changes of corporate loans (RHS) Total amount of corporate loans at the end of the year (LHS) Change in total amount of outstanding non-financial corporate loans (y/y)* * change in total value converted to euro Sources: Eurostat, MFB Hungary Czech Republic Slovakia Poland Romania months the annual growth rate of corporate lending in Hungary has been around the average of the Visegrád countries, and the optimism of economic actors suggests further loan growth for the coming months (Charts 3-4). Interest rates on corporate forint loans rose in December: the average interest rate of 1-5-year loans went up from 2.6 to 2.77% in one month, while the average interest rate of longer-term loans climbed from 2.5 to 2.6, but interest rate levels can still be considered favourable for companies in comparison with the previous years (). Based on the MFB s corporate surveys (MFB INDICATOR), banks collateral requirements remain the number one obstacle to borrowing for Hungarian businesses, while the demand for loans is less and less curbed by interest rates () Change in total amount of outstanding non-financial corporate loans through loan transactions HUF loans FX loans Total loans Sources: NBH, MFB Change in total amount of outstanding non-financial corporate loans through loan transactions and ESI economic sentiment index Sources: NBH, European Commission, MFB improving expectations Loan transactions (6-month rolling average, LHS) ESI sentiment index (6-month rolling average, RHS) Interbank interest rates*, and interest rates on corporate loans** Sources: ECB, NBH, MFB * 3-month interbank rates ** annualised interest rates weighted by month-end values BUBOR EURIBOR HUF loans - over 5 years HUF loans years EUR loans in Hungary - over 5 years EUR loans in Hungary years 4,4 4,2 4, 3,8 3,6 3,4 3,2 3, Summer 29 The most important barriers on lending* raised by credit institutions Winter 29 * scale of 1-5, 1 - the least important barrier 5 - the most important barrier Sources: MFB INDICATOR corporate surveys Summer 21 Spring 211 Autumn 211 Spring 212 Scarcity of credit supply Lack of own sources Autumn 212 Spring 213 Autumn 213 Spring 214 Autumn 214 Autumn 215 Autumn 216 High interest rates Amount of collateral Autumn 217 4,4 4,2 4, 3,8 3,6 3,4 3,2 3, Periscope Periszkóp december February 218

11 EXCHANGE RATES Stable start for the forint in the new year The excellent global investor sentiment seen at the start of the year lost its momentum by the second half of January, which also affected the HUF/EUR exchange rate: early in the month the Hungarian currency appreciated against the euro, the common European currency bounced back by the end of the month (Chart 1). While the HUF/EUR rate mostly moved sideways in January (the forint ended the month with a.1% loss in value), the Hungarian currency dropped by.7% against the Swiss franc but strengthened significantly, by 3. against the US dollar (month-end rates: 31.7 HUF/EUR; HUF/CHF; HUF/USD) (). The currencies of Central and Eastern Europe showed a rather mixed picture against the euro in the first month of 218: the Polish zloty gained., while the Czech koruna and the Romanian leu both appreciated by 1. against the single European currency. In regional comparison, the forint moved in sync mainly with the Romanian leu (). Both the domestic and the international environment will support a stable forint in the following months: Hungarian market players are characterised by outstanding optimism (the Eurostat economic sentiment index rose to an unprecedented 12.9 s in January) (), and the assessment of Hungarian instruments is also more and more positive (the BUX index set a new historic record at 41,516.4 s in the first month of 218, while the CDS premium of 1-year Hungarian government bonds sank to a never-before-seen low at 124. s) (Charts 5-6). Chart The HUF/EUR exchange rate and the global risk appetite Sources: CBOE, ECB, MFB HUF/EUR (LHS) VIX index (RHS) increasing global risk appetite The exchange rate of the forint against the Swiss franc, the US dollar and the euro Sources: ECB, MFB HUF/EUR HUF/USD HUF/CHF forint strenghtening , 1, 1, 99, 99, 99, 99, 99, 98, The exchange rates of Central and Eastern European currencies against the euro* * = 1 Sources: ECB, MFB strengthening against the euro , 1, 1, 99, 99, 99, 99, 99, 98, Czech koruna Hungarian forint Romanian leu Polish zloty The HUF/EUR exchange rate and the Economic Sentiment Index (ESI) in Hungary Sources: ECB, European Commission, MFB improving sentiment HUF/EUR (monthly average, LHS) ESI (RHS) inverted scale The HUF/EUR exchange rate and the 1-year country risk premium The HUF/EUR exchange rate and the Budapest Stock Exchange index basis Sources: ECB, Reuters, MFB year CDS premium (LHS) HUF/EUR (RHS) rising BUX index HUF/EUR (LHS) BUX index (inverted scale, RHS) Sources: ECB, Reuters, MFB forint streigrhening , inverted scale Periscope Periszkóp december February 218

12 GENERAL GOVERNMENT AND ITS FINANCING The general government deficit to GDP was around 2., well below the 2. target in 217 As a result of favourable economic trends and government measures, the 217 general government deficit to GDP calculated using the EU methodology is expected to be around 2. instead of the 2. target according to the convergence criteria (ESA); the final, adjusted figures will probably be published at the end of March. The central government budget deficit totalled HUF 1,94.2 billion on a cash flow basis, exceeding the annual target (HUF 1,2.9 billion) by 58. (Chart 1). Last year s deficit exceeded the previous year s low basis (HUF 747. billion) by HUF 1,157.2 billion. The EU payments advanced by the budget played a key part in the marked difference between the balances of 216 and 217. The items on the revenue side totalled HUF 13,1 billion in 217, while those on the Chart , 3, 3, 2, 2, 1, 1,,, -, Revenues and expenditures of central budget* in January - December period (billion HUF) Sources: Ministry for National Economy, HCSO, MFB *cash flow data The proportion of cumulated central government budget deficit* in ratio of the yearly target Sources: Ministry for National Economy, HCSO, MFB *cash flow data I II III IV V VI VII VIII IX X XI XII value of balance Other expenditures Debt service Transfers to general government subsystems Payments of central budgetary institutions National Fund for Family and Social Policy Other revenues Central budgetary institutions Payment of households Taxes in consumption Payment of economic organizations Reference yields on Hungarian government securites, the central bank base rate and the 1-year CDS spread month 6-month 12-month 5-year 1-year NBH base rate 1-year CDS spread Sources: Government Debt Management, NBH, Reuters, MFB basis expenditure side amounted to HUF 15, billion, exceeding the annual targets by 9.4 and 13.9%, respectively (, Table 1). In January the secondary market yields of 5-year and 1- year Hungarian government bonds rose by 15 bp and 29 bp, respectively, month on month, while the yields of discount treasury bills dropped by -2 bp. International risk appetite deteriorated slightly by the end of January 218, which also impacted long-term yields in the region: the benchmark yields of 1-year government securities increased throughout the region in January (Romania: 1bp, Slovakia: 15bp, Czech Republic: 22bp, Poland: 32bp). It should be noted, however, that prior to that, in the first week of 218, 1-year Hungarian yields sank to an unprecedented low at 1.9 (Charts 3-4). Table 1 The revenues of the central government and the social security funds by main groups CENTRAL GOVERNMENT Taxes imposed on corporations total income modified yearly revenue target January - December % of yearly revenue target % Corporate income tax Taxes imposed on SMEs Special taxes on banks and branches Taxes imposed on consumption % Value added tax Excise tax % Financial transaction tax Taxes imposed on households % Personal income tax PENSION FUND HEALTH CARE FUND Sources: Ministry for National Economy, HCSO, MFB 1% Yields on 1-year government bonds and VIX index Sources: Government Debt Menegament Agency, Reuters, CBOE, MFB increasing global risk appetite Hungary Czech Republic Poland Slovakia Romania VIX index (RHS) Periscope Periszkóp december February 218