The Hungarian Economy and Property Investment.

BudaRich said:

Its just a shame that this whole IMF situation looks so bad to the rest of the world.

They hear Iceland needing a bale out and then Ukraine and they then lump Hungary in with that negative thinking due to the IMF involvement.

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Don't worry, the list of countries being bailed out by the IMF will grow and maybe you'll be in better company then (OT - if Ireland wasn't in the Euro, we would almost certainly be facing the same situation).

Agreeing potential terms with IMF has actually helped the forint though. It's now below 270, compared to Thursday's 284. The important difference is that Iceland is being bailed out, whereas Hungary is using the fund as a support against further negative speculation in relation to the HUF.

I agree. The main wiff of IMF intervention sets off all sorts of alarms. We'll have to wait and see what this financing package boils down to.

This indeed is a very complex situation.

This IMF package effectively gives the Hungarian Government a get out of jail free card, they can just blame the warefare state cut backs on the IMF loan due to the many strings attached to such a loan.

The article on Portfolio.hu has the following conclusion.

What is the conclusion?

The IMF said the programme of the Hungarian authorities would “ensure fiscal sustainability, [...] strengthen the financial sector" and improve the country's long-term growth potential. This coupled with the senior official's remarks (see above) hint that:

- there is a good chance the cabinet will need to make adjustments to its social and pension-related spending items, and also to some elements in the family allowance regime.

- Meanwhile, as general elections (scheduled for 2010) draw closer, even the possibility of pre-election profligacy needs to be squashed. A means to that could be passing the bill on setting a budget spending cap or - even better - creating a more complex set of fiscal rules. It is also possible that the budget deficit will be lowered to an even larger extent than the government envisages.

- The cabinet may also take measures to enhance the international competitiveness of the tax regime and to cut the number of or scrap the elements in it that curb growth potential. Due to the existing time constraint, it is unlikely, though, that the government could manage to pull off a comprehensive reform of the tax system as part of the IMF deal."
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It seems to me that this IMF loan will be nothing but GOOD for Hungary. Just what the doctor ordered.

BudaRich said:

It seems to me that this IMF loan will be nothing but GOOD for Hungary. Just what the doctor ordered.

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As long as the doctor ordered a nasty period of deflation... what proportion of GDP is government spending? How much would reducing government spending affect economic activity? What about secondary effects?

There is only so much positive spin you can put on something before the smell becomes very rich...

Well I would question whether these hard cut backs would be made if it was'nt for this IMF loan, the population would be up in arms to bring down the government.

I fear the current government would just be too chicken to do it - get these painful changes out of the way so that growth can return, if they didnt have someone else to blame for the pain.

budapest said:

It might appear to be an honest account but it's actually not an accurate assessment of the current situation. The IMF won't 'bail out' Hungary. It's a last resort measure, which HU probably won't use, unless things get a lot worse. Perception and speculation rather than fundamental problems have caused the current crisis. It's difficult to see the facts through the mainly exaggerated and inaccurate sensationalist articles and overly-simplific explanations. The IMF and ECB funds were accessed, not necessarily to be used, but instead to provide absolute proof that if the worst were to happen, that the economy will not collapse.

The HUF has now firmed quite strongly to 1 EUR - 271 HUF from Thursday's low of 1 EUR - 284 HUF, now that speculators have been kept at bay somewhat with recent governmental tactics such as the 3% interest rate increase.


This also totally misses the point. The Hungarian government had terrible economic policies from 2001-2006 and since then, has barely put a foot wrong. The budget deficit was brought down from 10% in 2006 to 3.4% this year, a huge achievement by any stretch. There are no major fundamental economic problems in Hungary and the government is actually doing a good job, probably for the first time in over a decade. Few analysts would argue that long-term potential for Budapest is anything but favourable.

In relation to overseas property investment in general, most Irish got it totally wrong when they invested in the wrong areas and paid too much in Budapest around 2003/2004. Most got it wrong again with Bulgaria in 2006 and many are likely to have made the same mistakes in Poland in 2007. Amateur property investors tend to run like sheep and chase unrealistic goals like '20-30% capital appreciation' in an overheated marketplace, instead of doing proper research and buying a desirable property at a reasonable price in a stable market, where rental returns are good and long-term growth is likely. These investors then tend to blame the country for their bad judgments.

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These sheep (amateur property investors) also tend to be eaten by wolves ( estate agents ) in sheeps clothing

yoganmahew said:

As long as the doctor ordered a nasty period of deflation.

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I agree with Budarich's assessment of this. Specifically speaking, the IMF scheme is good news for Hungary. If the government goes through with it, they will get a 'get out of jail free' card and possibly tackle some of the issues, which are obvious problems in Hungary, but they dare not or can deal with as a minority government - generous social welfare system, etc. This will ultimately improve long-term economic prospects.

It's interesting to see what speculators and larger scale investors consider as important versus what popular opinion does. In relation to IMF support, larger investors obviously view it as a positive thing as the HUF has now rapidly strengthened to 1 EUR - 261 HUF.

irish_bob said:

theese sheep investors also tend to be eaten by wolves ( estate agents ) in sheeps clothing

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Very true. It's unfortunate that you got poor advice from your estate agent when purchasing. Hope things go well with the sale/rental.

News in:

Hungary to Receive $15.7 Billion IMF Rescue Package
By Zoltan Simon and Lily Nonomiya

Oct. 29 (Bloomberg) -- Hungary will receive a 12.5 billion euro ($15.7 billion) loan from the International Monetary Fund as the eastern European nation's economy heads toward its first contraction since 1993.
``The Hungarian authorities have developed a comprehensive policy package that will bolster the economy,'' IMF Managing Director Dominique Strauss-Kahn said in a statement in Washington yesterday. ``At the same time, it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets.''
Emerging economies are turning to the IMF as investors, stung by losses in developed countries caused by the global financial crisis, sell riskier developing-market stocks, bonds and currencies. Ukraine and Iceland have received IMF financing, while Pakistan and Belarus have also asked for loans.
The European Union is ready to provide 6.5 billion euros in funds to Hungary and the World Bank has agreed to provide 1 billion euros, the IMF said. The loan is a 17-month stand-by agreement, which will be approved by the Fund's executive board next month, the statement said. A stand-by agreement is a line of credit that doesn't necessarily need to be used.
Assets Ravaged
Hungarian assets have been ravaged as foreign-currency borrowing by local companies and consumers, along with slower growth, a wider budget deficit and higher government debt than elsewhere in east Europe, raised concern that the country may have difficulties in securing funding.
Prime Minister Ferenc Gyurcsany said in Budapest yesterday that the government expects gross domestic product will shrink by 1 percent next year, the first time the economy would contract since 1993.
The forint rose 5.2 percent to 260.61 at 7:07 a.m. since the IMF said on Oct. 27 that Hungary was to receive a ``substantial financing package'' to shore up its economy.
Previously, the forint fell more than 20 percent in the past three months, forcing the central bank to raise the benchmark interest rate to 11.5 percent from 8.5 percent, the biggest increase in five years. The currency fell to a record low against the euro on Oct. 23.
The benchmark BUX index plummeted to more than a four-year low, while OTP Bank Nyrt., the nation`s largest lender, lost 53 percent of its value this month.
Deficit Cuts
The government secured an emergency loan facility of 5 billion euros from the European Central Bank and the central bank started offering foreign-exchange swaps and buying back bonds to help revive interbank lending and debt trading.
As part of the package, Hungary will cut spending and move to reduce its reliance on external financing by cutting the budget deficit faster than earlier planned, Gyurcsany said yesterday.
The government is proposing freezing salaries and canceling bonuses for public workers and reducing pensions to cut the budget deficit to 2.6 percent of gross domestic product next year, rather than an earlier plan of 2.9 percent. Hungary estimates a gap of 3.4 percent this year.
Gyurcsany has also postponed tax cuts for next year, aimed at boosting economic growth from a 14-year low of 1.1 percent last year, to ease the country's financing pressure.
Western Europe is on the brink of a recession, exacerbating problems for neighboring emerging economies, which were scorched by investors dumping riskier assets in a flight to safety. Hungary was expecting GDP growth of 3 percent in 2009 when it first drew up next year's budget.
Markets were hit by the global financial crisis two years after Prime Minister Gyurcsany pushed through tax increases and cuts in public sector jobs and household energy price subsidies to narrow the widest budget deficit in the European Union.
The government managed to trim the shortfall to 5 percent of gross domestic product last year from 9.2 percent in 2006.
The government and central bank have pledged to meet euro- adoption requirements for the deficit, inflation and national debt by next year. The nation doesn't have a target for the switch, because deficit overruns forced it to scrap previous goals.
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net; Lily Nonomiya in Tokyo

The Bloomberg piece above has now been updated to:

Hungary Secures $25.5 Billion Bailout From IMF, EU
Hungary secured a 20 billion-euro ($25.5 billion) loan from the IMF, the EU and the World Bank to shore up its economy that was ravaged in the credit crisis and is headed for a recession next year.

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At least the forint is up...

Im sooo pleased that Hungary has taken this opportunity so sort itself out. The government has seized this with both hands and this will return growth to Hungary.

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IMF, EU, World Bank line up gigantic financial package for Hungary
Wednesday, October 29, 2008 08:11:00 AM
The International Monetary Fund (IMF), the European Union (EU), and the World Bank have announced a joint financing package for Hungary totalling USD 25.1 billion to bolster its economy, hit by recent financial market turbulence.




IMF, EU, World Bank loan 1/2 next page >>
Subject to agreement by the IMF's Management and Executive Board, the IMF is ready to lend Hungary USD 15.7 billion (EUR 12.5 bn) under a 17-month Stand-By Arrangement. The proposed package could be reviewed by the Board under the Fund's emergency procedures in early November, the IMF said in a press statement.

The EU stands ready to provide a loan of EUR 6.5 billion (USD 8.1 billion), and the World Bank has agreed to provide EUR 1.0 billion (USD 1.3 billion).

Third financing package

“The IMF is moving quickly to help emerging markets battered by fallout from global financial turmoil and the sharp slowdown in the economies of advanced industrialized countries," the fund said in a statement.

The 185-member institution has more than USD 200 billion of loanable funds and can draw on additional resources through two standing borrowing arrangements - the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB) - with groups of IMF member countries.

The planned financing package for Hungary follows within days earlier announcements of tentative loan agreements with both Iceland and Ukraine. The IMF is also in discussions with several other countries about possible new lending programs.

Restoring confidence in Hungary

The IMF said in the statement that the Hungarian authorities have developed a comprehensive policy package designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets. “It will bolster the economy's near-term stability and improve its long-term growth potential," the IMF said.

Core measures under the programme are designed to improve fiscal sustainability and strengthen the financial sector. Specifically, the package includes measures to secure adequate domestic and foreign currency liquidity, as well as strong levels of capital for the banking system.

Important measures in the fiscal area will reduce government financing needs and ensure longer term debt sustainability.

"These strong policies justify the exceptional level of access to Fund resources—equivalent to around 1,020 percent of Hungary's quota in the IMF—and deserve the support of the international community," said IMF Managing Director Dominique Strauss-Kahn.

The success of the policy package will be a shared responsibility between all stakeholders in the country and the international community. The IMF has worked in close co-ordination with the European Union, the European Presidency, and the World Bank on the issue.

"We will continue assisting the Hungarian authorities on how to adapt to the current global financial turmoil and to catalyze financing as needed," Strauss-Kahn added.

The BUX index is +12%, and the HUF is back to 256. I'd still be cautious though, everything is rallying today anyway; lets hope its not a happy coincidence, but its certainly being viewed as a positive sign by both the markets and economists.

I remember transferring EUR into a HUF a/c in maybe late '05 early '06 and I got 282 on the FX, so these type of fluctuations are not unusual.

"The HUF has now firmed quite strongly to 1 EUR - 271 HUF from Thursday's low of 1 EUR - 284 HUF, now that speculators have been kept at bay somewhat with recent governmental tactics such as the 3% interest rate increase."

I just noticed it's 1 Eur to 255 HUF today. Going in the right direction ! Very near it's 250 rate again.

The improvement in the florint clearly has to do with the IMF intervention. But be clear! The banks are not going to lend in a foreign currency anymore.
This means local buyers must borrow in high interest rate florints. This greatly reduces their buying power.......

This is not necessarily true, tyoung. The majority of Hungarian banks are continuing to lend in foreign currency mortgages. Local buying power has been low for years in any case. Lending in EUR or CHF mortgages has never been an ideal situation for anyone and most locals have been sitting on the fence. Everyone is waiting for real EUR-based mortgages from around 2011/2012 onwards.

I'm surprised that inaccurate accounts of the Hungarian economy continue to be published, despite the fact that the sensationalism of last week has been proven to be unfounded. Yesterday's (Friday's) 'Comment' section in the Irish Times was a typically inaccurate account of the current situation.

budapest said:

The majority of Hungarian banks are continuing to lend in foreign currency mortgages.

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Name them.

yoganmahew said:

Name them.

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I would love to hear this answer. Banks all over the world are having problems financing themselves. For banks in developing markets this is especially true.

One of the big reasons to be short the forint and the Hungarian banks was the out of control foreign currency lending (85% of all domestic loans issued this year were in foreign currencies). Hungarian banks are having severe difficulties in funding themselves and do you really think that outside investors are not aware of the foreign currency lending problem? Do you really believe that a Hungarian bank would be able to fund itself if it were to persist in this highly risky form of lending?

The Hungarian economy (like many others) is going to have to endure a horrible couple of years. The IMF loan only serves to emphasise how the Hungarian authorities had painted themselves into a corner. The intervention of the IMF is not really good news no matter how hard you spin it.

Its good news in a bad situation to be sure, however thanks to this IMF intervention Hungary will most likely recover more quickly than other countries in the region.

There was no property bubble in Hungary whereas there was in EVERY other country in the region, where property prices were ramped up by Western property speculators. THIS IS WHY I purchased in Hungary 2 years ago and then again a year ago, to AVOID the global asset collapse (Yes, - believe it or not some of us saw it coming), since all but the hardiest speculators left the Budapest market several years ago.

Simple property cycle methodology, the UK was at the top of the property cycle 2006 / 2007 - time to sell and buy somewhere that was at the bottom of the cycle and has a) No bubble b) Where consumer confidence had bottomed out and was returning.

Property prices are 20% lower than any other capital city in the region, thus property prices will not fall as far and as hard - if at all when compared to the other capital cities and since the property cycle bottomed out last year and consumer confidence was on the rebound = Hungary will be the first to recover.

The Budapest property market recovery has undoubtably been slowed somewhat - however, this pales in comparison to the pain yet to be endured by other countries in the region where property prices will fall if they have not already, perhaps when they fall down to the prices in Budapest I would say it is time to buy again. Right now .... any place - any investment that is not losing value is a good place to be and yet Hungary has far more to offer than just that, big companies make cuts where expenses are HIGH and where labour is expensive and unproductive - not a comparson that can be made to the Hungarian economy. If there are job losses they will be few when compared to else where.

This IMF loan if anything will attract investors / FDI since it is almost a guarantee that wage inflation will be kept in check for the next few years. Hungary's budgetary cut back measures are known to all, planned for and implemented and the problems are well known. Now compare that to other countries that have budget expenditure based on high growth that has since evaporated, clearly Hungary is the better, safer choice.

You fail to see the big picture Johnboy, like so many other would be property speculators. Driven by todays news (papers reflect the sentiment of the time and that right now is irrational fear, - a perception of reality that is full of half truths and inevitably incorrect) whereas I am driven by news yet to be written 6 months from now. Sure I read the papers but I look for the truth within those articles and certainly dont buy into the view of the journalist / and the so call panel of experts.

Experts are funny - you can always find one that confirms the story you want to tell. Dont get me started on Economists - worst of all 99% of economists get predictions of property house price crashes and recessions totally WRONG.

<personalised rermark removed>, being led by mass media off the cliff.

Mass media or is it because I work for an investment management firm with a dedicated emerging market research team made of of people who grew up in that area? Our Hungarian analyst regularly meets the management of the big Hungarian banks and also talks regularly with senior policy makers. This is an economy to avoid for the time being.

BudaRich,

Do you have an interest in property or the provision of related goods and services (financial or non financial)? If so you need to declare the interest and abide by the posting guidelines?

Please do not make personalised remarks concerning other posters.

aj
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