...austerity measures will be worth nothing.- "No matter how spectacularly the position of Hungary's budget is improving when household savings are eroding to the same extent. Consequently, the financing need of the national economy is increasing instead of decreasing.Overall, net borrowing of the total economy (or net lending of the rest of the world) was 8.7% of gross domestic product in the four quarters to 2008 Q3, according to financial accounts data published by the central bank (NBH) on Monday.
Balance status shabby
Hungary's borrowing requirement jumped in the third quarter. According to seasonally adjusted data, net borrowing of the total economy (or net lending of the rest of the world) was 9.2% of GDP. This is virtually the same number that characterised the fiscal adjustment period of 2006-2007.
This means that while there was a serious consolidation in the public sector, Hungary's external balance position has virtually not improved- pointing out how fragile the economy really is. Net borrowing of the total economy was 8.75 of GDP in the four quarters to Q3 2008, a very high figure.
Subsequently, the problem does not root in the awful figures of the last quarter; the situation is bad even looking at a more prolonged period.
Savings are not popular...
...because of two main things:
1. One is that - somewhat surprisingly - corporates started to increase their borrowing requirement. The phenomenon is strange, since such behaviour tends to occur when investments pick up, while capacity boost is not exactly what companies have been engaged in recently. Nevertheless, this is the less worrying process, given that funds arrive to the sector either in the form of parent company lending or direct capital investment - and these are not as risky as, for instance, debt accumulation within via the banking sector.
2. Unfortunately, though, this is not the only reason. Even if we disregard the corporate segment, we can still see that balance improvement has stopped and even reversed slightly. And once the combined financing position of the general government and households indicate a borrowing requirement of around 3.0% of GDP, it is exactly the key conditions of balance improvement that are missing.
What is behind the disappointing process is clearly the savings behaviour of households. The balance of gross savings and borrowing (net savings) is negative, which is extraordinary even in historical perspective.
The reason for the inadequate participation of households (as a classic savings segment) is that they are borrowing at an incredible pace. Transactions boosted the financial assets of households by HFU 214 billion in Q3, while their borrowing amounted to HUF 380 bn.
How to proceed?
The question currently is how the financial crisis will affect the above processes. In theory, loan conditions for households will be tighter, while the position of the general government will improve further - even more than projected earlier, as in response to the shaking financial stability the government decided to cut the deficit more than previously planned. Consequently, the aforementioned unfavourable trends may abate - in theory.
According to the latest financial accounts statistics, Hungary's general government deficit was below 3.0% of GDP in every quarter of 2008 - hence the country could have met even the Maastricht criterion in this respect. It probably did not do so, as the accounting of MÁV Cargo's privatisation need to be done in a way that will be bad for the budget.
Therefore the Q4 borrowing requirement will push the deficit figure higher. Altogether the position improvement of the general government is continuous and if shocks of the financial crisis on the real economy (GDP contraction) and inflation (CPI greatly lower than expected) do not burden the budget too drastically, the trend could remain the same in 2009, as well."
Source: Portfolio Online Financial Journal
06.01.2009