At an international “Hungary at First ‘Site'” press conference organized by the Friends of Hungary Foundation,Hungary Today’s publisher, and held online this year due to the coronavirus pandemic, Gábor Gion, State Secretary for Financial Policy Affairs, and Radován Jelasity, CEO of Erste Bank Hungary spoke of the Hungarian economy and the financial sector during the pandemic, and their outlook for the near future.
Gábor Gion, the State Secretary for Financial Policy Affairs, first discussed the state of the Hungarian economy. He said that while the first wave was managed relatively well healthcare-wise, the pandemic resulted in the economy “free-falling” 13.3% in the second quarter. Yet it initially rebounded unexpectedly quickly, 11.6% over the next few months. By today, it has contracted 5.6% year-on-year, and is expected to end up at 6.4% fall in GDP by the end of the year.
Gábor Gion. Photo by Szilárd Koszticsák/MTI
He drew attention to the fact that the economy was in much better shape before this crisis than prior to the financial crisis of 2008-2009, both in quantitative and in qualitative terms. The debt to GDP ratio of the country is in the 60s instead of the 80s, and the fiscal budget is under control with the deficit below 3% over most of the last decade. Hungary has consistently outgrown the EU average over the same period, also outpacing its regional reference group. The economy is more diverse now, not as export-focused, and much more balanced between sectors than it used to be. Foreign direct investment inflow has also been both diverse and high.
In terms on unemployment, Gion expected worse. At the beginning of the year, unemployment was at 3.4%, and despite a sharp initial rise at the beginning of the pandemic, at the moment, according to the official statistics, the number of people in employment in Hungary is higher than in February (without factoring in part-time workers). The government introduced programs for subsidizing jobs, and companies seem to otherwise be surviving in most sectors other than hospitality. This is in part thanks to the loan payment moratorium.
The Financial Sector
Radován Jelasity, the CEO of Erste Bank Hungary, highlighted the loan moratorium as an example of how the financial sector and the government worked together in Hungary to achieve social goals during the pandemic. He also confirmed that Hungary’s situation had improved dramatically compared to how it was before the 2008 crisis, when Hungarian people were net debtors.
Radován Jelasity. Photo by Zsolt Czeglédi/MTI
The loan moratorium extended to all debtors and financial services, and was therefore rather generous to debtors. While it was difficult for the sector, he remarked that they handled it extremely well, in close cooperation with the government. He is confident that the sector will get back to where it was before the pandemic with the government’s help. Investor reports seem to confirm the pervasiveness of this belief. Retail lending is already back to where it was before the pandemic.
Gion noted that since the root cause of the current crisis is the pandemic, one cannot predict what might happen to the economy without a good estimate of how the healthcare situation will evolve. He believes only a couple more months are left to survive as we get closer to addressing the root cause of the situation, the virus. By the middle of next year, we will have a vaccine, which will increase consumer and investor confidence, and reinvigorate the economy.
He said that based on large-scale analyses, a there has been a slow but steady recovery since the dramatic initial drop and smaller sharp rebound in the spring, and this is set to continue. Under the conditions predicted now, this year’s budget deficit will be 8%, and the debt to GDP ratio will rise above 80%. From next year on, both of these will decrease, while the economy is expected to grow 3.5%.
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Otherwise, investment is expected to remain high. Of the large volume of expected investment projects in manufacturing, only one has been cancelled, and three delayed. In the medium term, an overall GDP increase of 14-18% is expected to be derived from these investments. One reason for the sustained willingness to invest in Hungary is that many of these planned investments are rather forward-looking, such as one by a Korean company in electric battery manufacturing.
According to Jelasity, another reason is that many investment companies are rethinking their strategies. They now find that it does matter how close you are to the market for the products and services you provide. Therefore, producing some things within Europe has its benefits, and in this arena Hungary is a viable option. His bank, Erste, wants to serve as the proxy for this region on the international stage.
Factors that make Hungary attractive include the fact that wage-adjusted labor productivity is the highest in the EU, Gion said. This is doubly true in the automotive industry. A further reason is that corporate tax is exceptionally low at 9%. A third, to hear Gion tell it, is that the government is cooperative and forthcoming with companies, consistently delivering on their promises.
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In the current climate, when companies downsize, they do so in expensive places first, and often move jobs over to cheaper regions if sufficient workforce is available, making Central and Eastern Europe particularly attractive. This may also serve to keep unemployment lower in Hungary.
The way forward
Both Gion and Jelasity agree that life is going to be different after the pandemic; the new normal will not be the old normal, we will work and live differently. More of our affairs might be conducted online, but for the financial sector, this is an adjustment rather than a paradigm shift. It may even save some costs by allowing companies to outsource some jobs to lower-income areas within the country (and do away with some customer-facing roles).
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Answering a question from a journalist, Gion said that fiscal responsibility will be key going forward, and the country will therefore avoid measures such as printing money or taking on excessive debt to provide temporary solutions to aspects of the crisis. Although there is a clear appetite for the government to provide more funding, if debt is raised today, the same people asking for it now will decry it tomorrow.
The problem child
Fiscal discipline is also the central idea when it comes to supporting the ailing hospitality industry. In answer to the question of why the government does not support hospitality establishments to the same extent Austria does, Gion said that the government is willing to cover losses, but that this is no time to make profits. This is in no way what current governmental aid entails, however.
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Regardless, Gion said the government would like to see the effort and the visions from the side of firms in the industry before helping them any more. Gion noted that they saw that the hotel industry picked up in the countryside over the summer, while those in Budapest remained empty. He thinks maybe hotels in Budapest should think about changing their business model instead of relying on the government to bail them out.
Featured photo illustration by Csaba Krizsán/MTI