News
CZ: Neutral – Nov PPI added 0.4% mom, unchanged yoy at 5.6% (p2)
RU: Mixed – Putin’s Q&A session includes the usual tough rhetoric, hints of liberalization (p2)
Today’s Events
HU: Oct gross wages / LN: (15-16) Oct trade balance / PL: Nov unemployment and gross wages / RU: Money supply as of 12 Dec, (16-19) Nov labour market statistics, Nov retail sales, Nov investments in productive capacity / SL: Oct unemployment / TK: Nov consumer confidence / UA: Nov retail trade
EEMEA Markets
With the IMF and European Commission in Budapest, the government continues to generate headlines, some good, some bad. This is all ahead of next Tuesday’s rate decision. The positive news is that the government and banking sector has reached an agreement on FX mortgages. As per the last scheme households will still be able to convert FX mortages into HUF. The deadline has been extended to end-Jan from end-Dec. The exchange rate of 180/CHF remains. However the extra principle (the increase in principle due to the HUF losses) remains a liability for households but one that must not be addressed 2016. The government/banking sector will carry the extra interest rate costs on this. The government and banking sector has also introduced a new plan whereby all loans that are in arrears for 90 days or more are converted into HUF, with a 25% write down of the principle. The total cost of these measures stands at HUF900bn, according to official estimates, equivalent to 3% of GDP. The government has agreed to cover one third of the costs of above, the central bank two thirds, with the banking association also receiving a reduction in the bank tax.
The government has also put forward a more realistic budget for next year but one that still carries question marks. The combination of a 1pp reduction in its growth projection to 0.5% and a higher EUR/HUF assumption (299/EUR) has translated into a HUF320bn shortfall, equivalent to approximately 1% of GDP. The government intends to cover this largely by scrapping the HUF200bn reserve pencilled into the budget currently but will also force a reduction in expenditure at a ministerial level and well as absorb HUF48bn in pension payments from those still paying into the private pension system. At least from a signalling perspective, the latter is clearly negative. The government continues to target a deficit of 2.5% of GDP – arguably too tight given the growth outlook but one subject to risks given that we see the government’s growth assumption as too optimistic.
The final piece of newsflow is more negative, namely the presentation of another piece of legislation surrounding NBH procedures and management. Government influence on the central bank has been a source of contention with the EU since PM Orban’s election.
The legislation transfers responsibility for nomination of Deputy Governors to the PM rather than Govenor, as well as responsibility for certain issues away from Deputy Governors and to the MPC. Further tensions arose on Thursday when Governor Simor indicated that the government would have to compensate the NBH for the extra HUF300bn in FX reserves that the bank plan announced would require.
We see this very much as a case of ‘two steps forward, one step back’. The newflows on the fiscal and banking front is a positive but the newsflow in central bank legislation is a potential impediment to a new IMF/EU agreement. On Thursday PM signalled an interest in a precautionary line with the IMF but we continue to see an traditional stand-by arrangement as the most likely outcome.
Looking ahead to next Tuesday’s rate decision, we expect the NBH to leave its policy rate on hold but discuss a rate hike. Since its last rate decision at the end of November, financial market variables have improved slightly. EUR/HUF is 8 big figures lower while HGB yields have rallied modestly. Sovereign CDS is marginally tighter while there is some progress towards a IMF agreement, though a final announcement remains some distance away.
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Gillian Edgeworth
UniCredit Research