Download - Political Capital

High economic risk
EcoRisk Index - Summary
June 9, 2010
The economic weekly Figyelő and Political Capital publish their indicators monitoring political and
economic risks for the sixth year in a row. In the case of indicators arranged along a 100-point scale a
lower value indicates higher risk.
While in the subsequent quarters of 2009 the economic risk decreased at a steady rate, in
the last quarter the index fell short of the 2008 average as well. With this, for the first time
in the 2000s, the average EcoRisk index slipped into the higher-risk range.
 The deep recession has plunged the growth index to an all-time low; the average
score corresponds to the critically low economic growth index. However, in the region as
a whole, where the Hungarian economy had lagged behind through the middle of 2008,
the gap between growth indexes has narrowed considerably. And this year the
performance of the Hungarian economy has come to match the regional average.
 The financial/money market risk index has produced major shifts during the crisis,
and we strongly believe the worst is already behind us. A sense of calm returned in
the second half of 2009; the sustained rally of equity markets and the return of global
growth reduced risks affecting the real economy and the capital markets. By the end of
the year the index receded into the medium-risk category.
 The Balance sub-index entered the high-risk range already in 2002 and essentially
has remained there over the past seven years. However, in 2009 Hungary's risk
returned to the medium-risk range. Starting with the end of 2008 pressure from global
money markets and international intuitions (effective in the wake of the currency crisis)
managed to impose a painful discipline not only on public finances but, with the
mediation of the banking system, also on the saving/borrowing habits of the population.
 In respect to labour-market risks, following stagnation in the past few years, the
sub-index has deteriorated significantly, and in all likelihood the index will continue
to fall throughout 2010, due primarily to the delayed effects of the crisis on the labour
market. Looking at the East- Central-European region as a whole, during the crisis
labour-market trends in Hungary have not been all that alarming; the rate of job losses
has not exceeded the regional average.
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Last year the economic-risk index, the EcoRisk started off from a low base and
improved gradually over the year. In the last quarter it already returned to the
medium-risk range, which represented the average throughout the previous year.
However, the average for 2009 came to 38.4 points, and with this the EcoRisk
dropped into the high-risk range for the first time since 2000, the year we started
to compile the index consisting of four major and several sub-indexes.
EcoRisk and its component parts
100
Financial
Balance
Economic risk index
Labour market
Growth
80
60
40
20
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
GROWTH SUB-INDEX
In respect to the components, the deep economic crisis has dragged the growth
index to an all-time low; the sub-index hit the lowest point in the third quarter of
2009 (14 points). In 2009 the average came to under 17 points; in our definition
the range below 20 points represents critically low economic growth. The good
news is that the worst is behind us as, by the last quarter, the index managed to
climb above the 20-point range. This is due to improved external conditions and
the slow recovery of the processing industry, although domestic demand continued
to contract at the end of the year. In 2010 the growth index may continue to
improve gradually, although at a significantly slower rate; by the end of the year it
may come close to 50 points (the last time it reached that level was four years ago,
in the winter of 2006-2007).
Until the middle of 2008 the Hungarian economy lagged behind countries of the
region; the economies of Poland, Slovakia and particularly Romania produced
outstanding growth in that period.
The economies of the region converged: discrepancies in growth indexes
narrowed considerably (in 2008 the gap between the highest and lowest scores
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came to around 40 points, in 2009 the gap was 25 points, while in the first quarter
of 2010 under 20 points). This year the performance of the Hungarian economy is
expected to match the regional average. Over the year as a whole, Romania could
come in last while Slovakia's growth index is expected to be exceptionally high.
FINANCIAL SUB-INDEX
The financial/money market risk index produced significant shifts during the
crisis, and we strongly believe the worst is already behind us. Hungary’s financial
risk increased sharply in the fourth quarter of 2008 when it became evident that
the country’s financial stability, i.e., the stability of the national tender, can only
be guaranteed with an EUR 20 billion international standby loan package. In
retrospect, the second quarter was a period of quiet consolidation. The second half
brought relief; the sustained rally of equity markets and the return of global
growth reduced risks affecting the real economy and the capital markets. By the
end of the year the index slipped into the medium-risk category. The outlook for
2010 is essentially determined by concerns over sovereign debtors. While, at least
in theory, it has already been realized that the assets of the coming generations
cannot be squandered with abandon, it was not clear when capital markets would
start to become worried. By all indications, that time has come. Therefore, the
balancing of public finances must be one of the top priorities of economic policy,
otherwise the financial/money market risk may easily return to the “high” range.
BALANCE SUB-INDEX
With a synthesis of external and internal stability factors, the balance sub-index
provides information on the overall stability of the Hungarian macro economy,
i.e., the rate of risk due to instability. After Hungary’s balance index entered the
high-risk range in 2002, essentially it has remained in place over the next seven
years. At the same time, our projection that Hungary's balance risk would return to
the mid range in 2009 has come to pass. Starting with the end of 2008 pressure
from global money markets and international intuitions (effective in the wake of
the currency crisis) managed to impose a painful discipline not only on public
finances but, with the mediation of the banking system, also on the
saving/borrowing habits of the population. Moreover, in the same period the trade,
current-account and capital account balances have also improved; so much so that
a deficit was turned into a measurable surplus. However, it is highly doubtful that
this achievement can be sustained over the long term. Although the country’s
foreign economy and financing position are quite stable at this point, the rate of
state finances to household savings foreshadows a slight increase in risk. With all
that, a steep slide is unlikely; for 2010 we expect balance risk to remain in the
medium-risk range, within 50-60 points.
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LABOUR MARKET SUB-INDEX
In respect to labour-market risks, the level of economic activities and
unemployment trends, real exchange rate based on unit labour costs and the rate of
public sector employment as opposed to that in the private sector (i.e., public
burden on the private sector) provide an accurate picture of labour market risks.
Following stagnation in the past few years, the sub-index has deteriorated
significantly, and in all likelihood the index will continue to fall throughout 2010,
due primarily to the delayed effects of the crisis on the labour market. Be that as it
may, labour market risks grew sharply until the autumn of 2009 and continue to
grow to this day, albeit at a slower rate. From 57.8 points in the first quarter of
2009, the sub-index declined to 46.5 points by the end of last year and to 45.9
points by the end of the first quarter of 2010. In aggregate, these shifts represent
declines still in the medium labour-market risks range, although a jump in the rate
of unemployment already signals high risk. Looking at the East- Central-European
region as a whole, during the crisis labour market trends in Hungary have not been
all that alarming; the rate of job losses have not exceeded the regional average.
Labour market risks may increase through the middle of 2010 and, with the
economic recovery and the expansion of the labour market, risk factors may start
to improve. Due to structural problems Hungarian labour-market risks had shown
a rising trend well before the crisis. While on a global scale, reactions of the
Hungarian labour market to the crisis were not particularly detrimental, a steep
rise in unemployment and the significantly weaker job-retention capacity of the
private sector as compared to the public sector have become apparent. Despite the
level of economic activity and the relatively neutral effect of wage costs, the
above factors increase labour-market risks for 2009 and 2010, and only a slow
turnaround is projected starting in the second half of 2010. With all that, a
substantial drop in labour-market risks in annual average indexes will appear only
in 2011, the earliest.
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