Hungary’s Exaggerated Exchange Wizardry
Hungary’s stock market was the region’s runaway winner into the last month of the year up 30 percent on the MSCI Index, triple Russia’s gain as the core universe’s other positive performer. The equity march came despite a 5 percent stake sale in leading bank OTP at a discount as the exchange itself was repurchased from Austrian control at $45 million for 70 percent back to “return as national property,” according to the central bank. Budapest Bank had reverted from private hands earlier this year, and airline Wizz Air embarrassed officials around the same time when it chose to list in London instead of at home. Capitalization is under 20 percent of GDP, and private pension fund elimination in 2011 has thwarted activity for small companies in particular the government targets under its Growth Support lending scheme which is to expand another 5-10 percent in 2016. However economic expansion may be just over 2 percent then with reduced EU fund receipt and farm production, and German manufacturing spillover with the VW crisis and China export slump. The budget deficit should stay under the 3 percent EU sanctions threshold despite an agreed cut in the special bank tax. Interest rates could be lowered further as the euro undergoes another QE round and inflation settles around 2 percent.
Polish shares veered toward the opposite direction with a 25 percent MSCI loss after the populist Law and Justice Party won a majority in parliamentary elections on a platform to enact its own banking tax and raise social benefits while keeping within the 60 percent of GDP constitutional debt limit. On foreign policy its tough stance against Mideast refugees is in contrast with the position promoted by former Prime Minister Tusk in Brussels. An experienced bank executive was tapped as Finance Minister, and the new administration will have a chance to replace almost the entire monetary policy board as terms expire in the coming months. They will likely ease another 50 basis points with a slow exit from deflation, with domestic-demand led growth again set for 3 percent in 2016. Eurozone recovery could boost exports but the current account may slip to deficit on consumer and capital goods import appetite. Privatization of state enterprises will go on hold and they are to raise budget dividends, according to the party’s campaign plans. The Warsaw exchange will remain a strategic holding, and alliances with neighbors are unlikely as initiatives toward potential Belarus and Ukraine entrants may be scuttled.
The Czech Republic’s share decline was almost as bad at 20 percent despite superior 4.5 percent GDP growth from private consumption unlikely to last into 2016. EU spending that came to euro 6.5 billion through September will taper and inflation may pick up toward the 2 percent goal on wage inflation and less output slack. The 27 koruna exchange rate limit will stay in place for another year but the central bank has left 2017 exit open. Its balance sheet has increased to 35 percent of GDP on regular interventions, but exposure is under half the Swiss corresponding sum when its cap was abandoned with the magic formula no longer entrancing investors.
