OREANDA-NEWS. October 27, 2011. Renaissance Capital, the leading emerging markets investment bank, has extended its research coverage of the Central Europe Three (CE3) countries – Poland, the Czech Republic and Hungary – with an inaugural strategy report on Hungary, and a follow-up note on major Czech bank, Komercni Banka (on which Renaissance initiated coverage on 27 September).

In Hungary: Dropping to BB+, Renaissance Capital asserts that Hungary could be downgraded in 2012, noting that the country’s five-year CDS traded at 530 bpts, on average, through September and is currently around 520 bpts: the last time it reached this level, note analysts, both Standard & Poor’s (S&P) and Fitch downgraded the sovereign shortly afterwards. Nevertheless, Renaissance highlights that Hungary’s debt vs growth dynamics are currently in line with countries that have similar ratings – suggesting any downward rating action may not be imminent. The report adds that a lowering of the rating to non-investment grade (BB+) could delay future foreign direct investment and have a negative impact on investor sentiment.

Despite improving headline budget numbers, the underlying structure is not promising, analysts say. This puts more pressure on the Hungarian government to cut back on expenditure if it is serious about meeting the 2.5% of GDP budget deficit target for 2012. On the other hand, the lack of structural reforms suggests lower medium-term growth. In Renaissance’s view, the government needs to increase the retirement age (currently 60 years, significantly below Hungary’s peers in the CE3 and OECD) and resurrect the privatisation programme to boost medium-term growth. While the former is on the agenda, Prime Minister Viktor Orban’s government seems to be against privatisation, the bank says.

Renaissance Capital is less than optimistic about the Hungarian banking sector, which it expects to suffer in 2012, citing the early forex loan repayment scheme enacted in late September 2011 as “another nail in the coffin for the banks.” The scheme allows households to pay their mortgages, in full, at discounted exchange rates (discounted almost 30% for loans in Swiss francs and 17% for euro loans) while forcing banks to cover the cost of the discount. Almost 80% of the HUF4.5trn housing loan market is denominated in Swiss francs and euros. Based on Fitch’s estimates, this means a 1.5% haircut from Hungarian banks’ Tier 1 capital adequacy ratio, bringing the ratio down to 10%. Orban has also announced that tackling household forex debt should be a priority for the government, suggesting there could be more unconventional measures in the near future. Renaissance analysts conclude that the banks will have to cut back lending and the competition for deposits will probably get tougher – meaning lower margins for them in 2012.