Hungarian Loan Growth Will Be ’Subdued,’ Farkas Says

By Edith Balazs

Sept. 29 (Bloomberg) -- Hungarian bank lending growth may be “subdued” until next year, threatening to prolong the worst recession in almost two decades, according to the eastern European nation’s financial regulator.

“The room to maneuver is extremely tight,” Adam Farkas, head of financial regulator Pszaf, said in a Budapest interview on Sept. 23. “I expect lending to post a very subdued growth rate. The first positive signs will only emerge in 2010.”

Hungarians, eager to enjoy living standards closer to western European levels, ratcheted up borrowing as banking services expanded in the past decade. The amount of outstanding mortgages rose more than 30 times since 2000 to 3.9 trillion forint ($21 billion) by June 2009, central bank data show.

With Hungarian interest rates higher than those on loans in euros or Swiss francs, the ratio of foreign-currency household mortgages jumped to 70 percent by the end of 2008 from about 5 percent in 2003, the year before the country joined the European Union. The forint’s plunge to a record low against the euro this year pushed up payments and bad debt, threatening the stability of the mostly foreign-owned banking system.

The parent companies of local banks, including Austria’s Raiffeisen International Bank-Holding AG and Erste Group Bank AG, Italy’s UniCredit SpA and Germany’s Bayerische Landesbank have said they are committed to their units in the region after concern that deteriorating financial stability and eroding profits may convince them to leave.

Emergency Bailout

Hungary was the first European Union member to get an emergency bailout last year when concern that the country may run into difficulty repaying its foreign debt sent stocks, bonds and the currency tumbling. The government must keep the budget deficit in check to fulfill the loan terms.

Prime Minister Gordon Bajnai, who took office in April after the crisis toppled his predecessor, imposed austerity measures and the central bank raised its benchmark rate to as high as 11.5 percent to prop up the currency, exacerbating the problems faced by banks.

The government expects the economy to shrink 6.7 percent this year and 0.9 percent in 2010. The decline boosted unemployment, trimmed disposable incomes and slashed corporate spending.

‘Temper the Impact’

“The task of the authorities would be to temper the pro- cyclical impact” of the drop in lending, Farkas said. “This is a highly complex task and authorities can only ration incentives very carefully.”

At OTP Bank Nyrt., the nation’s largest lender, loans overdue more than 90 days rose to 7.4 percent of total lending in the second quarter from 5.7 percent in the previous three months, forcing it to triple provisions. Non-performing loans are poised to rise further, Standard & Poor’s said on Sept. 2.

OTP, which has subsidiaries in eight countries in central and eastern Europe, including Russia and Ukraine, faces heightened credit risk from its rapid loan growth outside Hungary and foreign currency lending, S&P said in the report.

Credit volumes may take two or three years to return to pre-crisis levels, said Gergely Tardos, chief economist at OTP.

“In the short term, cautiousness will be the main characteristic of the credit market both in terms of demand and supply,” he said in an e-mail.

OTP has gained 88 percent this year, the third-best performer on Hungary’s benchmark BUX Index, which advanced 68 percent. The stock yesterday climbed 135 forint, or 2.6 percent, to 5,400 forint, close to a year high.

Second Recession

The government was already taking steps to rein in spending and boost revenue when the global financial crisis engulfed the economy as it was faced with the prospect of the EU suspending grants because of a burgeoning budget deficit, the widest in the 27-nation bloc at the time.

Hungary entered its second recession in two years in the third quarter of 2008, with the pace of economic contraction reaching an annual 7.5 percent compared with 5.3 percent in Slovakia and 5.8 percent in the Czech Republic. Poland has so far avoided recession, with 1.1 percent growth.

Policy makers delayed cutting the benchmark rate to protect the forint, which slumped to a record low against the euro in March. The government and central bank now want to steer lending toward forint-denominated credit from foreign-currency loans.

The forint has since gained 16 percent against the euro, the second-best performance among the 26 emerging-market currencies tracked by Bloomberg.

“Authorities could improve the situation by steering Hungary along a convergence path that would lead to a decline in risk premiums and allow the central bank to eventually lower interest rates,” Zoltan Torok, an economist at the Budapest unit of Raiffeisen International AG said.

Spending Cuts

Bajnai pledged to cut spending by 1.3 trillion forint ($7.1 billion) this year and next. Spending cuts and the dearth of credit curb consumption, worsening the recession. By the end of July, household mortgages declined to 3.9 trillion forint from 4.3 trillion forint at the end of March.

The Magyar Nemzeti Bank returned to easing monetary policy after a six-month pause July and has since trimmed interest rates by 2 percentage points to 7.5 percent. Policy makers have said they want to continue lower borrowing costs as the economic contraction mutes inflation pressure.

“Hungary has understood this crisis, turned around its economy,” Bajnai said in an interview with Bloomberg Television. “Hungary will be one of those economies in 2011, 2012 that will come out of this crisis fastest in the region.”

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net.