Equilor: new lockdown may trigger stronger wave of bankruptcies

English2020. okt 1.Növekedés.hu

According to Equilor Befektetési Zrt, a 5 percent GDP decline is expected this year. Next year and in 2022, however, economy may grow by 4.5 and 4 percent, respectively. Government debt to GDP could rise to 75.9 percent by the end of the year, while the general government deficit could reach 8 percent. According to Equilor's forecasts, the EUR / HUF exchange rate may be around 365 forints this year, and it may fall to 360 forints next year, and to 355 in 2022.

This year, the global economy has faced challenges unprecedented since the 2008 crisis. Growth following the credit crunch was sustained by developed countries with record low interest rates and other central bank interventions. According to the analysis of Equilor Befektetési Zrt, these programmes had a number of negative consequences, one of the most important of which was the significant increase in social inequalities.

According to Lajos Török, chief analyst at Equilor, after the outbreak of the coronavirus pandemic the biggest question continues to be whether the current problems have only caused a temporary divergence or put economies on a completely new path.

In the most optimistic scenario, the recovery could be V-shaped, the bottom can be reached in the second or third quarter of 2020, and by 2021 we can return to the previous levels and onto the previous growth path.

According to Lajos Török, political decision-makers and central bankers keep stressing in most platforms that this scenario is the most likely and they will do their best to make it happen; this way increasing the probability of the prediction being fulfilled.

More pessimistic scenarios, however, predict a protracted and more painful recovery, while in the worst case, recovery, similarly to the crisis in 1929, could take a whole decade.

The chief analyst at Equilor believes that on the basis of the data currently available, we can rule out the worst-case scenarios, as we are likely to have reached the first low point in the first half of the year, and real economic indicators and markets have started to rise. Expectations about the speed of recovery are divided; and the W-shaped trajectory cannot be ruled out either: if economies were to close down again, another low point would follow.

Lajos Török pointed out that economic players paid a significant price because of the shutdowns in spring, which consumed a significant part of their reserves, so they would be much more exposed in case of another slowdown. To make the more optimistic scenario a reality, central banks have introduced programmes that had not been used before: they have inflated their balance sheets to higher levels than ever before, and they are buying corporate bonds in addition to government securities.

However, pumping money into the system could have a number of negative consequences: the biggest threat is soaring inflation, especially in the event of a V-shaped rebound, in the second half of 2021.

Central bank programmes are significantly raising asset prices, so social inequalities have risen to even higher levels than before, and the consequences of the pandemic are affecting those with lower earnings more negatively.

In Hungary, GDP fell by 13.6 percent in the second quarter, and the negative effects of the coronavirus epidemic appeared almost everywhere.

On the production side, industry fell by 20.1 percent, of which the manufacturing sector fell by 21.7 and the service sector by 12.2 percent. The biggest losers were the entertainment and transportation sectors, while the volume of financial and insurance activities increased. 

Household consumption decreased by 8.6 percent, mainly due to the absence of tourists.

Equilor expects an overall economic downturn of 5 percent this year, and 4.5 percent and 4 percent growth for next year and for 2022, respectively. Government debt to GDP could go up to 75.9 percent by the end of the year, while the general government deficit could rise to 8 percent.

Inflationary pressures intensified this year, in which the significant weakening of the forint also played a role. In the last few months of the year, the intensity of price rises may slow down; so inflation can be well above the 3 percent central bank target, but still within the tolerance range this year.

Lajos Török pointed out that a possible further weakening of the forint could pose a serious upward inflation risk. Equilor does not expect interest rates to fall further, and if inflation continues to grow steadily, there can be a raise in the last quarter of 2021. If growth prospects deteriorate permanently, the National Bank will directly support investments by providing funding through its NHP Hajrá! and ‘Növekedési Kötvényprogram schemes.

Equilor expects the EUR / HUF exchange rate to be around 365 this year, which may decrease to 360 next year and to 355 in 2022.

In stock markets, the coronavirus has brought the historic bull market to an end, but we have seen an unprecedented rise since the low point in spring: overseas stock indices have risen to record highs and shares of technology companies are now trading at prices not seen since the dotcom bubble.

The rise required unprecedented help by central banks, making the growth much more fragile than the almost unbroken growth of the previous 12 years. According to Lajos Török, the situation has to be treated with some caution, because share prices remain at high levels compared to the results expected by the market for this year, as shares have been able to rise since the end of March despite the fact that a significant drop in profits is expected for this year.

Accordingly, market views are deeply divided regarding year-end levels: optimists say we can close at new highs, while for pessimistic players even the low point in March does not seem unthinkable.

Equilor expects major stock indices to reach new historic highs. Market feedback shows that neither the deteriorating virus situation nor the shrinking economy is discouraging equity investors, also being fuelled by the ultra-loose policies of central banks and lack of alternatives.

Lajos Török believes that only another extensive lockdown could be a real turning point; until then the indices may rise further. The U.S. presidential election can also have exciting implications from a capital market perspective: looking at the elections over the past 100 years, it can be seen that election years mostly brought a rise in stock markets; and Republican presidents were typically more welcomed by the market than their Democratic counterparts.

If Trump begins his second term in November, his rhetoric is unlikely to change and he will continue to view stock market performance as his presidential accomplishment. However, if Joe Biden, who promises a left-wing turn, wins the election, it would probably not be received very enthusiastically by the market.

Macroeconomic, exchange rate and base rate forecasts of Equilor Befektetési Zrt

Hungary

2019

2020(FCST) 

2021(FCST) 

2022(FCST) 

Real GDP change

4,9%

-5,0%

4,5%

4,0%

Change in consumer price index

3,4%

3,4%

3,2%

3,2%

General government balance

-2,0%

-8,0%

-4,0%

-3,0%

Government debt to GDP

66,3%

75,9%

75,5%

74,4%

Source: MNB, KSH, Equilor

 

2019

2020(FCST) 

2021(FCST) 

2022(FCST) 

EUR/USD exchange rate

1,1214

1,2000

1,2200

1,2300

EUR/HUF exchange rate

330,52

365,00

360,00

355,00

USD/HUF exchange rate

294,74

304,17

295,08

288,62

Fed base rate

1,75%

0,25%

0,25%

0,25%

ECB base rate

0,00%

0,00%

0,00%

0,00%

Hungarian National Bank base rate

0,90%

0,60%

0,90%

1,20%