International Investment Bank: Hungarian recovery may be the fastest in the region 

Which countries in the region can be the fastest to recover from the coronavirus crisis? What is the expected GDP growth rate in the region this year and next? 

Hungary and Romania are again at the top of the EU's growth rankings, where they were before the pandemic. 

Both countries have built an extremely friendly environment for business investment. 

In addition, they have effectively implemented policies that boost domestic wage growth and consumption. This is also true for the period before, during, and after the pandemic.

Expected GDP growth in regional countries, percent

Source: International Investment Bank

We have not examined Poland, but Polish GDP is likely to expand by around 4 percent in both 2021 and 2022.

What kind of investment dynamics do you expect in the countries of the region this year? 

Investment is vital to economic growth, both in increasing the economy's capital stock, such as building new factories, and in using state-of-the-art technology.

For the region, it will be crucial to retain its attractiveness for investments against economies such as Germany or the United Kingdom.

This will ensure, for example, that tax rates remain competitive and do not grow despite pressure from the G7 countries. Governments must continue to focus on investment, namely investments in critical infrastructure - airports, roads, rail networks -, and the digital economy of the future - 5G deployment, education and workforce training systems. 

Overall, investment dynamics should remain extremely favourable, with interest rates remaining at record low levels. Economic growth, and along with it wages and consumption will rise to record high levels while the tax system remains favourable. 

Businesses need predictable and reliable government policies in both taxation and regulations. The current governments in the region have been very consistent in their policy in this regard.

Can the rapid inflow of working capital continue in Hungary and the countries of the region? What are your expectations regarding these trends?

Hungary and the region are basically very attractive places for new and growing businesses because of the relatively low labour costs - compared to Germany -, and a favourable fiscal and regulatory background. 

If Hungary continues the policy and approach of the last 5 years, foreign direct investments will continue, and the country will be able to benefit from those in the future as well. 

A good example of this is the more advanced technology and the large stock of capital, which result in higher wages and higher economic growth. 

I do not think that Hungary is likely to change its approach, as foreign direct investments benefit everyone after all. 

What major investment projects are being financed by the International Investment Bank (IIB) in the region and in Hungary? 

We are actively working together with European multinational companies that strengthen the presence of foreign direct investment in critical sectors. An example of this is the Swedish Medicover, which invests in hospital facilities in Romania, Hungary and Slovakia. 

There are plenty of other companies investing hundreds of millions of euros in agriculture, manufacturing, clean energy, social infrastructure, and cleaner transportation solutions.

The bank will realize a double-digit growth in loans in 2021 and build a new, record-high development portfolio of around 1.2 billion euros. As a result, IIB is going to meet its strategic goals for 2018-2022 one year before the end of term.

To what extent has the coronavirus affected IIB's loan portfolio? 

IIB has been successfully protected from the effects of the coronavirus crisis. 

The non-performing loan portfolio remains well below 3 percent, which clearly shows that the bank typically lends to critically important companies or diversified multinational companies investing in the region. 

The average quality of the bank’s loan portfolio is excellent.

It is also worth noting that the economic performance of IIB member states has been improving significantly in 2021, allowing our clients to achieve better financial results.

As a result, after the creation of provisions in 2020, we expect the release of provisions this year in accordance with the IFRS 19 International Financial Reporting Standards.

What inflation rate is to be expected in Hungary and the region this year and next? Is the rise in inflation only temporary? 

In 2021, inflation is likely to be a very important issue in Hungary, just like in many other countries in the region and around the world. 

The consumer price index will probably be around 4.5 percent at the end of the year, and inflation risks are expected to be present in 2022 as well.

Accumulated savings for consumers continue to decline and the country continues to benefit from various fiscal spending programs, both locally and at EU level.

We also have to consider the major disruptions in the global supply chains, which will push inflation figures upwards in the foreseeable future. Although this situation should be resolved within 2 years, there is a significant risk that consumers will start to count on higher inflation rates and demand higher wages. Especially if labour markets become tighter. 

As a result, I do not think that the rise in inflation will be temporary, so central banks including that of Hungary will be forced to react in time. For me, the question is when and not whether this will happen.

What do you expect from the Hungarian National Bank (MNB) and other central banks in the region? Can the current loose monetary policy be maintained in the region? 

I expect that a number of central banks, both regionally and globally, will begin tightening their monetary policy over the next twelve months. 

Most importantly, this will be led by the Federal Reserve, which will be forced to raise interest rates by next summer.

This will have a huge impact on global capital markets, forcing regional central banks to recalibrate their own interest rate policies whether or not the local economy is ready for this.

The economies of Central and Eastern European countries are currently performing excellently and this trend is expected to continue in the future. 

I believe that the cycle of interest rate hikes will only start when central banks are 100 percent sure that we pandemic is over. The recent surge in the number of coronavirus cases in the highly vaccinated UK, for example, shows that herd immunity is harder to achieve than we thought. 

Europe still needs at least 3-6 months before a final victory can be declared over the coronavirus and its economy can return to normal, including the implementation of a more neutral monetary and fiscal policy.

In general, the loose monetary policy is likely to be sustainable in the region as long as the European Central Bank (ECB) continues to pursue an extremely loose monetary policy, including negative interest rates and a huge bond purchase program. 

However, as soon as the ECB stops applying negative interest rates, it will immediately put pressure on central banks outside the euro area. In this way, regional central banks may tighten their monetary policy.

Can it cause considerable market volatility if the ECB starts tightening? 

In economies growing significantly faster than the EU average, central banks must always be one step ahead of the ECB so as not to jeopardize the volatility and stability of debt, capital and foreign exchange markets. 

For the time being, however, central banks like that of Hungary have plenty of time, as the ECB is likely to maintain negative interest rates until at least 2023. 

Having said that, I think the time has come for regional central banks to begin the process of normalizing their monetary policy to control inflation, thus sending a strong signal to the market that they are ready to prevent a possible surge in inflation.

With early action, central banks will be able to keep inflation under control, which will ultimately lead to lower interest rates in the long run. In contrast, if they fail to keep inflation under control, it will lead to even higher interest rates.

What is your expectation regarding the EUR/HUF exchange rate this year? 

The EUR/HUF exchange rate is unlikely to deviate significantly from the current level until the end of the year. The ECB is expected to maintain its ultra-loose monetary policy, while the MNB will already begin monetary tightening in 2021.

This will have a negative effect on the euro and a positive one on the forint, resulting in an exchange rate of around 340. 

However, given that the inflation in Hungary is well above that in the euro area, a general weakening of the forint is expected in the medium term. This may result in the EUR/HUF exchange rate rising back to around 360 in 2022. 

What are the biggest risks to economic growth now? 

Apart from another wave of closures due to the coronavirus, there are other economic risks on the horizon. 

Firstly, higher inflation rates could result in central banks tightening their monetary policy more than expected, which could slow down the economic recovery.

In my view, the chances of this risk are low for the time being. It is more likely that the Federal Reserve will start tightening its monetary policy due to higher price dynamics in the U.S. The United States economy is surpassing the rest of the world.

The consequence of this may be that capital flows back from emerging markets to the U.S. dollar at a time when emerging markets are not yet at the same stage of economic recovery as the U.S. As a result, regional crises can arise worldwide. 

There could potentially be debt crises in countries where public debt to GDP exceeds 100 percent.

Finally, the risk of a financial crisis ranging from meme stocks to cryptocurrencies to global stocks and real estate is very real. Asset price bubbles can emerge in several categories. 

While it is true that the global financial system is much more resilient to financial shocks today than at any time in its recent economic history, a sharp correction in these asset classes would have a profound impact on financial systems and the global economy.

In view of this risk, central banks should abandon their ultra-loose monetary policy in order to avoid the emergence of further asset price bubbles developing and to rebuild their assets for future economic downturns.