From the side of the real economy, the substantial net lending primarily reflected the historically high surplus of the foreign trade balance and the high transfer balance stemming from the elevated absorption of EU transfers. Regarding the changes in Q2, the slight decline in the surplus on the foreign trade balance and the transfer balance was broadly offset by a decline in the deficit on the income balance associated with investments, which can be attributed to the reduction in interest payable on foreign loans. At the end of Q2, the four-quarter absorption of EU transfers continued to exceed EUR 5 billion.
As a result of quarterly data dissemination, the income balance deficit decreased significantly, which may facilitate a further reduction in the external debt and vulnerability of the Hungarian economy. The moderate quarterly decline – which reflects the retrospective reduction of debt ratios and falling yields – is related to the lower interest expenditure on foreign loans. It is important to emphasise that the decrease in the income balance deficit was not limited to Q2; based on the data disclosure, the HCSO revised non-resident employees’ income on a retrospective basis as well. As a result, in 2013 the income balance deficit fell by 1.4 per cent of GDP; consequently, the annual deficit figure amounted to only 4.1 per cent of GDP in the past year ending with Q2, that is significantly lower than the pre-crisis level, amounted to 7 per cent of GDP.
Similar to the real economy approach, financing data also point to a high external balance surplus. At the same time, 2014 Q2 saw profound changes in the structure of external liabilities: partly owing to the dividend payments typical of the second quarter and partly as a result of state acquisitions, foreign direct investment contracted, in parallel with a small increase in the economy’s debt liabilities after the marked debt reduction observed in previous quarters. Debt liability inflows were predominantly associated with non-residents’ government bond purchases, while corporations and the banking sector continued to reduce their external debt. It is noteworthy, however, that preliminary monthly data for July point to another decline in external debt.
After contracting steadily since mid-2011, net external debt increased slightly in 2014 Q2. In this growth, however, the increase in debt liabilities played only a marginal role, which was more or less offset by the improvement in nominal GDP. However, by the end of June the forint exchange rate had depreciated by 1 per cent compared to the value recorded at the end of March, while the yield on forint-denominated government bonds also fell significantly (by 150 basis points) in Q2. This latter development is an important factor as, although the moderation of yields is particularly favourable from a sustainability perspective, the decrease in yields also raised the value of the government bond holdings of non-residents and hence, increased external debt ratios. As opposed to the rise in net external debt, due to the maturing of a previously pre-financed foreign currency bond, gross external debt did not change noticeably and remained at around 93 per cent of GDP. Gross short-term external debt, a crucially important indicator in terms of Hungary’s external vulnerability, declined by nearly EUR 2 billion to EUR 26.5 billion.
Analysing the external balance from the aspect of the savings of individual sectors, the net lending of corporations decreased amid heightened investment activities in the sector, supported in part by EU transfers and the Funding for Growth Scheme. At the same time, the net lending of households remained rather high, owing to precautionary savings and income growth stemming from the expansion in employment and rising real wages. As regards households’ savings, in addition to downsizing their deposit portfolio, households increased their government security holdings, and the structure of households’ government paper portfolio shifted to longer maturities. Accordingly, the second-quarter data available on households still indicate that domestic financing of the general government strengthened further, which may facilitate the reduction of external debt ratios over the longer term.
As a special topic, we analysed the earnings of foreign-owned corporations operating in Hungary. Based on the balance of payments, non-resident companies did not reduce their dividend payments notably despite diminishing profits in the wake of the crisis, and consequently, the crisis entailed a drastic fall in reinvested earnings associated with foreign direct investment. Presumably, this is due to firms’ efforts to restrain their investment projects in view of the deteriorating growth prospects and unused capacities, while parent undertakings may also have had a need for profits generated in Hungary in the difficult financing environment caused by the crisis. After the crisis, however, in most European countries the dividend payout ratio typically increased in parallel with diminishing returns. It is also noteworthy that, as a percentage of capital invested, the profits paid by foreign-owned companies operating in Hungary are considered high by European Union standards. According to the international methodology, balance of payments statistics do not present the profit after tax of foreign firms, but profits from normal business operations excluding one-off factors and revaluation. In recent years, domestic companies have faced several effects (e.g. the early repayment scheme or revaluations reflecting the depreciation of the exchange rate) that reduced the profitability of the sector; however, in view of their non-recurring nature, they were not included in the balance of payments. As a result, the annual corporate profit figure presented in the official statistics is higher than corporations’ after-tax profit by around 1–4 per cent of GDP.
Magyar Nemzeti Bank
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