Hi Richard

Good to see positive news on the Hungarian economy. Having just come back from a trip to the city, I agree with Huw's previous post that there are currently better investment locations in Central and Eastern Europe.

New builds in Budapest did well last year with an average of 16 - 20% growth per annum however the classical property market is slower.

Some districts are also performing better than others. Growth in District 5 leveled off last year whilst one of the highest growth rates in the city was seen in areas in District 6 - this was due to the Government announcing it was going to develop a new Government Quarter there – this is still currently on hold and awaiting an announcement of start dates from the Government.

Certain areas in the city will benefit from the new metro 4 line that is now under construction. There is also a lot of construction taking place in up and coming districts such as District 9. The new Millenium Centre being built by TriGranit is a large commercial development on the banks of the river in the heart of District 9 and is attracting companies such as Vodafone and Morgan Stanley. New developments in areas such as these should see continued steady growth in 2008.

The economy is showing signs of improvement and Budapest will prove to be a good long term investment however I still think there are better investment markets in Eastern and Central Europe currently.

Noreen

That is correct ..... the Government quarter has been indefinately posponed, however significant amount of money has been put into the planning and clearing of the site and I do not believe that it will be posponed for long. Even if it is I am certain that they will make good use of the site.

Dont forget that the Westend Mall is being extended into the area. The subsequent / combined redevelopment of the surroundings will have a big impact on the area - irrespective of the location of the Government quarter.

It is the only viable location for the government quarter within the city centre.

Pag, Richard

Thanks for the update - will have to watch this one to see what the outcome is.

Noreen

Property investment growth exceeded 150% in Hungary, the biggest increase CEE - CBRE
Monday, 21, January 2008 04:32:00 PM

CB Richard Ellis Group, Inc. has announced on Monday that despite a relatively slower fourth quarter, total investment turnover in European commercial real estate in 2007 reached an estimated EUR 236 billion, slightly up from the EUR 230 billion recorded in 2006.

EMEA

The decline in Q4 2007 activity was widely expected as a result of the credit squeeze. At EUR 47.2 billion, it was down by a third compared to Q4 2006. The majority of the fall in investment activity was in the UK. However, elsewhere in Europe, the level of investment remained relatively stable. Austria, Netherlands and Spain actually saw markedly higher levels of activity in the last three months of 2007.

Despite the weaker fourth quarter, the high levels of investment activity in the first three quarters resulted in another record year at EUR 236 billion. Most European markets showed a year-on-year increase in turnover, with significant growth coming from France, Germany and the Netherlands partially off-set by lower activity in the UK, Ireland, Poland and Sweden.

The higher than average growth in turnover in two of Europe's largest markets over the last few years - namely, France and Germany - has significantly changed the European investment landscape. In 2004, the UK market accounted for over 50% of the region's investment turnover. In 2007, the UK was still the largest European market, representing 30% of the total; however the size of the markets in both Germany and France grew much faster than the average over that time and between them they now represent approximately 36% of the European total.

Jonathan Hull, Executive Director of EMEA Capital Markets, CB Richard Ellis said: “The UK market is the most mature and transparent market in the region and has felt the correction in pricing in response to credit constraints, resulting in the expected decline in investment activity in Q4 2007.

“The relatively small reduction in activity outside the UK illustrates continued support for many continental European markets. Lower interest rates and significant pools of equity will support transactional demand in 2008, although investors will become more selective and more cautious in their pricing of risk."

Michael Haddock, EMEA Research Director, CB Richard Ellis said: “Looking forward, the impact of the credit squeeze on investment turnover is likely to continue into the first half of 2008. Despite the expected fall in activity between 2007 and 2008, equity-rich investors such as the German open-ended funds and sovereign wealth funds are expected to support market activity

Central & Eastern Europe and Hungary

Overall CEE investment volume did not change significantly compared to the EUR 12.5 bln reported last year. The picture is, however, very diverse.

While Russia and Poland saw a drop in investment turnover, the Czech Republic and Hungary experienced a record year. EUR 2.8 bln turnover was reported from the Czech Republic, which was the highest figure among CEE countries with a remarkable annual growth of 70% vs. 2006.

According to Margaréta Mészaros, Head of Investment and Valuation at CB Richard Elllis in Budapest: “The biggest increase, however, was recorded in Hungary where investment growth exceeded 150% (!) in one year and reached EUR 1.9 bln."

“Hungary remained the 3rd ranked CEE country in terms of overall investment volume since 2000."

Poland has attracted by far the biggest volume (over EUR 12.3 bln), followed by the Czech Republic (EUR 7.9 bln), Hungary (EUR 5.5 bln), and Russia (EUR 4.5 bln). Investment in these four countries still amounts to 90% of total CEE turnover.

As ive said MANY times .... buy at the bottom of the cycle (last year). Hungary has bottomed out (investor confidence) and is on the way up again.

The Monetary Council, in accordance with the government, has abolished the forint's fluctuation band against the euro as of 26 February, and decided to switch to a floating exchange rate regime.

“The National Bank of Hungary (NBH) considers the establishment and long-term sustaining of price stability its foremost and most important objective. In an inflation targeting system, considering the wide scope of macroeconomic and money market processes, the central bank reacts to the combined effect of these. Restricting exchange rate fluctuations in an inflation targeting system do not contribute to anchoring long-term inflation expectations."

“The abolishment of the exchange rate band is an important step towards the adoption of the euro in Hungary. A floating exchange rate regime creates more favourable conditions for the central bank to achieve its inflation target, and via this to meet the nominal Maastricht criteria and to enter the ERM-2."

“Given the openness of the Hungarian economy, the exchange rate will continue to play an important role in forming inflationary processes. If other developments in the economy fail to counterbalance, a sustained and considerable change in the nominal exchange rate will be reflected in the central bank's inflation prognosis and as such will exert an impact on monetary policy."

Any thoughts as to how this will effect things would be appreciated - my view is that the HUF will gain strength against the EUR - which it must do for EMU entry.

REACTIONS

Gábor Ambrus, 4Cast, London

“Defying our expectations, the Hungarian central bank has left rates unchanged at 7.50% but at the same time announced that it scrapped the trading band of the forint, a decision taken jointly with the government."

“CPI forecast is upped by a significant margin both for and 2008 and 2009. EUR/HUF reacted with a significant three figure dip."

2CPI report will offer a considerable amount of food for thought and market will now be eagerly awaiting what Governor Simor and the MPC will have to say."

“There will no doubt be some credibility issues to be addressed and we still expect to MPC to keep a hawkish bias and we still see the outlook biased to hikes."

Mariann Trippon, CIB Bank, Budapest

“The main intention of the central bank was to stabilize the market and leaving the base rate on hold and at the same time abandoning the band could do the job."

“It seems that the government and the central bank reached a compromise. Moving to free float was already in the air, but the government always rejected the idea, however they might have felt that the recent weakening of the HUF makes the decision less risky."

“Volatility is likely to persist in the upcoming period until the market finds a new equilibrium level."

Nigel Rendell, Royal Bank of Canada, London

“This was a clever move by the NBH, but whether this has a lasting impact on boosting the HUF is debatable. Hungary needs a tighter policy in order to cap inflationary pressures but higher interest rates would further hit the depressed domestic economy."

“By scraping the HUF band the central bank hopes that an appreciating currency will do the trick. However, the risk remains, particularly against an uncertain global environment, that the HUF rally runs out of steam."

“This would leave the NBH in a very difficult situation, particularly if there are disappointments on the inflation side."

Gyula Tóth, Martin Blum, UniCredit, Vienna

“We now see risk/reward in favour of receiving 5y rates (target 7%) and moving to long HGB duration, but would be flat HUF."

“Our rationale for positioning for lower rates:

(1) scrapping of EUR/HUF band means a greater degree of monetary conditions tightening could (though need not necessarily) now occur through a firmer HUF (+ if there's no HUF band the NBH doesn't need to hike to protect it).

(2) Politically, the govt is obviously trying to avoid hikes by finally giving the greenlight to scrapping the band.

(3) Growth remains soft.

N-t constructive for HUF (meaning we move back to neutral from neg and close EUR/HUF longs and move to M/W HUF). The big caveat, however, is that the soft growth outlook and lack of NBH hikes is not overly HUF positive in the m-t (despite an improvement in twin deficit). This means we continue to see better risk/reward on rates than FX."

Stuart Bennett, Calyon, London

“First impression is that getting rid of the HUF bands should not be good for the HUF. The NBH said that bands not in line with anchoring inflation expectations at the same time as increasing its 2008 and 2009 CPI forecasts."

“Hence suggests that Bank would like the HUF, rather than interest rate hikes, to do the hard work in fighting inflation, but with activity weak and perhaps the prospect of rate hikes diminishing there is little obvious reason to be bullish HUF solely because what were wide trading bands to start off with have been abolished"

“Plus, on the rate outlook, notice that the NBH is assuming wage growth of 7.8% in 2008 - this is still a little above its comfort range, but probably not enough to force it to hike rates aggressively given the econ backdrop."

Raffaella Tenconi, Dresdner Kleinwort, London

“The decision to abandon the HUF band today is surprising, but extremely positive since it is evidence that PM Gyurcsany maintains a strong leadership and is committed to advance deep structural reforms."

“By abandoning the band, the central bank will have full scope to influence inflation and the exchange rate. This is a major step forward since one of the main weaknesses of Hungary has been continuing elevated inflation expectations."

“At the same time, the abandonment of the band will put more pressure on the central bank and the government to deliver coherent and transparent policies in order to avoid disorderly corrections in Hungarian assets."

“The new Inflation Report revised the inflation projections in line with our view, strongly signalling that the MPC will tighten monetary policy in the near term. Headline inflation (avg) is seen at 5.9% in 2008 (from 5% previously) and 3.6% in 2009 (from 3.0%). That is inflation will not converge to the 3% target until the end of 2009. Core inflation (avg) is expected at 5.2% in 2008 (from 4.6%) and 3.6% in 2009 (from 3.1%). The growth outlook was revised down to 2.0% in 2008 (from 2.4%) and 3.0% in 2009."

“These developments reinforce our view of a 50bps monetary tightening in the near term, with potential for more given the uncertain global environment."

György Barcza, K&H Bank, Budapest

“The Monetary Council's statement emphasised that it will not tolerate deterioration of inflation expectations (ie. high yields at the long-end) and that rate hike may come if needed."

“Governor Mr Simor said that rate decision was a close call as 25bp hike was also discussed."

“The band abolishment was decided before the rate decision, which means that all members took into account that."

“Overall, the message sounds quite hawkish and we maintain our call for a 50bp rate hike, but we consider splitting it to two 25bp steps for March and April."

“The message sounds hawkish, especially as Governor said that "Council's aim is to cut inflation to target in 2009". This means significant disinflation as both core and headline CPI are projected at 3.6% for average-2009 vs the 3% target, although projection is close to 3% for end-2009."

“The inflation report now has slower growth and higher inflation path, this year's average CPI forecast was raised to 5.9%, close to our 6% level. The EURHUF assumption is 256, so at current exchange rate, somewhat higher inflation path would be the result."

“How could the central bank convince the government about scrapping the band? MNB has been arguing for this move for almost a year and the government might face the dilemma between exchange rate band with higher rates (extra budget cost) or no band with probably lower rates over the medium-term."

“Government finally took the better option in our understanding and this means another good point for the central bank. Last year we wrote that central bank will need more good points to achieve low inflation goals and it has gained one more."

Eszter Gárgyán, Citibank, Budapest

“The upside shift in the inflation forecast suggests to us that the NBH needs to see a significantly stronger forint to meet the inflation target, and with the abandonment of the band significant forint appreciation is now possible, supporting disinflation. Therefore, we believe that the NBH will still need to raise rates in the coming months, but less aggressive moves may be sufficient to support the currency due to the strengthening of monetary policy credibility."

“Our view is that the abandonment of the band supports monetary policy credibility, thereby reducing the expected risk premium on forint assets. This suggests to us that the NBH will probably need to hike less aggressively in the coming months to support disinflation, though we still believe there is a chance for a rate hike at the next MPC meeting in March."

“The size of the hike is likely to depend on market movements. Our view is that the MPC is trying to act cautiously with gradual 25bp steps."

“Following and increased initial volatility, we expect the forint to strengthen, supported by a hawkish monetary policy stance. Our view is that the abandonment of the band is supportive for long yields and the forint, but this alone does not prevent rate hikes in the short term, since a significantly stronger forint (around 245 against the euro) would be needed to achieve the 3% inflation target in 2009."

“This argument is also supported by today's hawkish statement, which emphasises the risks to elevated inflation expectations, owing to the upcoming supply-side shocks to producers. The statement confirms that further monetary tightening may be needed if incoming data, such as wages and prices, do not support the moderation of inflation expectations."

Lars Christensen, Danske Bank, Copenhagen

“The NBH also announced that it has abandoned its FX fluctuation band. We have long expected that this would happen sooner or later, so in that sense it is not a major surprise."

“Even though the NBH today left its key rate unchanged, the Hungarian forint rallied on the back of the decision."

“This clearly must be seen in the light of what is, in our opinion, a wise decision to finally get rid of the FX fluctuation band. The market reaction therefore is justified, but it should also be said that the forint spot rate was nowhere near the band - either at the weak or at the strong end of the band. The decision to scrap the fluctuation band was taken by the NBH with the consent of the Hungarian government which could have vetoed it."

“The decision ends years of an inconsistent monetary regime of dual targets - both FX and inflation - that the NBH has never been happy about. This is clearly a wise and positive decision."

2Even though the decision to abandon the FX fluctuation band is positive it should, in our view, not have a long-lasting positive impact on the forint and despite the favourable market reaction to the decision, we do not expect the rally in the forint to continue and we maintain the view that the risk of a large negative correction in the forint has increased on the back of the worsening of the global credit conditions. Rates and yields today fell roughly 20-25 bp at the front end of the curve."

“Today the NBH also published its quarterly inflation report. Not surprisingly, the NBH adjusted up its inflation forecast to 5.9% for 2008 vs an earlier 5.0%. This is not surprising given the recent weakness in the forint, higher oil prices and higher food prices. The NBH also adjusted down its GDP forecast for 2008 to 2.0% y/y from a previous 2.4% y/y."

“Going forward there is still a risk of rate hikes in Hungary - especially if the forint weakens significantly - but for now we believe that the NBH will maintain its wait-and-see approach."

Hi

The big story in Hungary now is not about forecasts, but a dose of immediate reality.

Now the country has decided to let its currency float - as of today, I believe - finally accepting, it seems, that you can't have a peg AND be expected to fight inflation effectively, we can see clearly where its priorities are.

It will be interesting to see whether this will turn out to be a smart move - basically a gamble that the currency will rise Vs the euro in particular and stay there to dampen import costs. It's already up so far.

It also signals that the central bank will raise rates as necessary, I reckon. As with the big economies, it'll be a tricky balance between taming inflation and killing growth in its tracks.

A brave move and an indicator that the country is ready to turn the corner? Or a measure of how bad things are in Hungary?

Portfolio.hu Interview - Hungary cenbank wants to see real convergence driven by HUF appreciation - rate setter Oblath
Wednesday, February 27, 2008 09:30:00 AM

Hungary's Monetary Council member Gábor Oblath told Portfolio.hu in an interview that his first impression about the abandoning of the forint's trading band against the euro was that the move was successful. The rate setter believes it its in the interest of monetary policy to see price convergence taking place amidst price stability and a nominal appreciation of the forint. Nevertheless, this is a connection that is valid in the medium term and the extent of the appreciation also depends on how steep the convergence path will be in respect of how advanced state economic development is in.

Portfolio.hu: In view of the past days' market developments, how successful do you think the removal of the forint's band and its timing was?

Gábor Oblath: I believe both the abandoning of the band and the timing of the move were a success. The (forint's) exchange rate was far from the (weak) end of the band, and the market did not see it coming. What is more important than what I think is that the analysts' reactions and the actions of the market were favourable.

P.: The allusion to a rate hike and a cautious statement by Governor Simor serve as a hint that the central bank may be interested in a stronger forint in the medium term. Do you share this view?

Gábor Oblath: The central bank is interested in achieving its inflation target set jointly with the government, rather than in seeing the exchange rate of the forint at any certain level or hover in a specific range.

It is another question that we have every reason to hope that real convergence of the economy will start in time, which cannot be detached from closing the gap between domestic and EU prices (in euro terms). The rate of this catching up basically hinges on the grade of real convergence and is out of monetary policy control.

What may be controlled by monetary policy is how big a part of this euro-based price level convergence would take place in the form of higher domestic inflation and forint appreciation. Hence the central bank's medium-term interest is that the part above price stability, a CPI of about 3%, would be achieved via a nominal appreciation of the forint.

But let me underline that firstly I'm talking about medium-term trends and, secondly, we'd be able to say anything about the extent of forint strengthening in view of the future rate of real convergence and the inflation of more developed EU member states. How long this medium term will last depends on when we join the euro zone, since within this area the entire “convergence inflation" will appear as domestic inflation.

P.: Will the central bank alter its means used to manage exchange rate changes? Do you foresee a different kind of communication? Do you think direct intervention could get more emphasis?

Gábor Oblath: The central bank will continue to refrain from attempts to manage the exchange rate and direct intervention is certain not to gain more emphasis. Our communication may change in a sense that you need to be very careful what you say when you have a trading band so as to avoid giving out hints. We are no longer bound by this consideration.

P.: How unified the Monetary Council was about the abandoning of the band? There were reports previously that not every member found it a good idea...

Gábor Oblath: All I can say about this is that the MPC was almost totally in unity. It would not be proper to talk about other members' views.

P.: Has the NBH discussed the decision with the European Central Bank (ECB) before the actual move?

Gábor Oblath: Before the announcement of the decision, the Governor of the NBH informed the President of the ECB.

P.: Could the switch between exchange rate regimes bring about changes in the optimal level of foreign currency reserves? A reduction of these may be on the cards?

Gábor Oblath: What I can give you is my personal opinion: I do not believe the scrapping of the band will change the optimal level of foreign currency reserves. I am well aware than, in theory, larger foreign currency reserves go with an exchange rate regime with a trading band, but Hungary's policy about foreign currency reserves has never been optimised to intervention on the weak end of the band.