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Global Research: Hungary


ERIC FINE: It looks like there's been a change in sentiment about Hungary in the market and among us. We had some exposure there and we have since been reducing it. A lot of it was due to what you learned on the trip. Could you please tell us about that?

NATALIA GURUSHINA: I think the shift in my outlook for Hungary has been fairly dramatic and I would begin by saying that the programs that were implemented by the central bank and the government have been pretty aggressive. The central bank cut interest rates by 125 basis points in the past month. The government, together with the central bank, implemented fairly aggressive and large-scale funding for lending programs but I have yet to see the results in terms of stronger growth in Hungary.

It seems to me that if growth does not materialize and the activity indicators continue to be below expectations, it will continue to weigh on the Forint, which might prompt a fairly rapid change in monetary policy. I don't think the market is pricing that in fully at the moment.

Another issue that I find quite concerning is the government tried to push perhaps an artificially lower inflation rate by aggressively slashing utility prices. This is likely to a) invite certain policy action by the European Union and b) not promote foreign direct investment into Hungary. I would say that these two issues are key from the macroeconomic point of view. I would also like to mention that Hungary is facing elections in April and we might see some political noise.

FINE: After you came back we talked and have since reduced all of our local currency exposure. We have some hard currency exposure there. It is a good credit and I think the risk of default is extremely low so they deserve the ratings on the hard currency side. Hungary’s local currency bonds do have external vulnerabilities caused by the market's choosing to pick on countries with external vulnerabilities. Valuations are obviously important but because Hungary is such a heavily foreign-owned market it almost doesn't matter whether the valuations there are good as investors can change their minds quickly and that's not necessarily a good thing.

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