10 OTP Bank Annual Report 2013

Macroeconomic and fi nancial environment in 2013

M A C R O E C O N O M I C A N D F I N A N C I A l D E V E l O P M E N T S I N h U N G A R Y

In 2013, hungary’s economy was shaped by

weak external demand, supportive money

market environment, and the stabilization of

domestic demand. A fragile quarter-on-quarter

recovery began in the eurozone, but the area’s

2013 GDP contracted in year on year terms,

chiefl y because of the peripheral countries.

The eurozone’s weak recovery had an adverse

eff ect on export-driven economies, causing most

countries in the CEE region to slow down.

Nevertheless, money markets were helpful,

as the Bank of Japan embarked on a major

stimulus programme in March, following the

Fed’s example. The huge excess liquidity resulted

in a permanent, albeit interrupted, capital infl ux

into emerging economies’ bond markets.

In 2013, hungary’s economy grew by 1.1%,

recovering from its 1.7% contraction in 2012.

looking at the expenditure side, net exports

remained vital to bolstering growth, but the fi rst

signs of improvement in domestic demand have

already come into sight.

Even though investments dropped in year-on-

year terms, a quarter-on-quarter growth began

in the second half of the year.

At this point, the recovery is chiefl y linked to the

EU funds that surged at the end of the seven-

year budget period, to the fl ood protection

investments, and to other publicly fi nanced

projects.

The private sector’s investment activity

remained subdued.

–16

–12

–8

–4

0

4

8

12

–16

–12

–8

–4

0

4

8

12

2005

/Q1

2005

/Q2

2005

/Q3

2005

/Q4

2006

/Q1

2006

/Q2

2006

/Q3

2006

/Q4

2007

/Q1

2007

/Q2

2007

/Q3

2007

/Q4

2008

/Q1

2008

/Q2

2008

/Q3

2008

/Q4

2009

/Q1

2009

/Q2

2009

/Q3

2009

/Q4

2010

/Q1

2010

/Q2

2010

/Q3

2010

/Q4

2011

/Q1

2011

/Q2

2011

/Q3

2011

/Q4

2012

/Q1

2012

/Q2

2012

/Q3

2012

/Q4

2013

/Q1

2013

/Q2

2013

/Q3

Consumption expenditure of households Government consumption Gross fixed investment Inventories Net export GDP

Hungary’s GDP growth, expenditure side (%)

Sources: HCSO, OTP Research

–8

–6

–4

–2

0

2

4

6

–8

–6

–4

–2

0

2

4

6

Agriculture Industry Construction Market ServicesGovernment services Taxes on production less subsidies GDP

2005

/Q1

2005

/Q2

2005

/Q3

2005

/Q4

2006

/Q1

2006

/Q2

2006

/Q3

2006

/Q4

2007

/Q1

2007

/Q2

2007

/Q3

2007

/Q4

2008

/Q1

2008

/Q2

2008

/Q3

2008

/Q4

2009

/Q1

2009

/Q2

2009

/Q3

2009

/Q4

2010

/Q1

2010

/Q2

2010

/Q3

2010

/Q4

2011

/Q1

2011

/Q2

2011

/Q3

2011

/Q4

2012

/Q1

2012

/Q2

2012

/Q3

2012

/Q4

2013

/Q1

2013

/Q2

2013

/Q3

Hungary’s GDP growth, production side (%)

Sources: HCSO, OTP Research

11Macroeconomic and fi nancial environment in 2013

Consumption also seems to have bottomed out.

The key labour market statistics signify major

improvement, while the indices that exclude

the eff ect of public work schemes indicate

a smaller rate of advance, but households’

income position clearly improved last year.

Private sector wages grew by 3–4%, while

the government raised pensions and public

employees’ wages at a slightly higher rate

than the near 5% infl ation that had been

expected at the beginning of the year.

Given the strong disinfl ation in 2013, which

was supported by the cut in retail utility tariff s,

the real value of households’ disposable income

could meaningfully increase. Although this

did not raise households’ fi nal consumption

expenditure by the same rate because of the

persisting uncertainty on the labour market,

the almost steady fall that started in 2006

seems to have ended.

In a huge fall, infl ation came down to 1.7%,

from 5.7% a year earlier. The government

measures’ (e.g. utility rate cuts vs. the duty

on fi nancial transactions, higher excise tax)

eff ect of infl ation was practically zero.

But the subdued domestic demand,

the decline in commodity and food prices,

and the 27% VAT rate’s drop from the base

have signifi cantly reduced infl ation

in hungary.

The above facts gave underlying principle

of the National Bank of hungary’s statements

issued after the rate cut decision each month.

In the fi rst half of the year, the benchmark rate

was trimmed in 25 basis point steps, then

a 20-basis-pont lowering sequence started

in August, which led the benchmark rate to 3%

by the end of year.

Thanks to the supportive global environment

(ample liquidity), government bond yields

followed the rate cuts in the fi rst half of 2013,

but long-term yields decoupled from the central

bank’s base rate in the summer.

01/2

012

02/2

012

03/2

012

04/2

012

05/2

012

06/2

012

07/2

012

08/2

012

09/2

012

10/2

012

11/2

012

12/2

012

01/2

013

02/2

013

03/2

013

04/2

013

05/2

013

06/2

013

07/2

013

08/2

013

09/2

013

10/2

013

11/2

013

12/2

013

Base rate HUF/EUR8

7

6

5

4

3

2

320

310

300

290

280

270

260

HUF/EUR and base rate

Sources: Reuters, MNB, OTP Elemzés

3Y 5Y 10Y 15Y

3

4

5

6

7

8

9

10

11

3

4

5

6

7

8

9

10

11

Government bond yields (%)

Sources: ÁKK, OTP Research

04.2012 07.2012 01.201310.2012 04.2013 10.2013.07.2013.01.2012

12 OTP Bank Annual Report 2013

13

Because of the major central banks’ monetary

stimulus programmes, and owing to hungary’s

encouraging external balance indicators, the

forint was not under signifi cant pressure in

2013. hungary’s current account surplus

exceeded 3% of GDP, and its net fi nancing

capacity surpassed 7% of GDP last year.

No wonder that the rapid deceleration of

external indebtedness continued: gross external

debt fell to 89% of GDP, down from 100%.

Nevertheless, the hungarian currency steadily

depreciated versus the euro throughout 2013,

by an average of more than 2%.

Macroeconomic and fi nancial developments in the countries of OTP Bank’s foreign subsidiaries

Because of the weak domestic demand, net

exports remained the main engine of growth

in most countries. however, the eurozone’s

slow growth had an adverse eff ect on other

countries of the CEE region too; only Romania

could achieve exceptional growth, Serbia’s and

Montenegro’s GDP might have increased by

2%, while the growth in other countries where

OTP has presence was 0–1.3%. Croatia’s GDP

contracted further. The positive development

in most countries is the declining infl ation, but

fi scal adjustment measures have not borne fruit

for the budget balance in all countries yet.

looking at the banking market, Central and

Eastern Europe’s countries remained largely

diverse. Both retail and corporate loan stock

grew in Russia, Ukraine, and Montenegro.

Net lending, both retail and corporate, was

negative in Romania and Croatia. In most of

the remaining countries, net lending to the

household sector was positive, while the debts

non-fi nancial corporations repaid were bigger

than the loans they took out.

Macroeconomic and fi nancial environment in 2013

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013

Hungary

Russia

Ukraine

Bulgaria

Romania

Slovakia

Croatia

Serbia

Montenegro

Banking system’s retail loan penetration(as % of GDP)

Sources: National bank, OTP Research

5

15

25

35

45

55

65

2006 2007 2008 2009 2010 2011 2012 2013

Banking system’s non-financial corporateloan penetration (as % of GDP)

Sources: National bank, OTP Research

Hungary

Russia

Ukraine

Bulgaria

Romania

Slovakia

Croatia

Serbia

Montenegro