Dávid Németh chief economist

Eat what you cook

dependence on foreigners

2

vulnerable countries before the crisis

3

Net foreign liabilities (% of GDP, 2007)

Forrás: IMF

increasing national banks

4

0

5

10

15

20

25

30

35

jan.07 jan.13 jan.07 jan.13 jan.07 jan.13

Mérlegfőösszeg Total Forgalomban lévő készpénz Értékpapírok

Központi Bankok mérlegfőösszege (GDP %-ban)

Federal Reserves Bank ECB Bank of Japan Bank of England

Forrás: IMF, K&H

Total assets of central banks (% of GDP)

Total assets Cash in circulation Securities

cost of monetary easing

5 Forrás: IMF

footprint of stock exchange

6

S&P index (peak=100)

Forrás: BLOOMBERG, K&H

102030405060708090

100110

1 2 3 4 5 6 7

1929-1954 1968-1972 1973-1980

1987-1989 2000-2007 2007-

Bear Stearns

F Mea

LehmanMar 09

End of QE1

Start of QE2

End of QE2

Start of QE3

footprint of stock exchange

7

Dax index (peak=100)

Forrás: BLOOMBERG, K&H

2030405060708090

100110120

1 2 3 4 5 6 7

1969-1983 1987-1989 1998-1999 2000-2007 2007-

footprint of stock exchange

8

NKY index (peak=100)

Forrás: BLOOMBERG, K&H

0

20

40

60

80

100

120

1 2 3 4 5 6 7

1973-1978 1990- 2000-2007 2007-

cost effectiveness

9

development of wages

10

real wage increase (% YoY) USA & China wage dynamic

wage cost

11

Wage cost per hour (€, % change between 2008 and 2012, without agriculture and public sector)

600

650

700

750

800

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13Employees (excl . fostered workers) Fostered workers

-40,0

-30,0

-20,0

-10,0

0,0

10,0

20,0

30,0

40,0

50,0

60,0

4,05,06,07,08,09,010,011,012,013,0

48,049,050,051,052,053,054,055,056,057,058,0

Employment rate % Activity rate% UR% (rhs)

labur market

Number of employees in public sector (thausand)

Labur market (%) Employment by sector (2012 vs. 2010, thousand)

Forrás: KSH, K&H

sectoral breakdown of Hungary’s external short-term debt

Forrás: NBH, HCSO, K&H

0

5

10

15

20

25

30

35

40

0

5

10

15

20

25

30

35

40

2006

Q1

Q2

Q3

Q4

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

EUR BnEUR Bn

Banks Government Corporate sector Short-term external debt

deleveraging in bank sector

Forrás: NBH, HCSO, K&H

-40

-30

-20

-10

0

10

20

30

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Households' net position in bank sector (% of GDP)

FX loans (% of GDP) HUF loans (% of GDP) FX deposits (% of GDP)HUF deposits (% of GDP) Net balance

deleveraging in bank sector

Forrás: NBH, HCSO, K&H

-40

-30

-20

-10

0

10

20

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Corporate's net position in bank sector (% of GDP)

FX loans (% of GDP) HUF loans (% of GDP) FX deposits (% of GDP)HUF deposits (% of GDP) Net balance

corporate lending

Decomposition of the cumulative decline in corporate lending into supply and demand effects (relative to 2008 Q3)

Forrás: NBH, HCSO, K&H

-25

-20

-15

-10

-5

0

5

-25

-20

-15

-10

-5

0

5

2008

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

percentage pointpercentage point

Demand effect Supply effect

corporate lending by sectors

Decomposition of the change in new loan volumes into supply and demand effects by industries (2007 - 2011)

Forrás: NBH, HCSO, K&H

-100

-80

-60

-40

-20

0

20

40

60

-140 -120 -100 -80 -60 -40 -20 0 20 40 60 80

Dem

and

(%)

Supply (%)

Real estate

Transport

Construct.

Prof., admin. activities

Trade, repair

Manufact.Electricity

Hotels, restaurants

Agriculture

relative level of outstanding FC household loans (Dec2008=100)

Forrás: NBH, HCSO, K&H

10

20

30

40

50

60

70

80

90

100

110

120

10

20

30

40

50

60

70

80

90

100

110

120

2005

Q1

Q2

Q3

Q4

2006

Q1

Q2

Q3

Q4

2007

Q1

Q2

Q3

Q4

2008

Q1

Q2

Q3

Q4

2009

Q1

Q2

Q3

Q4

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

2012

Q1

Q2

Q3

Q4

per centper cent

Loans outstanding to households

Loans outstanding to households (adj. for exchange rate)

utilisation of the exchange rate cap

Forrás: NBH, HCSO, K&H

0

5

10

15

20

25

30

35

40

45

50

0

150

300

450

600

750

900

1 050

1 200

1 350

1 500Ja

n-12

Feb

Mar

Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan-

13 Jan

Feb

Mar

Apr

May

per centHUF Bn

Outstanding amount Percentage of eligible FX-denominated mortgage loans (right-hand scale)

why interst rate of loans will be forced to decrease

Forrás: NBH, HCSO, K&H

0

100

200

300

400

500

600

700

800

900

1 000

3,0

3,5

4,0

4,5

5,0

5,5

6,0

6,5

7,0

7,5

8,0

Feb-

05 Apr

Jun

Aug

Oct

Dec

Feb-

06 Apr

Jun

Aug

Oct

Dec

Feb-

07 Apr

Jun

Aug

Oct

Dec

Feb-

08 Apr

Jun

Aug

Oct

Dec

Feb-

09 Apr

Jun

Aug

Oct

Dec

Feb-

10 Apr

Jun

Aug

Oct

Dec

Feb-

11 Apr

Jun

Aug

Oct

Dec

Feb-

12 Apr

Jun

Aug

Oct

Dec

basis pointper cent

Housing loansHome equity loansFive-year CDS spread of Hungary (right-hand scale)

Interest rates of Swiss franc housing loans, home equity loans and five-year CDS spread of Hungary

0

10

20

30

40

50

60

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

2008

2011

FRA FIN GRE SLO AUS ITA NET EU15 HUN POR UK GER SPA POL CZE ROM EST LAT SLK BUL

General public expenditures Health Education Social protection Other

stagnating redistribution

State expenditures (% of GDP, 2008 és 2011)

Forrás: Eurostat, K&H

22

stagnating redistribution

Forrás: Eurostat, K&H

0

2

4

6

8

10

12

14

Gree

ce

Hung

ary

Italy

Port

ugal

Finl

and

EU15

Aust

ria

Fran

ce

Slov

enia

Germ

any

Slov

akia

Pola

nd

Spai

n

Neth

erla

nds

Unite

d Ki

ngdo

m

Rom

ania

Czec

h Re

publ

ic

Latv

ia

Bulg

aria

Esto

nia

2008 2011

General central expenditures (% of GDP)

0

1

2

3

4

5

6

7

8

9

Neth

erlan

ds

Fran

ce

Unite

d Ki

ngdo

m

Czec

h Rep

ublic

Austr

ia

Finlan

d

EU15 Italy

Germ

any

Slove

nia

Portu

gal

Spain

Gree

ce

Slova

kia

Esto

nia

Hung

ary

Polan

d

Bulga

ria

Latv

ia

Rom

ania

2008 2011

Healthcare expenditures (% of GDP)

0

1

2

3

4

5

6

7

Slov

enia

Esto

nia

Unite

d Ki

ngdo

m

Finl

and

Port

ugal

Fran

ce

Neth

erla

nds

Latv

ia

Aust

ria

Pola

nd

EU15

Hung

ary

Czec

h Re

publ

ic

Spai

n

Germ

any

Italy

Gree

ce

Rom

ania

Slov

akia

Bulg

aria

2008 2011

0

5

10

15

20

25

Fran

ce

Finl

and

Aust

ria Italy

Gree

ce

EU15

Germ

any

Slov

enia

Port

ugal UK

Neth

erla

nds

Hung

ary

Spai

n

Pola

nd

Rom

ania

Czec

h Re

publ

ic

Esto

nia

Bulg

aria

Latv

ia

Slov

akia

2008 2011

Education expenditures (% of GDP) Social expenditures (% of GDP)

subdued production where is the miracle of car production?

Forrás: National sources,, K&H

Contribution by secto to the growth (% év/év)

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Industry Services Construction Agriculture GDP

weak domestic demand

development of households consumption in Hungary

Forrás: KSH, K&H

-10

-5

0

5

10

15

20

-10,0

-5,0

0,0

5,0

10,0

15,0

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Consumption (YoY%) Net real wage (YoY%, rhs)

26

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Goods Food Trade gds Free services

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Alcohol, tobacco vs.CPI

-9,0

-4,0

1,0

6,0

11,0

16,0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Regulated prices vs CPI

Inflation development government’s help in the year of sneak

Forrás: HCSO, NBH, K&H

Market priced goods & services vs. CPI

Alcohol, tobacco vs. CPI Regulated prices vs. CPI

0,0

2,0

4,0

6,0

8,0

10,0

2006 2007 2008 2009 2010 2011 2012 2013 2014

Inflation evolution (YoY %)

CPI (YoY %) MNB Core (YoY %)CPI adjusted for tax changes Inlation target

K&H Forecast

Global bond supply (end-2012)

28

Forrás: AKK, BLOOMBERG, K&H

financing need

Bond and loan redemption (€bn)

0

0,5

1

1,5

2

2,5

09/2

013

10/2

013

11/2

013

12/2

013

01/2

014

02/2

014

03/2

014

04/2

014

05/2

014

06/2

014

07/2

014

08/2

014

09/2

014

10/2

014

11/2

014

12/2

014

HGB REPHUN

distribution of households' government securities

0,02,04,06,08,010,012,014,0

0200400600800

1 0001 2001 400

Jun-

11

Jul-

11

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-

12

Aug-

12

Sep -

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb -

13

per centHUF Bn

Distribution and interest rate of households' government securities

Interest Bearing Treasury BillsHungarian Government BondDiscount Treasury BillTreasury Savings BillPremium Hungarian Government BondInterest rate of deposits with maturity up to 1 year (right-hand scale)Interes rate of interest bearing Treasury Bills (right-hand scale)

Source: MNB.

Investment tickets and

ETF; 46

Equities; 80

Mortgage and corporate bond; 10

Pension Reform and Debt Reduction Fund

31

HUF denominated (HUFbn) FC denominated (HUFbn)

Forrás: AKK, K&H

Investment tickets and

ETF; 68

Equities; 22

Mortgage and corporate bond; 5

Cash; 83

NBH’s account (end-July, HUFbn)

32

Forrás: MNB

Assets

External assets 10390 Currency in circulation 2942Remaining assets 503 Deposits of other MFIs 662

Deposits of central government 1457Two-week MNB bills held by residents 3699Two-week MNB bills held by non residents 371External liabilities 738Remaining liabilities 1025

Total assets 10894 Total liabilities 10894

Liabilities

opinion polls

Forrás: Gallup, Tárki, Szondaipsos, Századvég, Medián, Nézőpont Intézet, K&H

5

10

15

20

25

30

35

40

45

50

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

%

Parliamentary election

MSZP (former governing

party)22%

FIDESZ (governing

party)48%

LMP (new green party)

3%

Jobbik (far right-wing

party)14%

DKP3%

Együtt 2014 (new party)

9%

Other1%

support of eurozone

34

market environment

Return of currencies (2008 Jan 1=0)

Forrás: K&H , Bloomberg

-40,0

-20,0

0,0

20,0

40,0

60,0

80,0

08-jan. 08-júl. 09-jan. 09-júl. 10-jan. 10-júl. 11-jan. 11-júl. 12-jan. 12-júl. 13-jan. 13-júl.

EURHUF TRY ZAR BRL

real interest rate (%)

Forrás: K&H , Bloomberg

-8

-6

-4

-2

0

2

4

6

8

10

01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11 01/12 07/12 01/13 07/13

Turkey South Africa Hungary Brazil

market environment

Hungary’s 5-year CDS vs. region

Forrás: K&H , Bloomberg

-400-300-200-100

0100200300400500600

2007 2008 2009 2010 2011 2012 2013

Czech Poland Romania

market environment

Forrás: K&H , Bloomberg

correlation of 5-year CDS & EURHUF

230

243

256

269

282

295

308

321

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013

Hungary EURHUF (rhs)

market environment and expectations

market environment and expectations

Forrás: NBH. K&H, Bloomberg

3

4

5

6

7

8

9

10

11

12

220

240

260

280

300

320

2006 2007 2008 2009 2010 2011 2012 2013 2014

EUR/HUF Base rate (rhs, %)

K&H Forecast