• Andrew Hutchings, Editor-in-Chief at Financial IT


• 26.06.2023 01:15 pm
undisclosed

Fintech is alive and well in Hungary.

Before and at the huge Money20/20 Europe conference that took place in Amsterdam on 6-8 June, 2023, foreign fintech companies told me that they were working with major Hungarian banks.

Various sources – including Mafisz, the local trade association - indicate that there are dozens of fintech companies based in and near Budapest.

A major conference on artificial intelligence (AI) is scheduled to take place in the city on 11 September.

All this is well and good. However, even an economy where innovation thrives is likely to suffer in the event of a sharp shock.

The big – and relevant - question…

This was the main topic of a conference - Is Hungary Crisis-proof? - that I attended in Budapest on 26 May. Hosted by Napi.hu, a leading business media group, and sponsored by the Hungarian National Bank and MBH Bank, the conference revealed the thinking of key policy-makers.

The latest hard numbers point to an economy that is making a good recovery from the disruptions associated with Covid-related lockdowns, volatile energy prices and the war in neighbouring Ukraine.

After a strong rebound through 2021 and 2022, GDP growth stagnated early this year. At its meeting on 23 May, the Monetary Council of the Hungarian National Bank noted preliminary data which showed that GDP actually contracted by 0.9 percent year-on-year in 1Q23.

The Council observed that weakness in industrial output had been partially offset by growth in agriculture and services. Meanwhile household confidence is weak. However, unemployment is very low.

At its May meeting, the Council kept its Base Rate and Overnight Deposit Rate unchanged at 13.00 percent and 12.50 percent respectively. Meanwhile the Overnight Collateralised Lending Rate was reduced by 100 basis points to 19.50 percent.

High but falling inflation

The latest policy decision reflects a 1.2 percentage point fall in annual inflation from March to April. Nevertheless, with headline and core annual inflation at 24.0 percent and 24.8 percent respectively, returning Hungary to price stability is a key priority.

The Council anticipates that its tight monetary policy will bring headline inflation down to 15.0-19.5 percent in 2023, 3.0-5.0 percent in 2024 and 2.5-3.5 percent in 2026. Thanks mainly to a fall in energy imports from EUR17 billion last year to around EUR8 billion this year, the current account balance is also improving: the Council is looking for a deficit of 3-4 percent of GDP in 2023.

Nonetheless, it would be premature for the authorities to declare victory over inflation. Speaking at the Napi.hu conference, Előd Takáts, the Rector of Corvinus University, emphasised the need for inflationary expectations to be moderated.

Many structural strengths

The speakers at the conference identified a number of strengths in the Hungarian economy. Tibor Tóth, the Finance Ministry’s State Secretary responsible for macroeconomic and international affairs, noted that the number of people in the workforce has grown by 1,000,000 people to 4,700,000 since 2010. This is likely in part because of the dynamism of Hungary’s small company sector: over the last 30 years or so, the number of limited companies with fewer than 20 employees has risen 15-fold, according to László Parragh, the President of the Hungarian Chamber of Commerce and Industry. Barnabás Virág, the Deputy Governor of the Hungarian National Bank, remarked on the strong capital position and liquidity of the banking system.

In other words, Hungary’s economy and financial system are in a much better state than they were at the time of the Global Financial Crisis in 2008-09. The upside potential is substantial. Also speaking at the conference, Levente Szabó, the Deputy CEO of MBH Bank responsible for individual business, envisages that corporate lending could surge if lower inflation makes it possible for interest rates to fall below 10 percent.

A potential – and positive - wildcard

Further, the government’s 2024 budget, presented at the end of May, shows an optimistic picture. Key numbers include expected GDP growth of 4.0 percent, a deficit of 2.9 percent of GDP and public debt of 66.7 percent of GDP.

Finally, it is worth bearing in mind that there is a major, and positive, wildcard. This is the potential release of around EUR28 billion (equal to about 17 percent of GDP) in funds currently being withheld from the Hungarian government by the European Commission. As noted by the Intenational Monetary Fund (IMF), ‘full and timely receipt of EU funds … will help finance reforms in critical areas such as energy transition, digitalization and governance’.

In his speech at the napi.hu conference, the Hungarian National Bank’s Barnabás Virág answered the key question - Is Hungary Crisis-proof? – with a single word: Yes! The economy has made a good recovery from the disruptions associated with the Covid pandemic. The challenges – including global competition for skilled labour – are well understood by the policy-makers. The banking sector is in good shape. Key economic measures – inflation especially – are moving in the right direction.

I fully agree with the optimism expressed by the Deputy Governor and the other speakers at the Napi.hu conference. Hungary is crisis-proof. That being the case, I am also very confident about the prospects for the country’s fintech sector over the coming years.

My thanks go to Napi.hu for arranging this excellent conference and for inviting me to attend.