The National Bank of Hungary stated on Thursday that the banking system in Hungary is sound. What does this mean for the economy? It has a sizable reserve to manage risks. It added that banks faced lower profitability. This is due to the fact that them owing to government initiatives. The high interest rates were not a surprise.
In addition to promising to maintain tight monetary conditions for a “prolonged period,” the NBH maintained its base rate steady at 13%. From mid-2023, inflation will most likely start declining more noticeably. The bank claimed that the weakening economic climate brought on by the conflict in neighboring Ukraine had a negative impact on the Hungarian economy and constituted a significant risk to portfolio quality.
According to economists surveyed by Reuters, average inflation will hit a 26-year high of 16% in 2019. This will occur as economic development stagnates due to high interest rates, sluggish global growth, and declining demand as a result of the rising cost of living.
According to the bank’s financial stability assessment, even in the event of a crisis the sector’s shock resilience is adequate. Its liquidity and capital position are strong. Due to the rising interest rate environment and the uncertainty brought on by the war, they foresee a drop in credit expansion in both the corporate sector and the household sector.
According to the NBH, as consumers struggle with rising utility prices, the non-performing loan ratio for mortgage loans could grow by 2 percentage points by the end of next year, and the median chance of default for small firms with loans has increased to 4.7% from 2.9%.
Due to tax increases implemented by the government to reduce the budget deficit, the banking industry’s return on equity decreased by three percentage points to 7%. This happened in the first half of the year. The stabilization measures will continue to have a negative impact on banking profitability. Falling profitability and dwindling funding opportunities may lead to the deterioration in lending capacities. Even in a more severe, sustained stress scenario at the sector level things don’t look bright. There would only be a “temporary and manageable” capital shortfall.
On the strength of strong domestic demand, economic growth will remain somewhat robust this year. Consumer spending should be supported by a tight job market, higher minimum wages, and pay increases for public sector employees. In addition, the continued inflow of EU structural funds should boost public investment growth. While recent corporate tax cuts and historically low borrowing costs are not a surprise for the consumer. The primary threats to the outlook are potential capital flight brought on by the Fed’s tightening cycle. Also rising trade tensions around the world.