Crisis-hit Hungary: the worst is yet to come

Budapest — In Hungary, one of the countries hardest hit by the global financial crisis, most believe that the worst is yet to come, with the economy struggling and facing more pain from severe austerity measures.

"I really don’t know how we will survive the crisis," said Levente Benedekfi, a construction company owner who told AFP his business has suffered terribly since the crisis hit in late 2008.

In 2008, the number of new apartments sold was half the 2007 figure, official figures show, and the outlook remains grim for 2009.

In Budapest alone, between 2,000 and 2,500 new sales are expected in 2009, compared to 2008’s already low figure of 7,000.

"While we usually sell between 10 and 15 apartments a month, we have sold altogether two flats in the last nine months," said Benedekfi, who now has 480 empty apartments.

"In addition, the company has a Swiss-franc-denominated debt of HUF 3 billion (EUR 10.7 million, USD 15.1 million), which we expected to pay back from the sale of the apartments," he said.

Many Hungarians borrowed heavily in foreign currencies because forint interest rates were higher but with the weakening of the Hungarian currency, monthly repayments literally "exploded", said Benedekfi.

He and his associates now plan to mortgage their own properties, "the family silver" as he put it, to try to survive.

The future is far from bright

"The effects of the crisis have been spreading from the financial sector, through industries like car manufacturing to engulf services," David Nemeth, an analyst with ING Bank, told AFP.

"By now, the downturn has hit suppliers and subcontractors too, resulting in chains of debt, most frequently in the construction sector," Nemeth said.

Hungary was saved from bankruptcy in October 2008 by a EUR 20 billion lifeline from the International Monetary Fund (IMF), the European Union and the World Bank.

In exchange, Budapest pledged to limit public spending so that its budget deficit would equal no more than 3.9 percent of Gross Domestic Product for 2009 and 3.8 percent for 2010.

The economy is predicted to shrink 6.7 percent in 2009 and slightly less than 1.0 percent in 2010, according to government data.

The loan deal helped stabilise the current economy, but at a heavy cost, as recently-installed Premier Gordon Bajnai introduced a series of austerity measures effective from July.

To cut spending, the government cancelled bonus payments, froze wages in the public sector, reduced gas heating subsidies and increased sales taxes.

State support for purchases of a new house, which could reach almost EUR 14,000 for a family with three children, was also scrapped and further preferential loan schemes are likely to end next.

The downturn in the construction sector — which shrank 4.2 percent in the first quarter compared to the same 2008 period — was not worse because of ongoing highway projects and the building of Budapest’s fourth metro line, according to the central statistics office.

While investors, analysts and the IMF lauded the government’s measures, political analyst Peter Tolgyessy said the real cost of the crisis was not yet felt.

"From July … the effects will be devastating. Consumption will drop by eight to nine percent in the second half of the year," Tolgyessy estimated, pointing especially to a hike in value-added tax, from 20 to 25 percent.

"I am not too optimistic — Hungarians are still in for some difficult times," commented ING Bank’s David Nemeth.

Text credits: Geza Molnar / AFP / Expatica 2009
Photo credit: barnoid