12 OTP Bank Annual Report 2015 Macroeconomic and financial environment in 2015 MACROECONOMIC AND FINANCIAL DEVELOPMENTS IN HUNGARY In 2015 Hungary’s macroeconomy was mostly shaped by the different monetary policies expected from the Fed and the ECB, and by the continued slump in commodity prices, which started in 2014. In December 2015, the Fed embarked on interest rate hikes (0.25–0.5%), for the first time in seven years, owing to the accelerating growth and the favourable labour market developments in the USA. Meanwhile the ECB decided to extend its asset purchase programme and cut the interest rate on overnight deposits further (to –0.3%). For the first time since the crisis began, the eurozone posted meaningful growth (1.5%), but with significant discrepancies among the European Union’s regions. Preliminary GDP data for Q4 suggest that Central and South Eastern Europe remained the strongest region. The several-month-long negotiations with Greece, which ultimately resulted in a temporary solution to the country’s debt crisis, failed to cast a cloud on the supportive sentiment on global markets. Commodity prices slumped deeper, owing to the shrinking demand caused by the structural changes in China’s economy. Despite the sliding oil prices, the December meeting of OPEC members decided to boost output. As a result, prices hit lows last seen during the crisis in 2008. The persistently low oil prices shifted inflation forecasts lower, providing room for the monetary policy and helping the continued easing of monetary conditions. In line with our forecasts, Hungary’s economy grew by 2.9% in 2015, after expanding by 3.6% in 2014. After the election year, the volume of investments fell, but net exports’ contribution returned to positive territory from the slump in the previous year. Nonetheless, the engine of growth was clearly the further accelerating consumption of households. –16 –12 –8 –4 0 4 8 12 –16 –12 –8 –4 0 4 8 12 2006/Q1 2006/Q3 2007/Q1 2007/Q3 2008/Q1 2008/Q3 2009/Q1 2009/Q3 2010/Q1 2010/Q3 2011/Q1 2011/Q3 2012/Q1 2012/Q3 2013/Q1 2013/Q3 2014/Q1 2014/Q3 2015/Q1 2015/Q3 Consumption expenditure of households Gross fixed investment Government consumption Inventories Net export GDP Decomposition of Hungary’s GDP growth by expenditure side items (%) Sources: HCSO, OTP Research –8 –6 –4 –2 0 2 4 6 –8 –6 –4 –2 0 2 4 6 Agriculture Construction Market Services Industry Government Services Taxes on production less subsidies GDP Sources: HCSO, OTP Research 2006/Q1 2006/Q3 2007/Q1 2007/Q3 2008/Q1 2008/Q3 2009/Q1 2009/Q3 2010/Q1 2010/Q3 2011/Q1 2011/Q3 2012/Q1 2012/Q3 2013/Q1 2013/Q3 2014/Q1 2014/Q3 2015/Q1 2015/Q3 Decomposition of Hungary’s GDP growth by production side items (%)
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12 OTP Bank Annual Report 2015
Macroeconomic and financial
environment in 2015
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 2015 Hungary’s macroeconomy was mostly
shaped by the diff erent monetary policies
expected from the Fed and the ECB, and by the
continued slump in commodity prices, which
started in 2014. In December 2015, the Fed
embarked on interest rate hikes (0.25–0.5%),
for the fi rst time in seven years, owing to the
accelerating growth and the favourable labour
market developments in the USA. Meanwhile
the ECB decided to extend its asset purchase
programme and cut the interest rate on
overnight deposits further (to –0.3%). For the
fi rst time since the crisis began, the eurozone
posted meaningful growth (1.5%), but with
signifi cant discrepancies among the European
Union’s regions. Preliminary GDP data for Q4
suggest that Central and South Eastern Europe
remained the strongest region.
The several-month-long negotiations with
Greece, which ultimately resulted in a
temporary solution to the country’s debt
crisis, failed to cast a cloud on the supportive
sentiment on global markets.
Commodity prices slumped deeper, owing to
the shrinking demand caused by the structural
changes in China’s economy. Despite the sliding
oil prices, the December meeting of OPEC
members decided to boost output. As a result,
prices hit lows last seen during the crisis in
2008.
The persistently low oil prices shifted infl ation
forecasts lower, providing room for the
monetary policy and helping the continued
easing of monetary conditions.
In line with our forecasts, Hungary’s economy
grew by 2.9% in 2015, after expanding by 3.6%
in 2014. After the election year, the volume of
investments fell, but net exports’ contribution
returned to positive territory from the slump
in the previous year. Nonetheless, the engine
of growth was clearly the further accelerating
consumption of households.
–16
–12
–8
–4
0
4
8
12
–16
–12
–8
–4
0
4
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06
/Q1
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/Q3
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/Q1
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/Q3
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/Q1
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/Q1
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/Q1
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/Q3
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15
/Q1
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/Q3
Consumption expenditure of households
Gross fixed investment
Government consumption
Inventories Net export GDP
Decomposition of Hungary’s GDP growth by expenditure side items (%)
Sources: HCSO, OTP Research
–8
–6
–4
–2
0
2
4
6
–8
–6
–4
–2
0
2
4
6
Agriculture Construction Market ServicesIndustry
Government Services Taxes on production less subsidies GDP
Sources: HCSO, OTP Research
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06
/Q1
20
06
/Q3
20
07
/Q1
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07
/Q3
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08
/Q1
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08
/Q3
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09
/Q1
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/Q3
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/Q1
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/Q3
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11
/Q1
20
11
/Q3
20
12
/Q1
20
12
/Q3
20
13
/Q1
20
13
/Q3
20
14
/Q1
20
14
/Q3
20
15
/Q1
20
15
/Q3
Decomposition of Hungary’s GDP growth by production side items (%)
13Macroeconomic and fi nancial environment in 2015
The increase in the value added by market
services has largely contributed to the
economy’s expansion. Even though the
deceleration of Germany’s manufacturing may
pose risks to the demand for Hungary’s export
products, it seems that these fears did not get
in the way of production. Moreover, mostly
owing to the improved terms of trade,
Hungary’s trade surplus also hit an all-time
high, at EUR 8.1 billion (or 8% of GDP) in 2015.
A weaker-than-2014 year pushed agriculture’s
contribution to GDP into negative territory.
Non-farm private sector GDP was as
strong as elsewhere in the CEE region;
it may have grown by more than 4%.
Consumer prices dropped by 0.1% on
average in 2015, thanks to the fall in commodity
prices; demand-sensitive infl ation accelerated
until the end of summer, but somewhat slowed
towards the end of the year.
The further drop in infl ation justifi ed the
continuation of the easing cycle; the latest cut,
in July, brought the base rate to 1.35%.
The MNB’s Self-Financing Programme
introduced a two-pronged plan to boost lending
for SMEs, then the MNB decided to do away with
the two-week deposit bills, to boost commercial
banks’ appetite for government securities.
At the end of 2015, the MNB announced plans to
introduce unconventional monetary policy tools
because infl ation was likely to remain below its
target throughout the forecast horizon.
The further decrease in infl ation made a
case for the continuation of the easing cycle;
therefore the base rate was reduced in
July to 1.35%. As a part of the self-fi nancing
plan, the MNB introduced a Scheme which
aims to boost SME lending, later the MNB
decided to phase out the two-week deposit in
order to boost the demand of banks towards
government bonds.
Due to the fact that infl ation will remain below
the infl ation target over the forecast horizon,
at the end of the year the MNB announced they
plan to introduce new, mainly unconventional
monetary policy tools in the future.
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320
330
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.20
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08
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02
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10
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05
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12
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04
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11
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14
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06
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15
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01
.20
16
.
Base rate HUF/EUR
The HUF/EUR and the base rate
Sources: Reuters, MNB, OTP Research
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
01
.20
15
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01
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15
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02
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15
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03
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11
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12
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15
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12
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15
.
3Y 5Y 10Y 15Y
Government bond yields (%)
Sources: ÁKK, OTP Research
early 2015, the pair spent most of the second
half of the year around 310 levels, largely
owing to the measures taken by the central
bank.
Short-term yields dropped towards the end of
the year, while long-term yields barely moved.
The HUF/EUR oscillated in the 296.6–318.5
range. Following a forint appreciation in
14 OTP Bank Annual Report 2015
The countries where OTP Bank has foreign
subsidiary banks posted mixed economic
performance in 2015. In this respect, the eight
countries can be classified into three groups:
the clearly promising Central and Eastern
Europe, the improving Balkans region, and
commodity producers who are under pressure
but out of recession.
In the first group, the countries of Central
and Eastern Europe further enhanced their
favourable 2014 performance. The low budget
deficit and the shrinking government debt left
room for loosening fiscal policies, and these
countries used this opportunity more than once.
The good fiscal achievements owe a lot to the
low commodity prices and to the surge in EU
co-financing. External debts have decreased,
and external balance positions have improved.
Preliminary data rank Slovakia (+4%) and
Romania (+3.8%) among the most dynamically
expanding economies of the European Union.
The high savings ratio was accompanied by
consumption growth, which suggests to us
that this component’s contribution to GDP will
remain strong. Domestic demand is becoming
increasingly pronounced within economic
growth, which makes these economies resilient
to external tensions. Hungary, Romania and
Bulgaria saw their property markets recover,
which bodes well for a rise in lending in one or
two years.
Slovakia’s balanced economic performance
enabled it to better resist external shocks.
Nonetheless, the biggest risk in the future is
the decline in external demand, mainly that
from Germany. The most important engines
of economic performance are exports and
domestic demand. Romania’s economy
is diversified, its public and private sector
indebtedness is low, and the considerable
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 T H E C O U N T R I E S
O F O T P B A N K ’ S F O R E I G N S U B S I D I A R I E S
15Macroeconomic and fi nancial environment in 2015
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10
15
20
25
30
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40
20
06
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07
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Hungary
Russia
Ukraine
Bulgaria
Romania
Slovakia
Croatia
Serbia
Montenegro
The banking system’s retail loan penetration
(year-end, % of GDP)
Sources: National banks, OTP Research, 2015 forecast
10
15
20
25
30
35
40
45
50
55
60
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
The banking system’s non-financial corporate
loan penetration (year-end, % of GDP)
Sources: National banks, OTP Research, 2015 forecast
Hungary
Russia
Ukraine
Bulgaria
Romania
Slovakia
Croatia
Serbia
Montenegro
fi scal room may give further impetus to
growth. Yet the double-digit wage growth
and the aggressive fi scal loosening may
pose downward risks to short-term growth
prospects. Bulgaria’s growth pace (at 2.8% YoY
in full-year 2015) has also become more robust
than in 2014. What may cloud its outlook is the
low diversifi cation of Bulgaria’s economy and
the lack of industries with high value added.
In the Balkans region, the most important
good news is that economic growth returned
to each country. Montenegro is expanding
at the fastest speed; its GDP grew by 4.2%
in Q3, greatly benefi ting from the increasing
number of infrastructural investments
by the government and from the robust
increase in tourism revenues; unfortunately,
the government fi nances the former from
debts. Serbia continues to face considerable
challenges, mostly owing to the weak economic
performance, and the large fi scal and external
imbalances. Its banking system is stable, but
the ratio of non-performing loans needs to be
further reduced. In our view, Croatia exited the
six-year-long period of recession in 2015, owing
much to the dynamically increasing exports as
well as to the increased consumption caused by
the fall in commodity prices and administrative
changes. Regrettably, signifi cant fi scal and
external balance problems still persist in these
three countries, therefore their growth seem
less sustainable in the medium term than
elsewhere in Central and Eastern Europe. If the
external environment deteriorates, the market
pressure may mount particularly in Croatia.
The situation in Ukraine and Russia diff ers
markedly from the above country groups.
In addition to the low commodity prices (steel,
oil), the geopolitical confl ict between these
countries further deepens the recession.
Ukraine’s economy contracted by 10% and that
of Russia shrank 3.7%; both fell more than we
had expected at the beginning of 2015. It is
noteworthy that Ukraine’s Q4 gross domestic
product (–1.2%) has beaten expectations
in year/year comparison. The USD/UAH
increased from 15.62 in early 2015 to 24 by
the end of the year. Infl ation was above 43%
in December. What poses risks for its future
outlook is the uncertainty surrounding the
IMF agreement and the political situation.
In Russia, oil prices’ slump to record lows
weighed heavily on the budget and the steadily
depreciating ruble pushed the USD/RUB above
70 by end-December, up from 54 in January
2015. The weak ruble accelerated infl ation,
thus reducing real wages and consumption as
well as lending. Oil prices, which we expect to
remain low, will justify further fi scal austerity