Money and Capital Market
Money and Capital Market
The Russian and Brazilian financial crises of 1998 made their impact felt in early 1999 as well. As a result, domestic analysts and research institutes forecast a cloudy prospects for the year’s Hungarian economy up to February 1999. For example, they believed the Orbán Cabinet was too optimistic when it passed its budget for 1999, and virtually everyone besides the government assumed that some adjustments – perhaps a supplementary budget – would be needed. This sentiment was confirmed by the key figures for the first months of the year, which prognosticated a record deficit for both the central budget and the balance of payments on current account. Moreover, growth in the Gross Domestic Product (GDP) fell far short of the 7% per annum promised by the leading power of the coalition, Fidesz / Magyar Polgári Párt (Young Democratic Alliance / Hungarian Civic Party) in its 1998 election campaign. The fact that the European Union – considered Hungary’s leading trade partner, representing a nearly 3/4 share – was hit by a minor recession, unfortunately also contributed to this.
The low-keyed growth of the Hungarian economy was of course reflected in the activities of the domestic banks as well. Demand for bank loans dropped, and according to the data of the State Supervisory Body of Financial Organizations (Pénzügyi Szervezetek Állami Felügyelete), bank loans extended to clients increased by just 7.7 percent in the first half of 1999, in other words, they dwindled in terms of real value taking into account the average annual inflation rate of around 12-13%. In addition, the profitability of the financial institutions leveled off, primarily because the banks were compelled to lower their interest rates in keeping with the slow but sure rounding off of the inflation rate. Because the competition between the banks became as close as ever – new players were cropping up practically every month in the retail department – the financial institutions were unable to offset the drop in yields caused by the inflation by increasing the margin between the interests on loans and those on deposits. Moreover, this difference decreased from 4.5 to 4.2 percentage points in 1999. The banks’ elbow-room dwindled even further because the monopoly represented by bank loans in providing loans to enterprises and retail clients gradually broke up along with the proliferation of new financing and investment alternatives. Even though this effect had not been noticeable in 1999 due to the domestic capital market being also affected by the Russian and Brazilian financial crises, the trend of the population investing more and more of its savings in forms of investment other than banks continued.
The adverse environment the banks were active in was further worsened by the fact that foreign investors faced by the weak economic indices of Hungary in early 1999, also turned their backs dramatically, which essentially contributed to a decrease in the growth-rate of the banks’ balance-sheet figures and profits. Namely, as a result of a relative capital deficit, the number of investment and development projects that could have been financed by banks also declined. Adding to this, the financial institutions had to devote considerable resources to eliminating the Y2K problem, moreover several of them incurred extra costs because of certain miscalculated strategic development concepts. For all these reasons more banks than ever – namely 17 of them – were bound to account for losses, amounting to some HUF 36 billion, in 1999. This is quite much, mainly if one considers that loss-making banks comprised 20% of the banking sector’s balance-sheet footing.
Even though the Hungarian economy realized a spectacular comeback with improved key indices in the second half of the year and investors returned by the end of the year, this did not manage to improve the banks’ grave situation for 1999. The banks quickly bore down on numerous new business opportunities presenting themselves, and bank loans extended to clients grew by as much as 16.1 percent in the second half of 1999. Because of the increased rate of economic growth (ca. 5% per annum) though, the population’s real income also began steadily rising, and the demand for bank loans increased.
This trend maintained its momentum in 2000 as well, moreover its rate even increased dramatically, since the Hungarian GDP rose by nearly 6% in the first half of 2000 on account of a more favorable external environment. The banks took advantage of this good “tail-wind”, and although no final figures are available yet, it is definite according to the forecasts that the global profit of the Hungarian banking system exceeded the previous year’s in 2000.
Increasing competition among the banks and the fulfillment of capital demands, however, screened out even more players in 1999 and 2000. The number of domestic banks continued to decrease, which from the experts’ point of view, is no problem at all because 30 or more financial institutions in Hungary is still more than what the size and capacity of the Hungarian economy can support. The banking system was streamlined partly by bank closings and partly by the local impact of the fusions going on in full swing in the international arena. Realbank Rt. closed its doors and one of Hungary’s most venerable financial institutes, Pénzintézeti Központ Rt., was taken off the market in 1999, while Rákóczi Bank Rt. ceased to exist in 2000. Due to the merger of their foreign owners, Bank-Austria-Creditanstalt Hungary Rt. and HypoVereinsbank Hungária Rt. will continue their activities under one roof from the spring of 2001 as the domestic bank with the fifth highest balance-sheet footing.. The creation made up of the former success duo comprised of Kereskedelmi és Hitelbank Rt. and a bank rising from the ruins of the former Magyar Hitel Bank Rt., ABN Amro (Magyar) Bank Rt., is placed even further ahead, in second place. And there is still more to domestic bank mergers: in August 1998, OTP Bank Rt. – by far the largest member of the banking system – had the opportunity to devour Postabank és Takarékpénztár Rt. – a financial institute that had undergone nearly two and a half years of improvement and freed of its Chairman-C.E.O. Gábor Princz. Dozens of mergers took place in 1999 and 200 among the “busy ants” of the Hungarian banking system: the co-operative savings associations. In essence, they should not yet be considered as a reaction to market forces because merger was the only way that co-operative savings associations could meet the tightened capital requirements of the newly amended Act on Financial Institutions.
It is possible that the domestic brokerage firms suffered even more from the severe crises of 1998 than the banks. Many of them had gone bankrupt, while others were bought up. For example, Concorde Értékpapír Rt. incorporated no less than five of its former partners in 2000. So, the heyday of investment enterprises – related to a quick restoration of the trust of foreign clients in the Hungarian capital market and/or in the Budapest Stock Exchange (BÉT) and to proceeds (directly or indirectly) achievable through high interest premiums on the forint – ended in 1999.
The years 1999 and 2000 were not so memorable for the Hungarian stock market also because the boom clearly expected by practically everyone after the clearing of the ruins of 1999 failed to take place in 2000. Even though the overwhelming majority expected BÉT’s official index, the BUX, to well exceed the 8,819 point value of late 1999 in 2000 – some even believed 15,000 points to be a realistic goal – the BUX closed even lower than the previous year’s figure. This was primarily due to external factors, specifically the spectacular collapse of the American stock market in the spring of 2000, then the strong aftershocks of the Turkish financial crisis in November 2000, on account of which foreign investors withdrew much of their capital from the Budapest Stock Exchange (among others) – to save whatever they could. While somewhat more (EUR 1 billion) foreign operative capital came to Hungary in the first ten months of 2000 than in 1999, the value of financial or so-called portfolio investments decreased by EUR 560 million in 2000, in contrast with the EUR 900 million growth realized during the first ten months of 1999.
Magyar Távközlési Rt. – a company with the largest stock market turnover and market value, and influencing nearly 30% of the BUX – suffered greatly from the worldwide loss in interest in the telecommunications stocks that had been soaring in 1999 and in early 2000 after it turned out that developments relating to wireless telephony and the Internet were much more expensive than previously assumed by the experts. So, the firm dragged the BUX into the depths. Notwithstanding, the Orbán Cabinet gave Hungarian stocks the final push, which particularly in 2000 did not prove too investor-friendly because it did not allow MOL (Magyar Olaj- és Gázipari Rt.) to raise gas prices by more than 6% per annum in spite of crude oil prices rising from $10 a barrel to more than $30 in the space of twelve months. The two pharmaceutical manufacturers on the stock market, Egis Rt. and Richter Rt., had also been adversely affected because of the government’s freezing of drug prices. Moreover, there is also little chance of new companies showing up on the stock market with the end of Hungary’s “age of privatization”. For example, only the admission of Graphisoft N.V. and Econet.hu Rt. to stock-exchange dealing managed to attract investors in 2000, yet even these morsels proved to be precious little.
Károly Csabai
