With the reopening of the economy, which is happening relatively quickly compared to elsewhere, Hungary will see a big increase in local consumption because so much money has built up through the pandemic, says Pál Simák.

The Chairman and CEO of CIB Bank expects the Hungarian economy could jump back by around 5% this year, and the expectation for 2021 and 2022 cumulatively is a 10% increase in GDP.

He attributes this potential for a rapid return to growth to the foundations that Hungary already has in place: banks that are strong and prepared to fuel investment; manufacturing output set to return to pre-pandemic levels; and consumers preparing to drive domestic consumption.

Full interview with Pál Simák

Pál Simák, Chairman and CEO of CIB Bank, Intesa Sanpaolo’s Hungarian subsidiary, believes that the Hungarian economy is set for a strong return.

“I believe the rebound will be somewhat higher than the regional average,” he says. “I think we may jump back by around 5% this year, and the expectation for 2021 and 2022 cumulatively is a 10% increase in GDP.”

Given the difficulties faced by businesses in sectors such as hospitality and tourism, Hungary appears to be in a relatively strong position.

The government acted decisively to support individuals and businesses. Simák believes the suspension of loan repayments, or loan moratoria, is an especially important factor in the country’s pandemic response.

“We’ve seen a 25% to 30% increase year-on-year in the savings of individuals,” he says. “That’s down to a mix of the moratoria and a naturally cautious approach during the pandemic, but I think with the opening of the economy – which is happening relatively quickly compared to elsewhere – we’ll see a big increase in local consumption because so much money has built up through the pandemic. That’s a reason for optimism.”

The ending of moratoria could dampen the recovery, as households and businesses will have to start making loan repayments again. But Simák says the experience of other countries in the region that have already ended loan suspensions has been generally positive, with only a small percentage of households and businesses struggling to meet repayment obligations.

“That’s likely to be the situation in Hungary as well,” he adds. “But it’s true that at the moment we don’t know exactly how the end of the moratorium will affect wider economic performance.”

An upswing in domestic consumption will only take Hungary’s recovery so far, however. Manufacturing is a crucial sector in the Hungarian economy, with much of the output destined for export. To that extent, recovery relies heavily on the economic climate in chief export markets like Germany and, outside Europe, the US. At the moment, these markets are rebounding relatively quickly, giving Hungarian manufacturers grounds for cautious optimism.

“We are expecting quite a big acceleration in manufacturing output, up by around 10%,” says Simák. “That’s important because manufacturing is one of the biggest components of our GDP.”

It’s quite possible that, having weathered the COVID storm better than many regional counterparts, Hungary's recovery may also slightly outperform the EU average. The second COVID wave in particular had a smaller-than-expected impact on economic activity, resulting in GDP growth for 2020 that was slightly better than forecast. 

Rekindling growth will rely on a strong banking sector that is prepared to support business investment. Here, too, there are grounds for confidence. A recent Intesa Sanpaolo Economic and Banking Outlook report stated that, “despite the recessionary environment, the banking sector’s capital, liquidity and funding positions remain strong.” Simák agrees with that assessment.

“What has been particularly good to see during the pandemic is the resilience of the banking sector in Hungary,” he says. “In general, banks were a lot better capitalised, with better liquidity than before the crash in 2008, so vulnerability is low. Profitability has been hit, of course, but the sector is generally strong and in a position to support the economy as we move out of the pandemic.”

In fact, sector profitability slid by more than 50% in 2020, though that was expected. Loan volumes were up 18% that year, showing that the sector continued to support the real economy.

Like all neighbouring economies, Hungary faces challenges as it emerges from the pandemic. Inflation may spike in 2021, though that will partly be down to one-off impacts. Risks associated with a return to pandemic measures can’t be entirely discounted at this stage.