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News 1 ///macroscope
Base Rate at Another Record low, no Further Cuts Expected
As hinted at in the last month, the Monetary Council of the National Bank of Hungary (MNB) further cut the key rate, already at a historical low, to 0.6%. The move is expected to boost the virus-hit economy, but no further cuts are likely in the foreseeable future, both central bank representatives and analysts say.
ZSÓFIA CZIFRA
Changes in Gross Domestic Product (GDP) in Hungary; 2008-2020 (Q1)
Annual economic growth rate; seasonally and calendar adjusted and balanced data
Quarterly Change in GDP; 2008-2020 (Q1)
Seasonally and calendar adjusted and balanced data
Source:
After leaving it unchanged for more than four years, monetary policy decision makers cut the base rate for the second month in a row, this time by 15 basis points.
The move did not come as a surprise, as MNB deputy governor Barnabás Virág had said a few days after the June policy meeting, when the first cut in four years was made, that he would propose another 15-basis point reduction at the next rate-setting meeting. He added, however, that a rate under 0.6% was not a possibility.
The Monetary Council decided to leave the O/N deposit rate at -0.05% and the O/N and one-week collateralized loan rates at 1.85%. These two mark the bottom and the top, respectively, of the central bank’s “interest rate corridor.” The base rate is paid on mandatory reserves and preferential deposits.
In its statement released after the meeting, the Monetary Council said that the new, 0.6% key rate would support price stability, the preservation of financial stability and the recovery of the economic growth in a sustainable manner. They added that “in the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero.”
Other Instruments
The council also suggested that, if necessary, instruments other than the base rate would be used as additional stimulus.
“In the event of a persistent deterioration in the outlook for growth, the bank will deliver the required additional economic stimulus using its targeted instruments, i.e. the Funding for Growth Scheme Go! and the Bond Funding for Growth Scheme, providing the most direct support to investment,” the statement reads.
Analysts also believe that the 0.6% level is here to stay for a longer period of time. “The forward rate market priced the 15-basis point rate cut, and is not expecting further cuts,” wrote Takarékbank head analyst Gergely Suppan.
Also, as the inflation rate is likely to remain in the tolerance band in the coming months, even until the beginning of next year, there will be no need for tightening the monetary conditions, Suppan said, adding that he does not expect any tightening action in the next two to three years.
As the central bank had already hinted at a second rate cut, the decision surprised neither analysts nor markets, agreed Gábor Regős, head of the macroeconomic division of research institution Századvég.
Symbolic Cut
According to him, the rate-cutting decision is more symbolic; its goal is mainly to boost the economy through a lower key rate level, and also through a weaker forint/euro exchange rate, he added.
But he emphasized that the rate cut also has a communication goal, namely that it expresses that the central bank still has room to loosen monetary conditions. The next interest rate setting meeting is scheduled for August 25.
In the meantime, it seems that economic sentiment has improved in Hungary, albeit still at a very low level. According to the GKI economic sentiment index, a composite indicator, the level rose to -18.2 in July from -20.5 in June. July’s reading reflected an improvement in both business and consumer sentiment.
Business confidence increased to -15.2 in July from -16.2 in June, driven in large part by less pessimistic views in the trade and services sectors. Meanwhile, sentiment in the industrial and construction sectors remained unchanged.
Consumer confidence has improved as well: the index rose to minus 26.9 in July from minus 32.8 in the previous month as households’ assessment of their financial position and expected savings capacity improved. Economic think-tank FocusEconomics said its panelists projected private consumption to fall 3.3% in 2020, which is up 0.7 percentage points from last month’s projection. For 2021, panelists see private consumption rising 4.5%.
Numbers to Watch in the Coming Weeks
The Central Statistical Office (KSH) will publish several important data sets in the coming weeks. First, the June retail trade data will come out on August 5, it will be interesting to see the how lifting of the quarantine rules has impacted consumption. June industrial output data will be published a day later, the first estimate will be followed by the second reading on August 12. On August 11, July consumer prices will be released, and two days later, we will find out how the construction sector performed in June.
Investment Volumes Could top EUR 1 bln in Hungary
Real estate investment volume for Hungary in first half year reached
EUR 500 million in 14 deals according to CBRE. The main contribution to this figure was the purchase by the Hungarian Optimum Ventures
Private Equity Fund (Optima) of a majority 61.5% stake in GTC.
GARY J. MORRELL
“We currently see more than EUR 600 mln worth of deals that could realistically close this year and unexpected opportunities could [also] emerge,” the consultancy says.
“As such, while there is lingering uncertainty as to how the latter stages of the COVID-19 situation could play out, currently it seems like a recovery in investment activity can be expected in the second half and the annual investment volume can end up comfortably above the EUR 1 billion mark, with a stronger rebound in 2021.”
BBJ STAFF
Closed-system farming offers a solution to the biggest challenges in the future of global food supply. Soil contamination, the depletion of areas suitable for agricultural production, extreme weather conditions, the rising volume of food waste, urbanization, and the growing demand for quality food all point towards the increasing importance of local indoor farming and urban vertical farms, says Zoltán Sejpes.
Light is the alpha and the omega of indoor farming, Sejpes explains. The proliferation of LED technology has brought about a veritable revolution in so-called vertical farming, as it allows for energy-efficient light that mirrors the solar lighting conditions necessary for plant growth.
JLL put the first half year volume even higher at EUR 610 mln, with an estimation for the year at EUR 1.4 bln-1.6 bln.
“The super-cycle, witnessed during the previous years, has ended. That said, real estate investments remain attractive due to their relative returns and we expect the transactions to pick up after the summer when the market normalizes,” comments Benjamin Perez-Ellischewitz, head of capital markets at JLL Hungary.
“In most asset classes compression is not on the horizon, but volumes should be back to their usual levels by 2021,” he adds.
Eston International have traced first half year investment volume at EUR 300 million,
In addition, the technology ensures that less water and virtually no agricultural land is needed for crop production; there is no waste generation, while pests and contamination can be avoided due to the closed system.
An example in the Budapest agglomeration can be found at Veresegyház, where an indoor farming complex has been in operation for some time. Here, tomatoes grow by means of artificial lighting; this complex provides several supermarket chains with tasty produce, independent of season, time of day, or weather.
GMO-free
Moreover, these farms produce a healthy, GMO-free crop, adds Sejpes; they only experiment with light spectrum, i.e., the proportion of its colors and with other, more
GTC Pillar office complex.
although that excludes the Optima deal in the figures. A moderate estimation by the consultancy places the 2021 volume at EUR 1 bln, assuming a second wave of the coronavirus causes no further disruption.
Regional Leader
Poland remains the leading CEE investment market; JLL has recorded EUR 2.9 bln in transaction volume for H1 2020, in what it described as the second best first half year in the history of the market.
“Despite the global pandemic, the first months of the year saw a continuation of the trends that have been observed on the market for some time now,” JLL explains. natural factors. A modern indoor farming module is more like a 4.0 industrial unit than an agricultural one; this is a world of sensors, monitors, drones, software and artificial intelligence, where there is still much to discover in order to understand the “language of plants.”
With Tungsram lamps, experiments are already underway in several Hungarian institutes, and beyond Hungary at the University of Reading, as well as the Office remains the leading sector in Poland with EUR 1.3 bln for H1.
Again, much of this is put down to the aforementioned purchase of a majority stake in GTC by the Optima that included both office complexes and shopping centers across the region. This follows the CEE trend of developers and investors concluding the acquisition of companies and platforms in other countries the region.
The yield gap between Budapest and Warsaw and Prague remains at around 100-125 basis points according to JLL. CBRE puts prime office yields at 5.75%, shopping centers at 6.25%, high street retail at 5.75% and industrial at 7.25%.
“Prague remains the hottest and most expensive market in the region and Budapest is catching up, but a considerable 100 basis point gap remains between these markets, offering great value to investors focused on Hungary,” comments Bence Vécsey, head of capital markets at Colliers Hungary.
Domestic investors are expected to continue to play a key role on the market. “In recent years domestic investors dominated the Hungarian market and their market share is expected to remain significant,” says Perez-Ellischewitz of JLL.
“Nevertheless, international investors are just as capable of carrying out transactions as their local competitors. They might need the support of a local advisor or a local asset manager for market intelligence. Good examples are the recent acquisition of Eiffel Square by Allianz RE or Rumbach Center by Galeon Capital
Indoor Farm Technology: The key to the Post-COVID World
Closed-system farms, lit with LED-lamps, can produce in all seasons and at any time of day to help achieve local self-sustenance, promoting exports at the same time, and thus have key potential in the post-COVID-19 world, states Zoltán Sejpes, director of the Tungsram Agritech business unit.
during the lock down period,” he adds. Fraunhofer Institute, which is well-known for its standard-setting certificates.
Furthermore, the first full scale vertical farms in the region will be established in Újpest, at Tungsram’s headquarters, becoming, as Sejpes puts it, the “playground” of every interested researcher, where they can complete worldclass experiments that have the potential of globally influencing the Earth’s food supply.
Sejpes thinks that, thanks to the modern indoor farming technologies, Hungary has the potential to attain year-round self-sustenance in the fields of vegetable and fruit production.
Business 2 “But considering where we are, I am incredibly pleased with the results. Now, let’s see what happens in the second half.” He attributes such success to staying close to the customer, and in a sense, the move to working from home, which necessitated an embrace of digital platforms from all parties, may have www.bbj.hu Budapest Business Journal | July 31 – September 3, 2020 helped. Certainly, people are much more aware of what is possible. Moving on, but Staying in Touch Digital Learning “Some of the interesting learnings we took away from the pandemic is that digital plays an important part in
Despite the difficult continuity of business and how end-toend digitalization impacts the customer economic climate experience,” he says. Citi, famously, has long been a engendered by the pioneer of digital banking and FinTech applications. Lockdown looks to have built
COVID-19 health on that. “Every event that happens gives you a new view. We learn, modify, react crisis, Citi’s business and advance again.” is in “very good shape”, Central “Some of the interesting
A. Murray tells the digital plays an important Budapest Business part in continuity of Journal. Indeed, business and how end-tofactor in some of end digitalization impacts the customer experience.” the learning around digitization from Murray is full of praise for Citi staff who the lockdown, and Kevin A. Murray saw their work day overturned almost overnight as they were sent to work from you could argue its future is also in I think, a Hungarian saying about looking at things with one eye crying and one eye While the business environment is certainly challenging, with an economic home, amounting to 95% in the very good shape. laughing. That certainly fits here. We have really enjoyed our time in Hungary.” crisis resulting from actions taken to stem the health crisis, the underlying fundamentals, case of Hungary, 85% in Poland. “These are people who had to go home, The appointment was actually made at least in Central and Eastern Europe, clear off the kitchen table and set up a work in February, but when the pandemic hit are good, which bodes well for the future. station, plus balance that with educating
ROBIN MARSHALL and borders closed, the process slowed. Ultimately, the final move to Poland is their children or looking after elderly parents. And they did not miss a beat:
When we caught up with Murray, it was via expected at the end of this summer. His former role of managing director “For any job, I always think; front, middle and back office.” But he is also keen to remember those
Zoom, as he was in Poland, transitioning to his next role as head of the Citibank Europe Plc. branch in Poland and its and CEO of the Citibank Europe Plc. Hungarian branch will be taken by Czech national Veronika Špaňárová, currently the will it interest me? And this one was fascinating. There who “had to come in because there were critical functions that had to be performed in the office. They deserve expanding Citi Solutions Center, which employs some 4,700 people with power to across two sites: Warsaw and Olsztyn country head for Slovakia. World Experience is, I think, a Hungarian saying about looking at huge gratitude for coming in when no one else could do so.” Getting back to “normal” will evolve (about 200 kilometers north of Warsaw). Alongside that, he will maintain his “I have worked with her for four years, but she is a 25-year veteran of Citi, who has things with one eye crying over time, he insists. “We always said it would be driven by the data, not position as CEO for Central Europe, worked in a number of roles in the Czech and one eye laughing. the date. When Citi’s people are more with oversight of the regional cluster where Citi has a presence (Bulgaria, the Republic and also overseas in Sao Paulo, Brazil, so she brings a world of experience That certainly fits here. confident they will come back in a very controlled process.”
Czech Republic, Hungary, Romania, and with her. This is international progression We have really enjoyed Citi celebrates its 35th anniversary in
Slovakia), and another 12 for her career, so we are quite fortunate to get someone of her caliber.” Murray expects her to be in place our time in Hungary.” Hungary this year (an anniversary no one is going to forget quickly, Murray jokes). The country remains a great location to countries “sometime in the month of August, ‘Lord do business, he says. “In the Hungarian where Citi does business but has no willing and the creek don’t rise’, as they “The first six months for the cluster Investment Promotion Agency, it has physical presence. It puts him in a very used to say.” He is conscious of the were better than the previous year a real gem. Hungary would not get the good place to judge the recovery; more challenges of taking a role where the by about investment figures it does if it did not have of that later. “When the time to move comes along, former post-holder is your boss. Initially, he will be a more frequent 10% a pro-investment government.” Will he miss it? “Personally, it is you start thinking about your next role. visitor to Budapest, but once Špaňárová on the revenue side, mirroring Citigroup’s always the people I will miss and the
This opportunity in Poland came up; it is in place and the transition is over, he results. Where it looks more difficult is many things we have accomplished, but allowed me to move on to another remit expects to visit once a quarter, as he the cost of credit line. In the CECLs, the this is a beautiful country, and living in while also maintaining a significant part does with the four other counties in the Current Expected Credit Loss, Citi takes this city [Budapest] has been a delight of my former business role, which was a cluster unless something specific comes a view on the future macro environment, and a privilege. Anywhere I go there is rather unusual opportunity,” he explains. up where his involvement will help. and that is where the big numbers come in. something special you take with you; in
“For any job, I always think; will it interest “Other than that, I intend to act like a That’s what we have to keep an eye on for Hungary there are so many. And the great me? And this one was fascinating. There is, good in-law and keep my visits short.” the future,” Murray explains. thing is I get to come back.”
