Trends

Buoyant exports raise hopes
EXPORT PICK-UP INDICATES BETTER TIMES AHEAD
WRITTEN BY Zoltán Ákos Kovács

Hungarian exports, which suffered severe setbacks in 2001-2002, rebounded last year, and since mid-2003, they have not only come out of the red, but have been growing at a pace not seen for four years.

The high volatility of Hungarian exports in past years is strongly connected to changes in demand on world markets. The beginning of the 21st century posted sharp declines in world trade as well as a recession in Hungary's main market – the European Union. But that situation has considerably changed and dark clouds gathering in front of the Hungarian export market appear to have lifted. World trade is expected to grow by more than 9% this year while import demand from Western Europe gradually improves.

GROWTH IN EXPORT-ORIENTED BRANCHES

In the first four months of this year, prior to Hungary’s EU accession, exports increased by more than 18%, according to preliminary data and estimates of the Hungarian Central Statistical Office (KSH). This pick-up is double the 9% recorded in 2003 and shows that the rate of Hungarian exports continually increased as a result of the improving business climate worldwide. The export boom has been driven by manufacturers, especially those who build machinery and transport equipment. Electrical and mechanical machinery, road vehicles and spare parts, professional and controlling instruments, pharmaceutical products as well as plastics and rubber are among the best performing product groups. Internalcombustion engines as well as mobile phones are two of the export-oriented branches in the Hungarian industry that have dynamically excelled and are seen as engines of growth.

THE REASON BEHIND GOOD PERFORMANCE

Since the early 1990s, Hungary’s manufacturing industry has undergone profound structural changes, modernization and productivity growth – a process driven by multinational companies that invested heavily here by buying-up existing Hungarian companies during the mass privatization process in the mid-90s and in the form of greenfield investments. As a result, Hungary has become one of the most attractive locations for export-oriented production in Central and Eastern Europe (CEE). Most of Hungary’s top exporters are multinational companies operating as parts of global production and sales networks. Although the best performing branches are producing medium-high and high-tech products, assembly of spare parts seems to be the most characteristic activity. The gradual increase in local wages, however, has prompted certain labor-intensive industries like clothing manufacturers to close shop and move eastward. Meanwhile, more sophisticated phases of global production relying on qualified labor rather than low costs are being redeployed from the West. The first signs of this emerging international trend are already visible in the composition of investments coming into Hungary.

REGIONS WITH GOOD PROSPECTS

In the first four months of this year, Hungarian exports to developing countries and CEE expanded rapidly, at a rate of 58% and 16% in terms of volume. China, Southeast Asian countries and Brazil are among the most dynamic take-up markets for Hungarian products. Several CEFTA (Central European Free Trade Agreement) countries (including Poland, Slovakia, Bulgaria, Slovenia, Romania, or the Czech Republic) as well as Russia and the Ukraine are also among the most popular destinations. This can partly be explained by the much healthier growth of these economies as compared to developed countries.

On the other hand, these economies have also become integrated parts of multinational companies’ global networks separating production processes into smaller segments and locating them around the globe. Higher exports from these companies indicate that the longawaited turnaround in world economic growth has finally taken place. Despite the trend of redirection, the EU-15 continues to be the most important market for Hungary, where more than 74% of total exports are directed. Due to a sluggish but improving import demand, Hungarian exports to the EU-15 could post an increase of more than 16% by the end of 2004.

IMPORT GROWTH REMAINED STRONG

Imports have also become more buoyant, with growth rates exceeding those of exports in March and April 2004. In the first four months, import volume expanded by 18 %, and contrary to exports with a month-on-month increase. On the import side, the redirection toward CEE and the dynamism of Asian economies, especially China, seems to be more pronounced. This is in line with global trends and indicative of the competitiveness strategy of multinational companies, which rely heavily on low cost input supply. It also points to the high import intensity of Hungarian manufacturing exports.

As for the sustainability of this trend, March and April figures raised some concerns among analysts. Preliminary figures suggest that most of the increment could be attributed to the stronger demand of export sectors with remarkable stock of new export orders and vivid fixed capital investments. Increasing raw material prices on world markets may also have given impetus to the purchase of non-ferrous metals. However, the impacts of EU accession should also not be underestimated.

EU ACCESSION HAD MIXED IMPACTS ON TRADE

In the run-up to Hungary’s EU accession, several companies brought forward their purchases to build-up stocks. Most of them expected setbacks in customs clearance during the transition period in switching to new EU recording systems, Extrastat and Intrastat. Furthermore, in a few product groups, Hungarian tariffs prior to accession were lower than the harmonized tariff rates of the EU. With the recent EU enlargement, about 83% of Hungary’s exports and 76% of its imports have become intra-trade, i.e. trade within the Single European Market. By joining the EU, Hungary was also required to harmonize regulations concerning more than 100 companies that operate in industrial customs-free zones. The latest preliminary KSH figures for May suggest a notable slowdown in both export and import growth, close to 7% in terms of volume. KSH points out, however, that these figures should be interpreted with more caution due to possible statistical recording problems.

DETERIORATING TRADE BALANCE

In the first five months of 2004, the Hungarian forint weakened an average 4%, declining against the euro but strengthening versus the dollar. Hungary’s trade deficit also increased to EUR 2.2 billion (USD 2.6 billion), up EUR 292 million compared to the same period last year. Assuming that exports remain strong and imports develop along a more normal path, the trade deficit for 2004 could hover around the EUR 4.3 billion (USD 4.8 billion) recorded in 2003.