BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Hungary's overall CBBER is 65.5. The equivalent figures for the US and the eurozone are 84.8 and 81.4, respectively. Hungary's CBBER is second only to Greece (69.1) of the Central and Eastern European countries surveyed by BMI. Within the CBBER, the most important aspect is the banking market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Hungary's rating for this element (56.9) is significantly lower than the overall CBBER and significantly lower than the country element of the limits of potential returns (68.0). In contrast, Hungary scores highly in both the banking and country elements of risks to realisation of returns, 76.7 and 74.1, respectively. These scores act to offset the low banking element of limits to potential returns in Hungary's overall CBBER.

Sharp declines in domestic consumption will continue to depress economic activity in Hungary over the medium term. While an anticipated improvement in government finances will help to justify new spending commitments beyond 2008, we are concerned that Hungary will continue to fall behind its regional peers in terms of competitiveness, which is bound to present further risks to economic growth.

Extensive spending cuts and tax hikes introduced by the government in 2006, amid a gaping budgetary shortfall of 9.2% of GDP that year, will continue to set the tone for the overall macroeconomic picture in Hungary over our forecast period. The fiscal tightening measures will continue to weigh on economic activity in the medium term, where we have recently revised down our economic growth outlook for 2007, estimating 2.6% growth, down from a previous 3.4%. We expect real GDP growth to remain subdued in 2008, at 2.9%, until Hungary's economic performance is lifted by renewed spending commitments and rising household consumption, bringing real GDP growth in 2009 to 4.5%. Growth will remain above the 4.0% mark through to 2012. Although overall economic growth is set to remain robust after 2009, Hungary's economy is likely to continue lagging behind its regional peers, with growth set to average 3.8% through our five-year forecast period, well below that of the Czech Republic and Slovakia, with 4.8% and 6.5% averages forecast for the same period, respectively.

During the first half of 2007, government expenditure remained below the H106 level, declining by 7.6% in Q107 and 2.7% in Q207. Considering that government consumption is expected to account for almost 10% of GDP in 2007, real GDP growth in H107 came in at a lacklustre 1.9% year-on-year (y-o-y) on the back of an 11-year low in GDP growth of 1.2% y-o-y in Q207. This is a massive slowdown compared to 3.7% y-o-y growth in H106. However, with government efforts to rein in the enormous budget deficit