The current account surplus is shrinking in Hungary, falling by more than half from the third and fourth quarters, but we don't expect this to be a large source of concern. Other parts of the Hungarian economy are more worrisome.
Indeed, central bank deputy governor Ferenc Karvalits echoed our concerns about credit in an interview Thursday. The governor said lending could remain subdued for a few years despite the central bank's new facilities (a mini-Long Term Refinancing Operation). In addition, unemployment released Thursday ticked up once again and is almost back to cycle highs of 11.8% year over year -- this is surely related to the 18% hike in minimum wage.
Although CPI remains elevated, the only factor preventing the central bank from shifting to a dovish stance is the uncertainty surrounding the IMF negotiations and the risk of a spike higher in EUR/HUF.This is a wise position to take, in our view, as we see a lot that could go wrong still. The forint is one of the trickiest currencies to trade at the moment, but we think the balance of risk is toward higher EUR/HUF in the short term.