Monday 26 October 2015

France, Hong Kong, Hungary and India Country Risk Report Q1 2016 Market Report; Launched via MarketResearchReports.com

France, Hong Kong, Hungary and India Country Risk Report Q1 2016

We believe that French economic growth will lag the rest of the eurozone over the next two years as investment growth and external demand remain lacklustre, while meagre wage growth and high unemployment mean that household consumption – traditionally the key driver of the economy – will become less able to support growth. France will experience a temporary terms of trade boost in 2016 and 2017 which will keep its trade deficit from expanding significantly. Beyond 2017 we expect the structural inefficiencies of the French economy to result in expansion of its trade and current account deficits.

We expect the Socialist Party to suffer in the 2015 regional elections, further weakening President François Hollande’s position ahead of the 2017 presidential election. While France will benefit from a cyclical economic upswing in the eurozone we do not expect this will boost the economy enough to save Hollande from elimination in the presidential election.

We expect the 2016 budget, which is the last to be submitted by Hollande before the presidential election, to fall short of its deficit reduction targets as expenditure cuts are insufficient to outweigh the proposed tax cuts.

Although we are likely to see a gradual increase in positive rhetoric towards structural reforms, Hollande is unlikely to become an ambitious reformer of the French model. While we expect some reformers will take baby steps in the right direction, the ability of Hollande to implement sweeping reforms will be restrained by divisions within his own party and core support base.

Major Forecast Changes
  • We maintain our current GDP forecasts for 2016 and 2017.
  • In light of a downward revision to our oil price forecasts, we have modestly narrowed our current account deficit forecast from 1.0% to 0.7% of GDP in 2016. We have narrowed our budget deficit forecast for 2016 from 3.6% of GDP to 3.5%.



Despite a relatively strong H115, we have downgraded Hong Kong's real GDP growth forecasts for 2015 and 2016 to 2.5%. Dual headwinds emanating from the slowing Chinese economy and Hong Kong's overheated domestic property market will weigh heavily over the coming years, undermining potential for a more robust pick-up in economic activity.

We expect the ongoing run-up in Hong Kong residential property mprices to fade heading in 2016, particularly as supply limitations subside and interest rates increase. While the eventual correction is likely to be moderate in nature, this will weigh on financial services and construction activity over the coming years.

Extremely large-scale pro-democracy protests, which began in September 2014 and were only wound up in December, failed to bring about any significant political compromise from either the Hong Kong or Chinese governments. The rejection by the pan-democrats of Beijing's blueprint for 2017's Chief Executive elections in June 2015 was another sign that the two sides remain very far apart, and we continue to believe that Beijing will progressively assert more domain over Hong Kong over the coming years.


Having been propped up by fiscal stimulus and large volumes of EU structural funding inflows in recent quarters, real GDP growth in Hungary will slow as government-led investment projects are scaled back. Hungary’s domestic demand recovery will trail its Central European peers due partly to weak credit conditions. However, we see steady economic growth ahead, driven by accelerating external demand, improving terms of trade and a better outlook for private consumption.

Although public debt remains well above Emerging European averages and is forecast to decline slowly in the coming years, Hungary’s sovereign profile has improved in recent years following substantial external deleveraging. Hungary’s current account surplus will remain sizeable in the coming years, bolstered by falling oil prices. We forecast a long-term narrowing of the surplus on the back of weak external demand. Strong deflationary forces and additional monetary easing from emerging and developed peers will enable the Hungarian National Bank to keep policy accommodative in coming quarters. The bank’s pro-growth stance and policy coordination with the government pose minimal risks in the short term as global monetary conditions remain loose, but could damage its credibility over the long term.

Alleged infringements of civil liberties in Hungary will leave the government ostracised from decision making at an EU level. This isolation will pose little threat to government stability, given the strong popular support the government enjoys, but it does pose a threat to Hungary’s influence on regional policy.


The Indian government led by the Bharatiya Janata Party has initiated various reforms in its first year in office, and it will continue to enact incremental rather than big bang reforms over the coming years. That said, the lack of majority in the Rajya Sabha, India's 245-seat upper house, will remain a hurdle to the implementation of large-scale reforms. State elections, which will continue to take place over the coming years, will determine whether the BJP will attain an upper house majority.

We remain broadly constructive on the Indian economy, and it will become the fastest growing major economy in Asia owing to the government's pro-business initiatives and accommodative monetary policy by the central bank. However, weakening agricultural growth and slowing reform momentum, notably in the infrastructure sector, will weigh on overall economic growth, and we revised down our FY2015/16 (April-March) real GDP growth to 7.3%, from 7.6%.

The Reserve Bank of India (RBI) lowered its repo rate by 50bps to 6.75% at its September monetary policy meeting, and we expect the central bank to keep its benchmark policy rate steady for the remainder of FY2015/16 (April-March) as its shifts its focus towards improving the transmission of past rate cuts. The RBI left the door open for further easing, and given that medium term inflation is likely to remain subdued in FY2016/17 (coming in below the RBI's target of 5.0%), we forecast another 50bps worth of interest rate cuts in FY2016/17 to 6.25%.

We expect the Indian government to eventually implement the Goods and Services Tax (GST) system over the coming years, but the proposed implementation date of April 2016 is an optimistic one. Even if the GST Constitution Amendment Bill is passed by the upper house, ratification by at least half of the 29 legislative state assemblies is likely to be a time consuming process. The Indian rupee will depreciate gradually against the US dollar over the coming years, and we forecast the unit to average INR65.00/ USD in 2015 and INR68.25/USD in 2016. The RBI will continue to accumulate reserves, and will allow the currency to weaken amid weak non-oil export growth. However, major rupee weakness is unlikely as continued economic growth and positive real interest rates will lend support to the currency.

Major Forecast Changes
We have downgraded our FY2015/16 real GDP growth forecast to 7.3% (from 7.6% previously) due to weakening agricultural growth and backtracking of reforms, particularly in the area of land, which will weigh on the infrastructure sector.

We have revised our average INR/USD forecasts for 2016 to INR68.25/USD (versus INR66.78.75/USD previously) as the RBI will continue to accumulate reserves in an attempt to reduce external vulnerability and improve trade competitiveness.

We have revised our FY2015/16 (April-March) current account forecast to a deficit equivalent to 1.5% of GDP (from 2.3% previously, but widening marginally from 1.3% in FY2014/15) as it will benefit from terms of trade improvement due to low oil prices.

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