ETFs

Hungary ETFs Face Uphill Battle

Recently, credit rating agency Fitch downgraded Hungary’s foreign currency credit rating to just above junk status, fueling concerns of the overall health of the nation’s economy and what lies ahead.

Fitch stated that a primary driver behind its downgrade was due to a “material worsening in the underlying medium-term budget position”.  This downgrade came shortly after the Hungarian parliament passed its 2011 budget.  The new budget is expected to run a little leaner than in previous years resulting in an expected cut to the nation’s deficit to 2.9 percent of debt in the next year.  As a result of these belt tightening measures, Fitch further added that it expects Hungary’s overall output to decrease by nearly 4 percent of GDP in the coming year. 

Similar to many other European nations like Greece, Portugal and Spain, Hungary was hit hard by the global financial crisis of 2008, hurting revenue streams and generating major deficits.  In regards to future revenue streams, the nation is expected to take a major hit from revenue generated via taxes as it has recently implemented a flat income tax rate.  Additionally, Hungary has introduced new levies on foreign-owned businesses which is likely to deter foreign business and further eat away at revenues.   

Lastly, public finances in the coming years are expected to worsen as the nation could witness amplified pensions coming to the market.  Public finances are expected to take another blow as Hungary starts to repay the $24 billion in loans that it received from the European Union and the International Monetary Fund in 2008. 

Some ETFs that are likely to be influenced by Hungary include:

  • The SPDR S&P Emerging Europe ETF (GUR), which is a diversified play on emerging Europe that allocates nearly 5.1 percent of its assets to Hungary. 
  • The iShares MSCI Emerging Markets Eastern Europe ETF (ESR), which tracks an Index which is a free float-adjusted market capitalization index designed to measure equity performance of the Czech Republic, Hungary, Poland and Russia.  In regards to country weightings, ESR allocates nearly 5.12% of its assets to Hungary.

Disclosure: No Positions

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