The financial foundations of construction
The building industry in Hungary is facing the double strain of a gloomy economy and rising material costs – but well-placed companies will weather the storm.
After the strong start to 2022 tapered through the year, construction and infrastructure businesses in Hungary are far less optimistic about 2023.
Less than 10% of 400 companies recently surveyed by the country’s trade bodies expect their order books to exceed their current capacity in 2023.
Many more forecast a year of shrinking business, knocked by the dual forces of international conflict and global economic struggle.
More than three-quarters of the companies surveyed expect their profitability as a percentage of sales to deteriorate.
An industry under pressure
Construction in Hungary faces the same raft of problems as other countries. Rising energy and materials prices are expected to lead to shrinking profits in the near term.
Take for example the price of cement, which rose 100% in four months between May and September 2022.
This is the kind of volatility that could bankrupt smaller firms operating on narrow margins.
Yet Hungary has its own problems, too. Inflation is spiralling and currently stands at an annualized 14.5%. The economy threatens stagnation. The weakening of the forint against the euro is exacerbating rising cost issues, while a labour shortage and skills shortage threatens the potential of the industry to fulfil projects.
Of the companies surveyed, 27% expect order books to be above 80% of current capacity, while 32% expect them to be between 50% and 80%.
A third of companies expect to have less than half of their current capacity on their order books.
István Fetter, Head of Small Business Segment Management at CIB Bank, says: “There are several structural problems that are setbacks for the industry.
“Over the past decade we have seen a huge shift from blue-collar workers to white-collar workers. Together with rising material costs this is no doubt going to have a longer-term effect on the industry.
“Additionally, strong state sponsorship behind the real estate market may decrease in the future – and this will have a very huge effect on the market.”
In challenging times, the support of well-considered finance is more important than ever.
While infrastructure companies are suffering from uncertainty on many fronts, CIB aims to reduce risk on the financing side, to help companies weather the storm.
Examples of support include tailor-made cash-management services in line with company turnover, fulfilment of and access to state-subsidised lending and leasing products, and preferential fixed interest rates for companies – 3.5% per annum compared with the standard 15-20%.
CIB’s financial products are bespoke and delivered with full knowledge of what the industry is facing.
“By providing Hungarian forint-denominated, fixed interest rates, we remove the interest rate risk and currency exchange risk from the equation,” says Fetter.
"Companies operating in the construction or infrastructure segment are always prone to exchange rate changes, economic turmoil and workforce shortages. It can be crucial to have a banking partner that understands their business and the challenges they are facing."
István Fetter, Head of Small Business Segment Management, CIB Bank
Supporting small to medium-sized businesses will be key during these uncertain times. While large corporates will no doubt be able to mitigate against attacking economic forces, small and medium-sized businesses are exposed to them through the supply chain.
Light in the dark?
While downward pressure falls in all directions on the industry, there are glimmers of hope in the form of government stimulus. A 10-15-year railway redevelopment plan across the country worth €19.68bn is already under way.
As well as railway renovation, the country has planned to invest around €454m to build residential solar power systems and to provide electrification of residential heating systems.
Hungary has also allocated €188m to renovate social housing and €33m for renewable energy production.
The Hungarian government will be able to access €5.8bn in Covid-19 recovery and resilience funding, which has been approved by the EU although its structural foundations are still under discussion. It is hoped that, when fully released, the subsidies will contribute greatly to achieving Hungary’s economic goals.
“This funding, together with an end to the conflict in Ukraine, would have a very positive effect on the Hungarian economy and specifically for the construction and infrastructure segment,” says Fetter.
As the industry faces an uncertain start to 2023, companies with the right banking support will be well placed to keep building.