HUNGARY'S CONSUMPTION CLIMATE SHIFTS.

Late last year, rising interest rates and devaluation of the national currency (the forint) clouded Hungarys consumption climate. These shifts undermined the cost competitiveness of imported goods and services, while causing industry to rethink major capital expenditures requiring financing.

Fluctuations in the value of the forint have proven to be a headache for importers and consumers alike. During December, the auto import company Porsche Hungaria announced that it would price its vehicles in accordance with the daily exchange rate. That, in turn makes it impossible for individuals and companies to project the cost of high-end car purchases.

The central banks decision to raise the repo rate to 12.5 percent in December also came as a blow to individuals and companies making high-end purchases. The higher cost of financing represents an unexpected financial burden that will cause some companies to put capital purchases and plant expansion projects on hold until at least midyear 2004. Orders for foreign capital equipment will experience sluggish growth through the second quarter, with year-on-year gains not likely to approach the 5 percent mark until some time in the fourth quarter.

Increasing concerns regarding the handling of Hungarys monetary policy will put Hungarian business leaders and foreign investors on the defensive through at least the first half of this year. Inflation is likely to run above projection this year, and that will put downward pressure on real household income and the value of Hungarian fixed assets. That, in turn, will limit growth in household consumption of durable goods to less than 5 percent year-on-year through at least mid-2004.