Hungary’s deteriorating economic situation, the credit crunch and the introduction of a new car tax that raised prices led to a sales slump of 18% y-o-y in 2008 to 162,000 units, according to BMI’s latest Hungary Automotives Report.

The car tax has compounded problems for the new car market amid the general economic downturn in Hungary. Consumers are reportedly not responding to long-term financing deals offered by dealers.

Instead, they are travelling to neighbouring countries to purchase new cars that do not incur the tax. At the same time, Hungarian banks are in the grip of a financial crisis, which has required an IMF bail-out.

By October, banks were reportedly accepting only two-thirds of vehicle loan applications, down from 90% earlier in the year. Yet, 80% of new cars are purchased through loan schemes, leading to a depressed market. On the upside, BMI does not expect the trend seen in 2008 to worsen significantly, having passed the low-point in H208, and by H209 the market should have levelled out, returning to growth from 2010.

By 2013, sales should exceed 190,000 units, but that will still be below the level achieved in 2007.

The plunge in the domestic market has not had a major impact on automotive production. Magyar Suzuki has not made any plans for a temporary halt to production at Esztergom. However, it did reduce its production forecast from 298,000 units to 290,000 units in response to the drop in demand in external markets, which represent 90% of its sales. Nevertheless, Hungary still posted strong output growth due to capacity expansion, with the country situated as a major production base for the Japanese carmaker. BMI estimates that total automotive production growth, including the country’s Audi and Suzuki car plants, slowed to a still impressive 25.1% in 2008, with output of 365,223 units.

Hungary is approaching the limits of growth as projects reach full capacity and investment begins to slow as carmakers seek cheaper locations such as Romania for new production facilities. Nevertheless, high capacity utilisation rates mean there is enough flexibility in the industry to ride out the downturn in export markets in 2009. Daimler’s plans to open a Mercedes plant in Hungary in 2012 with an annual production capacity of 100,000 units will provide a boost in output towards the end of the forecast period; BMI expects automotive output to exceed 480,000 units by 2013.

Hungary scored 42.4 (out of a theoretical maximum of 100) in the BMI Automotive Business Environment Ratings this quarter, down 2.3 points since the previous quarter. The plunge in the country’s automotive risk rating is due to two factors: the slump in domestic vehicle sales; and a deterioration of its overall country risk score amid the economic gloom that hangs over the country. On the upside, Daimler’s announcement in June that it intends to produce Mercedes models in Hungary indicates that the country remains attractive to investment in the automotive industry, despite rising costs and a depressed local car market. BMI anticipates a recovery in Hungary’s Business Environment Ranking as a result of higher rates of output from 2012.