Via IMF (Den Internationale Valutafond)

On November 27, 2019, the Executive Board of the International Monetary
Fund (IMF) concluded the 2019 Article IV consultation

[1]

with Hungary.

Over the last decade, Hungary achieved further income convergence at an
impressive speed and has become less vulnerable to shocks. In 2018,
Hungary was one of the fastest growing economies in Europe. It was
largely driven by domestic demand, including record-high EU
funds-related investment. The current account surplus has disappeared
reflecting the high level of investment-related imports and buoyant
consumption. Both headline and core inflation remained within the
tolerance band. Public debt continued to declined, and external
deleveraging has been even more sizable. Unemployment fell threefold to
new historical lows amid a tight labor markets, intensifying wage
pressures.

The budget deficit target was met in 2018 due to higher-than-expected
VAT collection and lower spending on goods and services. However,
fiscal policy appears to have stayed procyclical and the primary
structural balance worsened further. The 2019 budget deficit target
will likely be met, driven by strong revenue due to the rapid growth in
private consumption and gains in tax collection efficiency, but with
output growth above potential, the structural primary balance would
continue to deteriorate.

Monetary policy remained accommodating, notwithstanding a modest
tightening in the spring of 2019. As inflation approached the upper
half of the tolerance band in March 2019, the MNB increased the
overnight deposit rate from -15 to -5 bp and modestly reduced excess
liquidity by limiting the rollover of its FX liquidity swaps, resulting
in a slight increase in short-term money market rates.

Growth is projected to register 4.9 percent in 2019, and to gradually
decelerate from its highs starting in amid relatively sluggish global
activity and declining EU funds-related investment, but to remain above
2 percent over the medium term despite the negative demographics.
Average inflation should stay around 3.4 percent in 2019 and move back
towards the midpoint of the tolerance band over the medium term.

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Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
commended Hungary’s continued strong economic performance, which has
led to faster income convergence towards the European Union average and
reduction of vulnerabilities. Directors noted that growth has been
underpinned by strong domestic consumption and investment. However,
given the increased external uncertainty and Hungary’s still high
public debt and gross financing needs, Directors encouraged continued
fiscal consolidation and supply‑side reforms, to further build
resilience and sustain the growth momentum.

Directors were reassured by the government’s medium‑term fiscal
targets, which will help reverse the procyclical fiscal stance,
alleviate demand pressures, and increase the available fiscal space
that can be used in future downturns. In this context, Directors
encouraged specific growth‑friendly revenue and expenditure measures,
including reducing exemptions, broadening the tax base, phasing out
sectoral taxes, moderately reducing spending on goods and services,
containing the public wage bill and rationalizing generalized
subsidies. Directors saw merit in a public debt management strategy
that reduces rollover and foreign exchange rate risks, while avoiding
large increases in domestic interest costs. It will also be important
to implement the government’s plan to enhance the monitoring of
state‑owned enterprises to improve efficiency and reduce the risk of
contingent liabilities.

Directors supported the current monetary policy stance and acknowledged
the challenges posed by divergent domestic and external conditions.
Since risks to inflation from domestic conditions appear to be on the
upside, they encouraged the Central Bank of Hungary (MNB) to be
attentive to demand pressures. In this respect, Directors noted that
close monitoring of the housing market is warranted, and consideration
should be given to reducing housing bottlenecks and scaling down
existing incentives that stimulate demand. Directors also recommended
continued assessment of new and existing unconventional arrangements to
reduce the risk of market distortions. Clear and timely communication
will remain essential for effective forward guidance.

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Directors emphasized that rapidly rising wages relative to
productivity, decelerated export growth, and remaining shortcomings in
the business environment underline the need to invigorate supply‑side
reforms. Accordingly, they welcomed the authorities’ extensive agenda
to improve competitiveness and to help address demographic challenges.
Directors called for timely implementation of prioritized reform
measures that focus on reducing impediments to doing business. Such
prioritization should focus on leveling the playing field for small and
medium‑sized enterprises, improving governance and transparency,
increasing labor force participation, particularly of women, and
enhancing education and vocational training.




Hungary: Selected Economic Indicators, 2014–20


2014

2015

2016

2017

2018

2019

2020

Proj.

Percentage change, unless otherwise indicated

Real economy

Real GDP (percentage change)

4.2

3.8

2.2

4.3

5.1

4.9

3.5

Total domestic demand (contribution to growth)

4.9

2.3

1.6

4.8

6.7

7.0

5.2

Private consumption

1.3

2.2

2.5

2.5

2.4

2.0

2.1

Government consumption

1.0

0.1

0.0

0.3

0.2

0.3

0.3

Gross fixed investment

2.6

1.1

-2.4

3.7

3.8

3.0

1.1

Foreign balance (contribution to growth)

-0.7

1.6

0.6

-0.5

-1.7

-2.1

-1.7

CPI inflation (average)

-0.2

-0.1

0.4

2.4

2.8

3.4

3.4

CPI inflation (end year)

-0.9

0.9

1.8

2.1

2.7

3.4

3.2

Unemployment rate (average, ages 15-64)

7.7

6.8

5.1

4.2

3.7

Gross fixed capital formation (percent of GDP)

22.1

22.3

19.7

22.2

25.2

26.6

26.7

Gross national saving (percent of GDP, from BOP)

23.4

24.6

24.2

24.5

24.6

25.7

26.0

General government

Overall balance

-2.8

-2.0

-1.8

-2.4

-2.3

-1.8

-1.6

Primary balance

1.0

1.4

1.3

0.2

0.0

0.1

0.4

Primary structural balance (percent of potential GDP)

2.0

2.2

1.6

0.0

-0.5

-0.8

-0.5

Public debt

76.8

76.1

75.5

72.9

70.2

66.5

64.0

Money and credit (end-of-period)

Broad money

5.1

6.3

7.1

7.8

11.8

9.1

7.3

Lending to the private sector, flow-based 1/

-0.9

-10.9

2.0

6.5

10.7

12.0

10.0

Interest rates

T-bill (90-day, average) 1/

2.1

1.1

0.7

0.0

0.1

0.0

Government bond yield (5-year, average) 1/

3.9

2.7

2.1

1.7

2.2

1.0

Balance of payments

Current account

1.3

2.4

4.5

2.3

-0.5

-0.9

-0.7

Reserves (billions of Euros)

34.6

30.3

24.4

23.4

27.4

29.2

28.5

Gross external debt

118.4

107.0

95.7

83.3

79.6

69.5

63.0

Gross official reserves (percent of short-term debt at
remaining maturity)

161.8

139.5

129.7

136.4

156.7

168.6

178.5

Exchange rate

Exchange regime

Exchange rate, HUF per euro, period average 1/

309

310

311

309

319

332

Nominal effective rate (2000=100, average) 2/

114.2

116.5

116.7

115.5

118.6

120.5

Real effective rate, CPI basis (2000=100, average) 2/

77.7

79.6

79.7

78.4

79.8

79.5

Memorandum Items:

Nominal GDP (billions of Forints)

32,694

34,785

35,896

38,835

42,662

46,095

49,139

Per capita GDP (EUR)

10,723

11,389

11,725

12,816

13,685

14,743

15,670

Output gap (percent of potential GDP)

-2.7

-1.6

-1.7

-0.2

1.2

2.2

2.0

Potential GDP growth

1.8

2.7

2.3

2.8

3.6

3.9

3.7

Sources: Hungarian authorities; IMF, International
Financial Statistics; Bloomberg; and Fund staff estimates
and projections.

1/ Data as of August and September 30, 2019.

2/ Q2 data for 2019.




[1]

Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.


[2]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.