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IMF Executive Board Concludes 2019 Article IV Consultation with Hungary

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.

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.

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 .