a. Current account determination

External capital flows enable a country to import for some time more goods and services than it exports. However, intertemporal solvency implies that these debts should eventually be paid back through surpluses on the trade and services accounts. In this way, the external current account is fundamentally a venue of intertemporal resource allocation between countries. This aspect is at the center of the intertemporal approach which analyzes the current account within an intertemporal saving-investment model and identifies the factors that may make it optimal for countries to run current account imbalances for some periods.

To highlight some key features of this approach, it is instructive to start from the national accounts identity:

where national income (Y) is the sum of consumption (C), investment (I), government spending (G), and net exports (N=X-M). ^2/ The government’s deficit (DEF) in any period is DEF-G-T, where T denotes government taxes net of transfers. Defining private sector saving as S^p=(Y-C-T), equation (1) can be rewritten in a way that relates net exports to private sector saving, the government deficit, and investment:

Note that net exports (N) is the national accounts equivalent to the external current account, excluding transfers. For simplicity of exposition, it is assumed in this Section that these transfers are zero so that the current account is equal to net exports.

The main focus of the intertemporal saving-investment approach is to identify the determinants of the left-hand side of equation (2). It takes into account the intertemporal solvency condition of a country:

whereby the present value of all future net exports, PV(N), must equal (the negative value of) a country’s initial net foreign asset position. This allows a country with an initially positive net foreign asset position to “eat up” the assets over time by running current account deficits, and vice versa.

The intertemporal model highlights the role of the current account as a buffer for transitory shocks. This essentially extends the consumption smoothing model to an open economy: inter alia, it suggests a relatively strong current account position for a country that is in a weaker cyclical position than its trading partners; also, in the case of temporary real exchange rate, terms of trade, or supply shocks, demand smoothing would result in temporary current account imbalances. For example, an unusually bad harvest, as Hungary witnessed for several years in the early 1990s, may have only a limited effect on domestic demand and result in a concurrent temporary deterioration of the external current account. ^1/ Temporary shocks that affect the current account can also be policy induced, including monetary policy shocks and temporary changes in the fiscal policy stance (see below the discussion on Hungary).

The intertemporal approach also identifies factors that may result in more sustained periods of current account imbalances. A country that starts from a relatively underdeveloped position, and is expected to narrow its relative income gap, could be expected to run a current account deficit during part of the catch-up period. While this would allow some intertemporal smoothing of consumption, it should also be reflected in a relatively large share of capital goods imports. As a result, the composition of a current account imbalance may be an important indicator of its sustainability; this is underscored by the experience in several countries in East Asia, where sustained periods of current account deficits have come in the face of high domestic saving rates, but even higher investment ratios, with imports primarily reflecting investment goods needed for achieving the relatively high growth rates and the narrowing of the relative income gap. ^1/ Demographic factors may also result in sustained periods of current account imbalances. Theories in this respect mostly build on aggregate life-cycle models. In particular, as a country’s population ages relative to its partner countries, its dependency ratio may tend to rise. If, as the life cycle hypothesis suggests, older dependent people have lower propensities to save, this would tend to lower a country’s saving rate over time. ^2/ In order for the intertemporal solvency condition (3) to hold, this country would have to save relatively more in the years prior to the relative rise in its dependency ratio, i.e., a country would ceteris paribus have to record a stronger net current account position in the earlier years ahead of the relative aging of its population.

Fiscal policy can affect the current account in these models through several channels. ^3/ The fiscal deficit may affect a country’s current account if Ricardian equivalence does not (fully) hold, so that changes in public sector saving are not fully offset by changes in private sector saving (see equation (2)). Fiscal policy also exerts direct demand effects (or indirect effects via taxation and transfers) and these have repercussions on the external current account. For example, to the extent that the private sector has a different (generally lower) marginal propensity to consume nontradable goods than the public sector, a temporary increase in government demand would generally affect the current account even if Ricardian equivalence held. ^4/

Finally, intertemporal models of the current account ascribe an important role to interest rates. First, a rise in real interest rates has a wealth effect. It is negative in countries that are net borrowers, like Hungary, as it increases their debt service burden; as a result, Hungary would have to run larger current account (net of interest payments) surpluses over time if there were a sustained rise in real interest rates. Secondly, as an intertemporal price, the real interest rate also affects the intertemporal demand and supply pattern, and thereby the current account.

b. Implications for equilibrium exchange rates

The intertemporal approach sketched above provides a framework to analyze an equilibrium path for saving, investment, and the current account. As discussed, the path depends on a set of variables Z (including, for example, the real interest rate, the stage of development, and temporary supply shocks), the government deficit (DEF), and the real exchange rate (q). Accordingly, equation (2) can be rewritten as a function of these variables: ^1/

where we assume, for simplicity, that the government deficit is an exogenous policy variable. For a realization of Z and the government deficit, equation (4) can be solved for the corresponding real exchange rate.

The realization of the variables Z and DEF at any particular point in time may, however, include temporary factors—for example, the economy may be in a cyclically weak position—or the policy maker may consider steps to bring some of the variables to a more “desirable” level (denoted below by an asterisk *), including reducing the fiscal deficit to DEF*. More precisely, the combination (Z*, DEF*) is the value of the saving-investment determinants that is consistent with a targeted internal and external equilibrium of the economy. Corresponding to this level would be a level of the real exchange rate, call it the “desirable” real exchange rate (q*):

The basic idea behind a desirable exchange rate model like equation (5) is quite similar to Williamson’s (1985) concept of the “fundamental equilibrium exchange rate”, and work by Artus (1978) and Edwards (1989).

In a special case, ^2/ all left-hand side variables in equation (5) are determined exclusively by the underlying structural factors (Z) and independent of the real exchange rate:

In this special case, the left-hand side variables determine, based on the saving-investment model, the desirable current account level. The corresponding level of the desirable real exchange rate can then be calculated purely from the external trade side, i.e., by essentially applying the elasticity approach.

C. Foreign asset equilibria

The cumulated sum of a country’s historical current account, adjusted for transfer payments and valuation gains, determines its net foreign asset position at any particular point in time. An alternative way to apply the intertemporal saving-investment model is thus to focus on a country’s net foreign asset position (i.e., a stock equilibrium) rather than the current account (i.e., a flow equilibrium) which was discussed in Section 2.a above. This may provide some additional insights, in particular in empirical analyses. For example, by analyzing the net foreign asset position one can draw on the empirical observation that some countries, notably in the developing world, have encountered (negative) net foreign asset positions that turned out to be ultimately unsustainable. By comparing the experience of different countries, the objective is to analyze if there is an optimal level or optimal range for a country’s net foreign asset position.

With net foreign assets essentially representing the stock equivalent to the current account, the theoretical determinants of a country’s optimal foreign asset position are also the factors identified above in the intertemporal saving-investment model. ^1/ In turn, net foreign assets have two important effects on a country’s current account. First, the return on these assets directly affects the current account in the form of net interest and dividend payments and profit remittances. Secondly, net foreign asset positions should, over longer time periods, be reversed as indicated by the solvency condition (3) above. It has proven difficult to disentangle these two effects in empirical work on the saving-investment model. As a result, analyzing a country’s foreign asset equilibrium directly may provide useful additional insights into a country’s external position. Specifically, by comparing Hungary’s net foreign asset position to that of other countries, or country groups, it may be possible to identify implications for Hungary’s present and projected future foreign asset position. A step in this direction is undertaken in Section 3.b. below.

Once a “desirable” net foreign asset position is identified, a corresponding “desirable” equilibrium exchange rate can be calculated. The calculation of this exchange rate is based on the real exchange rate elasticities of goods and services, as captured by the right-hand side of equation (6) above. Correspondingly, the desirable exchange rate would secure a path for a country’s net exports which obtains the “desirable” net foreign asset level.

a. Intertemporal saving-investment model ^2/

Several recent studies have been able to lend some empirical support to the importance of the current account determinants highlighted in the intertemporal saving-investment model. This includes studies of the experience in individual countries, but also cross-country analysis—where each country is treated as a single observation—as well as studies using time series panel data—where also the behavior over time in the different countries is analyzed. The following discussion employs the results reported in a recent study by Debelle and Faruqee (1996) and applies them in several simulation exercises to Hungary. In interpreting the results reported below, it must be emphasized from the outset that the empirical findings are tentative and can not be placed into narrow confidence bands.

The results in Debelle and Faruqee (1996) lend support to the hypothesis of the intertemporal saving-investment model that the stage of development and demographic factors are significant determinants of a country’s current account position. ^3/ For industrial as well as developing countries, and in panel and cross-section regressions, a rise in the dependency ratio tends to be associated with a lower current account surplus or larger deficit. For Hungary, this effect would tend to lead to a relatively stronger current account position now and in the near to medium-term: its dependency ratio is currently close to the average in industrial countries and is expected to fall relative to these countries in coming years, before a gradually (absolute and, In view of Its low birth rate, also relative) increasing trend takes hold during the first half of the next century. ^1/

The negative effect on the current account of a country’s relative development position—proxied, for example, by its relative income or the capital-output or capital-labor ratio—is also broadly supported by the data. In the case of Hungary, this would contribute importantly to current account deficits, if a catch-up is likely and partly financed in this way. Sizable FDI inflows into Hungary would tend to support this conjecture. On the other hand, its investment rate, despite recent increases, may not be high enough to support a very rapid growth process; especially in comparison to some of the newly industrializing countries in South-East Asia, this would limit the extent to which the catch-up can rationalize sustained large current account deficits.

There is also some support for the hypothesis that fiscal policy affects a country’s current account position. In particular, this is confirmed by panel data and partial adjustment models. ^2/ For Hungary, one could also expect fiscal policy to have quantitatively important effects, as Ricardian equivalence is unlikely to hold in view of the still limited role of capital markets, despite recent substantial progress. As a result, one would expect that an increase in public saving would tend to lead to some increase in national saving and a reduction in the current account deficit, a conjecture also corroborated by the observed correlation ever time between public and national saving.

Finally, the empirical results indicate the importance of temporary factors, including the business cycle position and temporary terms of trade shocks. On the other hand, as in many studies on investment or saving behavior, it is generally difficult to find a statistically significant impact of the real interest rate on the current account.

Based on these results, it is now possible to provide a rough quantitative assessment of Hungary’s current account position, fitting the parameter estimates to the specific variable values in Hungary. These simulated values for Hungary can then be compared to the actual or projected values. The basic idea of this approach is that the experience of other countries may provide a norm against which one can compare Hungary’s current account position. Should the simulated value of the current account be stronger (or weaker) than the actual or projected one for Hungary, the deviation, judged by this norm, may be viewed as undesirable. Of course, in the actual evaluation of the appropriate current account level one would also have to consider country-specific effects that may make deviations from these norms appropriate.

The simulation results indicate that Hungary’s projected current account may be somewhat weaker than suggested by the experience in other countries. However, the deviation would appear to be relatively minor and well within the confidence band of most of the statistical results. Specifically, the staff projects a current account deficit in 2001 of about 2 percent of GDP (see main Staff Report). This compares with simulation results of a current account range, depending on the specific model employed, of -3¼ to +½ percent of GDP, with most estimates for industrial countries indicating a deficit of somewhat below 1 percent (see Tables 6-8). ^{1/ 2/}

Table 6.

HUNGARY: Current Account Simulations Based on Cross-Section Results fox Industrial Countries

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification A corresponds to column (3) and specification B to column (5) in Table 2 of Debelle and Faruqee (1996). The parameter estimates are based on cross section analysis for 21 industrial countries for the period 1971-93.

^2/Staff projections are based on the main Staff Report.

^3/Share of population aged 0-19 and over 65 in percent of the rest of the population; for Hungary, the data refer to 1995 and 2000, respectively.

Table 6.

HUNGARY: Current Account Simulations Based on Cross-Section Results fox Industrial Countries

				Parameter Values from Debelle and Faruqee 1/		Variable Values for Hungary
				Specification A	Specification B	1996	2001
Dependent variables
	Constant			-94.8	-81.2
	Budget surplus			-0.01	0.13	-4	-2
	Dependency ratio (normalized)			-0.18	-0.2	1	-3
	Relative income			…	…	23	26
	Relative income—squared			…	…	538	655
	Capital stock/GDP			0.95	0.8	203	210
	Capital stock/GDP-squared			-0.0024	-0.002	41,297	44,100
	Initial NFA/GDP			…	0.037	-35	-35
Implied current account for Hungary (in percent of GDP)
		1996		-1.0	-3.3
			Deviation from staff projection 1/	3.3	1.0
		2001		-0.6	-2.4
			Deviation from staff projection 2/	1.4	-0.4
Real exchange rate deviation from baseline needed per annum to equalize the model’s implied and the projected current account				-1.0	0.2
Memorandum items:
	Dependency ratio (non-normalized) 3/					68	64
	Staff current account projections
		(in percent of GDP) 2/				-4.3	-2.0

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification A corresponds to column (3) and specification B to column (5) in Table 2 of Debelle and Faruqee (1996). The parameter estimates are based on cross section analysis for 21 industrial countries for the period 1971-93.

^2/Staff projections are based on the main Staff Report.

^3/Share of population aged 0-19 and over 65 in percent of the rest of the population; for Hungary, the data refer to 1995 and 2000, respectively.

View Table

Table 6.

HUNGARY: Current Account Simulations Based on Cross-Section Results fox Industrial Countries

				Parameter Values from Debelle and Faruqee 1/		Variable Values for Hungary
				Specification A	Specification B	1996	2001
Dependent variables
	Constant			-94.8	-81.2
	Budget surplus			-0.01	0.13	-4	-2
	Dependency ratio (normalized)			-0.18	-0.2	1	-3
	Relative income			…	…	23	26
	Relative income—squared			…	…	538	655
	Capital stock/GDP			0.95	0.8	203	210
	Capital stock/GDP-squared			-0.0024	-0.002	41,297	44,100
	Initial NFA/GDP			…	0.037	-35	-35
Implied current account for Hungary (in percent of GDP)
		1996		-1.0	-3.3
			Deviation from staff projection 1/	3.3	1.0
		2001		-0.6	-2.4
			Deviation from staff projection 2/	1.4	-0.4
Real exchange rate deviation from baseline needed per annum to equalize the model’s implied and the projected current account				-1.0	0.2
Memorandum items:
	Dependency ratio (non-normalized) 3/					68	64
	Staff current account projections
		(in percent of GDP) 2/				-4.3	-2.0

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification A corresponds to column (3) and specification B to column (5) in Table 2 of Debelle and Faruqee (1996). The parameter estimates are based on cross section analysis for 21 industrial countries for the period 1971-93.

^2/Staff projections are based on the main Staff Report.

^3/Share of population aged 0-19 and over 65 in percent of the rest of the population; for Hungary, the data refer to 1995 and 2000, respectively.

Table 7.

HUNGARY: Current Account Simulations Based on Panel Data for Industrial Countries

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification C corresponds to column (1) and specification D to column (4) in Table 4 of Debelle and Faruqee (1996). The parameter estimates are based on panel data analysis for 21 industrial countries for the period 1971–93.

^2/Debelle and Faruqee (1996) allow for country specific effects—i.e., country-specific constants—in the panel regression.

^3/The table reports the average of the country specific effects in Debelle and Faruqee (1996). The range of their estimates was from -0.9 to -6.2 in specification C, and from -1.7 to -7.1 in specification D.

^4/Value for constant is chosen that would make the 1996 simulated current account equal to the expected current account (-4.3 percent, see the main Staff Report).

Table 7.

HUNGARY: Current Account Simulations Based on Panel Data for Industrial Countries

				Parameter Values from Debelle and Faruqee 1/
				Specification C	Specification D
Dependent variables
	Lagged current account			0.67	0.64
	Budget surplus			0.16	0.18
	Real exchange rate change			-4.49	2.13
		first lag		-3.72	-5.26
	Domestic output gap			-0.24	-0.32
	Terms of trade change			0.15	…
	Dependency ratio (normalized)			-0.041	-0.021
	Relative income			0.059	0.068
	Constant 2/
Implied current account for Hungary (in percent of ODP)
		1996
			Debelle and Faruqee (1996)3/	-7.3	-8.0
			Calibrated for Hungary 4/	-4.3	-4.3
		Implied long-run values
			Calibrated for Hungary 4/	-0.4	0.4
Real exchange rate deviation from baseline needed per annum to equalize the model’s calibrated implied long-run value and the projected current account in 2001				-1.1	-1.7
Memorandum items:
	Assumed constant for Hungary
		Debelle and Faruqee (1996)3/		-3.8	-4.4
		Calibrated for Hungary 4/		-0.8	-0.7

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification C corresponds to column (1) and specification D to column (4) in Table 4 of Debelle and Faruqee (1996). The parameter estimates are based on panel data analysis for 21 industrial countries for the period 1971–93.

^2/Debelle and Faruqee (1996) allow for country specific effects—i.e., country-specific constants—in the panel regression.

^3/The table reports the average of the country specific effects in Debelle and Faruqee (1996). The range of their estimates was from -0.9 to -6.2 in specification C, and from -1.7 to -7.1 in specification D.

^4/Value for constant is chosen that would make the 1996 simulated current account equal to the expected current account (-4.3 percent, see the main Staff Report).

View Table

Table 7.

HUNGARY: Current Account Simulations Based on Panel Data for Industrial Countries

				Parameter Values from Debelle and Faruqee 1/
				Specification C	Specification D
Dependent variables
	Lagged current account			0.67	0.64
	Budget surplus			0.16	0.18
	Real exchange rate change			-4.49	2.13
		first lag		-3.72	-5.26
	Domestic output gap			-0.24	-0.32
	Terms of trade change			0.15	…
	Dependency ratio (normalized)			-0.041	-0.021
	Relative income			0.059	0.068
	Constant 2/
Implied current account for Hungary (in percent of ODP)
		1996
			Debelle and Faruqee (1996)3/	-7.3	-8.0
			Calibrated for Hungary 4/	-4.3	-4.3
		Implied long-run values
			Calibrated for Hungary 4/	-0.4	0.4
Real exchange rate deviation from baseline needed per annum to equalize the model’s calibrated implied long-run value and the projected current account in 2001				-1.1	-1.7
Memorandum items:
	Assumed constant for Hungary
		Debelle and Faruqee (1996)3/		-3.8	-4.4
		Calibrated for Hungary 4/		-0.8	-0.7

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification C corresponds to column (1) and specification D to column (4) in Table 4 of Debelle and Faruqee (1996). The parameter estimates are based on panel data analysis for 21 industrial countries for the period 1971–93.

^2/Debelle and Faruqee (1996) allow for country specific effects—i.e., country-specific constants—in the panel regression.

^3/The table reports the average of the country specific effects in Debelle and Faruqee (1996). The range of their estimates was from -0.9 to -6.2 in specification C, and from -1.7 to -7.1 in specification D.

^4/Value for constant is chosen that would make the 1996 simulated current account equal to the expected current account (-4.3 percent, see the main Staff Report).

Table 8.

HUNGARY: Current Account Simulations Based on Cross-Section Results for Developing Countries

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification E corresponds to column (1), specifaction F to column (3), and specification G to column (4) in Table A2 of Debelle and Faruqee (1996). The parameter estimates are based on cross-section analysis for 32 developing countries for the period 1971-93.

^2/Staff projections are based on the main Staff Report.

Table 8.

HUNGARY: Current Account Simulations Based on Cross-Section Results for Developing Countries

			Parameter Values from Debelle and Faruqee 1/			Variable Values for Hungary
			Specification E	Specification F	Specification G	1996	2001
Dependent variables
	Constant		-6.42	-1.91	-2.56
	Budget surplus		-0.02	0.13	0.26	-4	-2
	Dependency ratio (normalized)		-0.04	-0.04	-0.02	-33	-30
	Relative income		0.14	-0.56	-0.30	23	26
	Relative income—squared		…	0.02	0.01	538	655
	Capital per worker (/l000)		…	0.69	0.34	3	3
	Capital per worker (/l000)—squared		…	-0.05	-0.02	8	9
	Terms of trade		0.44	0.56	…	-1	—
Implied current account for Hungary (in percent of GDP)
		1996	-2.0	-4.3	-3.1
		2001	-1.6	-3.1	-2.0
Real exchange rate deviation from baseline per annum that would equalize the model’s implied and projected
	current account in 2001		-0.3	0.7	—
Memorandum item:
	Staff current account projections
		(in percent of GDP) 2/				-4.3	-2.0

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification E corresponds to column (1), specifaction F to column (3), and specification G to column (4) in Table A2 of Debelle and Faruqee (1996). The parameter estimates are based on cross-section analysis for 32 developing countries for the period 1971-93.

^2/Staff projections are based on the main Staff Report.

View Table

Table 8.

HUNGARY: Current Account Simulations Based on Cross-Section Results for Developing Countries

			Parameter Values from Debelle and Faruqee 1/			Variable Values for Hungary
			Specification E	Specification F	Specification G	1996	2001
Dependent variables
	Constant		-6.42	-1.91	-2.56
	Budget surplus		-0.02	0.13	0.26	-4	-2
	Dependency ratio (normalized)		-0.04	-0.04	-0.02	-33	-30
	Relative income		0.14	-0.56	-0.30	23	26
	Relative income—squared		…	0.02	0.01	538	655
	Capital per worker (/l000)		…	0.69	0.34	3	3
	Capital per worker (/l000)—squared		…	-0.05	-0.02	8	9
	Terms of trade		0.44	0.56	…	-1	—
Implied current account for Hungary (in percent of GDP)
		1996	-2.0	-4.3	-3.1
		2001	-1.6	-3.1	-2.0
Real exchange rate deviation from baseline per annum that would equalize the model’s implied and projected
	current account in 2001		-0.3	0.7	—
Memorandum item:
	Staff current account projections
		(in percent of GDP) 2/				-4.3	-2.0

Sources: Data provided by the Hungarian authorities; Debelle and Faruqee (1996); and staff estimates.

^1/Specification E corresponds to column (1), specifaction F to column (3), and specification G to column (4) in Table A2 of Debelle and Faruqee (1996). The parameter estimates are based on cross-section analysis for 32 developing countries for the period 1971-93.

^2/Staff projections are based on the main Staff Report.

The staff’s projected current account deficit is, as indicated, well within the margin of error of the estimates. And while the point estimate is a current account deficit over the medium-term that exceeds the deficit indicated for the industrial countries by about 1 percent of GDP, there are several arguments suggesting that a somewhat larger deficit may be appropriate for the Hungarian economy. First, with the transition process still far from complete, there is a need to rebuild the capital stock. It is likely that the staff estimate of the current size of the capital stock, which is based on historical capital stock data, does not adequately reflect the efficiency (or lack thereof) of the historical capital stock, and thereby under estimates the capital need of the economy. ^1/ Secondly, it is projected that foreign direct investment will provide inflows which will more than finance the current account deficit over the medium-term. This type of capital inflow should enable a country to sustain larger current account deficits for some time. However, the type of capital inflow used to finance a current account imbalance is not adequately captured in the empirical estimates underlying the simulation results in this section.

b. Net foreign asset equilibria

Complementing the previous discussion, this section addresses two issues. First, to what extent are the staff’s projected changes in Hungary’s net foreign asset position, as described in the main Staff Report, consistent with recent empirical estimates reported in the literature. Second, is the level of Hungary’s net foreign assets consistent with the one observed in other countries, or, alternatively, may it give rise to particular concerns.

Along the discussions in Section 2.c above, a simple net foreign asset equation is estimated for industrial countries in Debelle and Faruqee (1996). But their estimate highlights the importance of country specific factors, as captured by country-specific constants which vary widely, and significantly, across countries. Since Hungary was not included in their data sample, the model’s main usefulness for the present purpose is as a benchmark for the staff’s projected changes in net foreign assets. This is achieved by calibrating the country-specific constant for Hungary in such a way that the model’s estimated 1996 value equals the net foreign asset level projected by the staff for 1996. ^2/ Based on this calibration of the empirical model, one can then evaluate if the staff’s projected change in Hungary’s net foreign asset position is consistent with the empirical results in Debelle and Faruqee (1996).

The result of this exercise are reported below and indicate that the staff’s projections are broadly consistent with the empirical findings for industrial countries. The staff projects a slightly larger improvement in Hungary’s net foreign asset position, but the difference is well within the statistical margin of error. In terms of the empirical model, three factors influence the projected improvement in Hungary’s net foreign asset position over the coming five years: a continuation of the fiscal adjustment program, as envisaged by the authorities, resulting in a sustained decline of the public debt-to-GDP ratio; a (temporary) relative decline in Hungary’s dependency ratio in those years; and the projected gradual narrowing in the income gap. The consistency of the model’s and the staff’s projection would suggest that the projected improvement in Hungary’s net foreign asset-to-GDP ratio could be achieved without a substantial deviation of the exchange path from the one envisaged in the staff’s projection. ^1/

HUNGARY: Net Foreign Assets

(In percent of GDP)

Sources: staff estimates; and staff projections based on main Staff Report.

^1/For the estimation results reported in Debelle and Faruqee (1996; Table 5, column 1), the country specific constant for Hungary is chosen so that the model value equals the staff projection for 1996.

HUNGARY: Net Foreign Assets

(In percent of GDP)

		1996	2001
Empirical model, calibrated for Hungary 1/		-35.0	-25.5
Staff projections		-35.0	-24.0

Sources: staff estimates; and staff projections based on main Staff Report.

^1/For the estimation results reported in Debelle and Faruqee (1996; Table 5, column 1), the country specific constant for Hungary is chosen so that the model value equals the staff projection for 1996.

View Table

HUNGARY: Net Foreign Assets

(In percent of GDP)

		1996	2001
Empirical model, calibrated for Hungary 1/		-35.0	-25.5
Staff projections		-35.0	-24.0

Sources: staff estimates; and staff projections based on main Staff Report.

^1/For the estimation results reported in Debelle and Faruqee (1996; Table 5, column 1), the country specific constant for Hungary is chosen so that the model value equals the staff projection for 1996.

While the above results shed some light on the change in Hungary’s foreign asset position, they do not answer the question if Hungary’s net foreign asset is at an appropriate level, A comparison with a wide range of developing countries reveals that, despite recent substantial improvements, Hungary remains settled with an external debt burden that is very high by international standards (Table 9 and Chart 11). For example, its external debt (net of foreign exchange reserves) ^1/ at end-1996 is estimated at about 44 percent of GDP, almost three times the level in countries classified as market borrowers in the WEO. And even if the coming years were to see the improvements indicated in the table above, Hungary’s external debt (net of foreign exchange reserves) would in the year 2001 still be about twice the average level currently recorded in developing countries and over 2k times the current level of market borrowers.

Table 9.

External Debt and Assets in 1996: Hungary and Selected Other Countries

Sources: Staff estimates for Hungary are based on main Staff Report; for other countries: IMF, World Economic Outlook, May 1996.

^1/Net debt as defined in this table differs from net debt data of the Hungarian authorities, which incorporates other foreign assets in addition to foreign reserves.

^2/See IMF, World Economic Outlook, May 1996, for country classifications.

^3/Hong Kong, Korea, Singapore, and Taiwan Province of China.

^4/The debt figures for some countries in this group are affected by debt reduction agreements; the debt-to-GDP ratio of this group was 56 percent in 1988, when they had also low reserves.

Table 9.

External Debt and Assets in 1996: Hungary and Selected Other Countries

				Gross External (1)	Foreign Exchange Reserves (2)	Net Debt 1/ (3)-(2)-(1)
				(In percent of GDP)
Hungary				66.5	22.9	43.6
Other country groups2/
	Developing countries (total)			29.6	10.9	18.7
	Developing countries in Asia			22.3	14.0	8.3
		Of which:
			Four newly industrializing economies 3/	13.7	22.0	-8.3
	Market borrowers			26.6	11.7	14.9
	Developing countries with recent debt-servicing difficulties 4/			37.1	6.8	30.3
	Developing countries without debt-servicing difficulties			27.1	12.2	14.9

Sources: Staff estimates for Hungary are based on main Staff Report; for other countries: IMF, World Economic Outlook, May 1996.

^1/Net debt as defined in this table differs from net debt data of the Hungarian authorities, which incorporates other foreign assets in addition to foreign reserves.

^2/See IMF, World Economic Outlook, May 1996, for country classifications.

^3/Hong Kong, Korea, Singapore, and Taiwan Province of China.

^4/The debt figures for some countries in this group are affected by debt reduction agreements; the debt-to-GDP ratio of this group was 56 percent in 1988, when they had also low reserves.

View Table

Table 9.

External Debt and Assets in 1996: Hungary and Selected Other Countries

				Gross External (1)	Foreign Exchange Reserves (2)	Net Debt 1/ (3)-(2)-(1)
				(In percent of GDP)
Hungary				66.5	22.9	43.6
Other country groups2/
	Developing countries (total)			29.6	10.9	18.7
	Developing countries in Asia			22.3	14.0	8.3
		Of which:
			Four newly industrializing economies 3/	13.7	22.0	-8.3
	Market borrowers			26.6	11.7	14.9
	Developing countries with recent debt-servicing difficulties 4/			37.1	6.8	30.3
	Developing countries without debt-servicing difficulties			27.1	12.2	14.9

Sources: Staff estimates for Hungary are based on main Staff Report; for other countries: IMF, World Economic Outlook, May 1996.

^1/Net debt as defined in this table differs from net debt data of the Hungarian authorities, which incorporates other foreign assets in addition to foreign reserves.

^2/See IMF, World Economic Outlook, May 1996, for country classifications.

^3/Hong Kong, Korea, Singapore, and Taiwan Province of China.

^4/The debt figures for some countries in this group are affected by debt reduction agreements; the debt-to-GDP ratio of this group was 56 percent in 1988, when they had also low reserves.