January 31, 2011
1. This statement provides information that has become available since the issuance of the staff report (EBS/11/8). The new information does not alter the thrust of the staff appraisal.
2. Based on preliminary Central Government data, the authorities 2010 fiscal deficit target of 3.8 percent of GDP was just about met in cash terms. The budget outcome in ESA95 terms is expected to be available only in mid-2011.
3. The dismantling of the second pension pillar is proceeding as planned. According to the law passed in December, all second pillar assets are automatically transferred to the first pillar unless the individual contributor actively opts out. Thus far, only some 40,000 out of a total of 3.1 million private pension fund members have done so, suggesting that virtually all second pillar pension assets will be transferred to the state.
4. The authorities announced elements of the structural reform package to be formally discussed by the government in February. According to initial statements, the reforms could include better targeted social benefits, a redesign of drug subsidies, and broadening of the tax base. Several of the proposals appear in line with guidance from past IMF technical assistance and recommendations under the 2008–10 Stand-By Arrangement. Depending on the size and nature of these measures, the package could help address debt sustainability concerns raised in the staff report. Staffs assessment will be provided as part of the first post-program monitoring report.
5. On January 24, the Central Bank increased the policy rate by 25 basis points to 6 percent. The press statement cited cost-push shocks amid unanchored inflation expectations as driving the decision. Inflation rose to 4.6 percent in December (above the 4.4 percent consensus and 3 percent center target), driven largely by food and energy prices but also an incipient upward trend in core inflation. Amid still high unemployment of 11 percent, real wage growth was roughly flat. However, the annual collective wage negotiation in December, which agreed to recommend a general wage increase of 4-6 percent for 2011, could provide upward pressure going forward.
6. The latest balance of payments data suggest that Hungary, unlike regional peers, experienced net capital outflows in both Q2 and Q3, 2010. This reflects, inter alia, a further decline of parent banks’ funding of their Hungarian subsidiaries. According to preliminary data, at end-December 2010 aggregate funding of the six subsidiaries that had participated in European Bank Coordination Initiative (EBCI) stood at 120 percent of end-September 2008 level, compared to peak exposure of 140 percent at end-July 2010. The counterpart of the funding decline has been a reduction banks’ liquid assets, especially central bank bills.
7. Prime Minister Orban publicly stated that the government is considering to partially repay the IMF early. While timing and amount are still unclear, technical staff have indicated that the government may tap foreign exchange deposits at the MNB earmarked for contingent bank funding (€3 billion or roughly one third of outstanding IMF debt) to finance the repayment. Such a move would reduce Hungary’s fiscal and foreign exchange reserve buffers while paying down low cost debt. At present, Hungary’s official reserves stand at €33 billion, equivalent to 81 percent of short term debt.