Abstract
The economic development of Hungary after the economic crisis is discussed. Hungary’s economic program supported by Stand-By Arrangement has been successful in strengthening the economy and stabilizing market conditions. Given Hungary’s high public debt and large financing needs, Executive Directors emphasized the need for full and timely implementation of consolidation measures. Directors also recognized the positive collaboration between the European Union and the IMF during the program period. Furthermore, the foreclosure moratorium continues to prevent banks from cleaning balance sheets.
This statement provides information that has become available since the issuance of the staff report (EBS/11/75). The new information does not alter the thrust of the staff appraisal.
1. The macroeconomic environment is broadly unchanged from the staff report. The flash estimate for first quarter GDP growth was 0.7 percent qoq which is consistent with staffs forecast of 2.6 percent annual growth in 2011. Domestic demand remains weak with retail sales falling 2.4 percent in March but strong demand from Germany helped exports rise 23 percent, driving the trade balance to a record surplus of 6 percent of GDP. On fiscal policy, the budget deficit through April continues to appear consistent with the authorities’ revised fiscal target for 2011. Food prices pushed annual inflation to 4.4 percent in April, but muted core prices and weak domestic demand data have left the MNB on hold since January. Risk spreads, at about 250 basis points, are largely unchanged since the staff report.
2. Implementation of the Szell Kalman plan is proceeding gradually, with many details yet to be determined. Thus far, measures have been fully identified in the area of sick pay. In addition, Parliament is considering proposals to revise drug subsidies and increase taxes for pharmaceutical companies. Furthermore, a constitutional amendment has been proposed enabling the revision of early retirement schemes. According to the authorities’ timetable, additional measures on pension, health care and employment are expected to be specified by July 1, although final details regarding 2012 measures and their fiscal impact may not realistically emerge until the budget process in the fall.
3. The government has reached an agreement with the banking sector designed to reduce stress in FX-mortgage portfolios. While broadly consistent with the pillars identified in Box 3 of the staff report, several key parameters in the final agreement have changed that materially alter the implications of the agreement:
The exchange rate for calculating monthly installments is fixed for four years at levels stronger than initially expected (i.e. 250 for EUR/HUF, 180 for CHF/HUF, and 2 for JPY/HUF) and no means-testing has been specified, raising concerns about moral hazard, potential fiscal cost and household balance sheets once the temporary fix expires.
The foreclosure and eviction moratoria will be lifted only very gradually, which will likely prevent banks from fully cleaning balance sheets of existing NPLs even over the medium term.
While the de facto ban on EUR loans will be lifted, the authorities have introduced particularly stringent prudential requirements regarding minimum euro denominated income that will leave FX borrowing effectively out of reach for most of the population; the de facto ban on CHF mortgage lending remains in place.
The plan to introduce an interest rate subsidy remains, but the entire concept has changed to target defaulted borrowers willing to downsize to a less valuable accommodation (and a smaller loan).
In addition to participating in real estate purchases, the national asset management fund will invest in social housing. Details of national asset management fund’s operation, including eligibility criteria, still need to be determined.
The government has not yet released estimates of the new scheme’s fiscal costs.
4. On May 24, the government announced the purchase of a 21 percent stake in Hungarian energy company MOL for EUR 1.88bn, implying some reduction in already modest official reserve coverage. The transaction will be financed by a drawdown in government deposits at the Central Bank, with a corresponding fall in FX reserves to about EUR 36.5 billion at end-2011. While this level is adequate relative to imports, broad money, and the composite metric elaborated in Assessing Reserve Adequacy, coverage of short-term debt will fall from 82 percent to 78 percent. At least in the short term, the MOL purchase thus reduces fiscal and external buffers—already assessed by staff as modest in view of ongoing tensions in the European financial system and large external amortizations falling due in 2012–14.