“The Hungarian economy emerged from the 2012 recession and posted 1.1% growth last year, mainly driven by government investment and consumption, as well as net exports,” stated mission head Costas Christou.

“Moderate growth of 2% is expected this year as investment and private consumption continue to improve, while exports expand further. Notwithstanding this welcome improvement, medium-term growth prospects remain subdued … Raising potential growth will require boosting labor demand further, enhancing the business climate and policy environment, reducing the regulatory burden, rationalizing taxes, and increasing productivity in the services sectors.”

Christou said Hungary had reduced its vulnerabilities, but noted “still-high public and external financing needs, heavy reliance on nonresident funding, uncertainty regarding advanced economies’ monetary policies, and reemergence of financial stress in emerging markets” as factors posing risks.

“The recent market volatility illustrates the fragility of market sentiment and underscores the need for strong policies and clear communication to boost confidence,” Christou stated, going on to say that the Hungarian government’s demonstrated “strong commitment” to keeping the general deficit under the European Union threshold of 3% GDP. He further reckoned, however, that the government’s 2.9% deficit target for 2014 would only be met if budget reserves are saved.

The IMF mission welcomed the government’s intent to reduce the structural fiscal deficit over the medium term and recommended a “gradual and growth-friendly” fiscal consolidation, “relying on durable expenditure reduction, a better composition of expenditure, and a gradual elimination of distortionary taxes.”

Christou acknowledged eased inflationary pressures and lower inflation expectations when commenting on the National Bank of Hungary (MNB)’s record-low base rate. But he said that inflationary pressure would build up as the output gap narrows and one-off effects on prices wane. “Geopolitical uncertainties,” the winding down of the US Federal Reserve’s asset purchase program and a less optimistic growth outlook for some big emerging markets “warrant a cautious policy stance in the period ahead.”

Christou described the banking sector as remaining “under pressure”: “A long-lasting restoration of financial intermediation should primarily rely on a sustainable improvement in banks’ operating environment, including steps to facilitate faster nonperforming loans resolution and reduce the tax burden.”

The mission was in Hungary on March 5-17 for a regular Article IV consultation, a typically annual visit by IMF staff to member countries that involves collection of economic and financial information and discussions with officials on the country’s economic developments and policies.