European Commission press release

European Commission officials, in close cooperation with International Monetary Fund staff, conducted their fifth review mission under the EU balance of payments assistance to Hungary from 6th to 17th July. They welcomed the new government's commitment to the budget deficit target of 3.8% of GDP for 2010 and recognized that several significant measures have been taken to correct budgetary slippages this year.

However, they noted that there are a number of open questions on which the government would need more time to provide clarification. It was decided to postpone the conclusion of the review and that it would be appropriate to return for further discussions at a later stage.

“Hungary has returned to a positive economic growth path and now has one of the lowest budget deficits in the EU. I welcome the authorities' commitment to the 2010 deficit target,” said Olli Rehn, Commissioner for Economic and Monetary Affairs. “However, the correction of the excessive deficit by next year will require tough decisions, notably on spending. Care will also be needed to ensure a stable environment for both domestic and international investors.”

The mission reviewed the economic situation and welcomed that in light of the latest strong performance of exports, GDP is expected to expand by 0.6% this year, compared to the previous forecast of around 0%. For 2011, growth is expected to accelerate to at least 2.5%.

Useful discussions were held on the new government's economic policy intentions for 2010 and beyond. The mission welcomed the government's commitment to the agreed budget deficit target of 3.8% of GDP for 2010. It stressed that continued fiscal adjustment in line with agreed fiscal targets is essential to ensure a reduction in the government debt ratio, improve financing conditions and support sustainable growth and to support credibility in Hungary’s public finances. It recognized that following the budgetary slippage in the first half of this year, a number of steps were taken to correct the situation, including sizeable revenue-enhancing and expenditure-saving measures.

However, the corrective measures considered so far fall somewhat short of the required adjustment and are largely of a temporary nature. Hence, the government has to make increased efforts to bring the deficit below 3% of GDP, on a sustainable basis, in 2011. While noting that the planned financial sector levy would help in meeting short-term budgetary commitments, the Commission services considered that the levy in its current form could have a significantly negative impact on the country’s investment climate and economic growth. The mission urged the authorities to review some features of the levy in this regard.

The Commission services recognized that financial stability has been underpinned by the reinforcement of prudential supervision in the financial sector. While also recognizing a commitment to structural reforms elsewhere, including in the transport and health sectors, the mission noted that the government was not in a position to provide more clarity at this stage. Several draft laws proposed by the government are considered to be distortive and potentially not in compliance with EU law. The mission further urged the government to respect the full independence of the central bank, including its operations. It considered that further discussions with the authorities were needed and it would be most productive to postpone the conclusion of the review and to return at a later stage.

Regarding the structural reform conditionality pertaining to the EU's financial assistance, apart from the satisfactory progress in the area of financial sector, there was also some progress in the area of structural governance although the mission noted a number of concerns, such as the time lag between phasing out the system of treasurers and introducing the new system of supervisors. With respect to structural reforms in the area of the public transport sector that were supposed to underpin the planned budgetary savings, the mission noted that most of the planned measures had been postponed except for the price increase earlier this year. This underlines the importance of the envisaged restructuring of this sector.

On the Commission side, the mission was led by Matthias Mors, Acting Director at the Economic and Financial Affairs Directorate General (ECFIN) and Barbara Kauffmann, Head of Unit at ECFIN for a group of countries that comprises Hungary.

The EU medium-term financial assistance to Hungary was decided in November 2008. Hungary received three installments of the EU €6.5 billion balance of payments loan: two installments of €2 billion each on December 9, 2008 and March 26, 2009 and a further €1.5 billion on July 6, 2009 so far. In view of the improved access to market financing, Hungary has not drawn on EU and IMF assistance upon the completion of the reviews in November 2009 and February 2010. The EU assistance was granted for a period of two years until  November 3, 2010.

Statement by the IMF Mission to Hungary

Press Release No. 10/295
July 17, 2010

An International Monetary Fund (IMF) mission, led by Christoph Rosenberg, held discussions with the Hungarian authorities during July 6-17, 2010 as part of the sixth and seventh reviews of the country’s Stand-By Arrangement (SBA) approved by the IMF Executive Board on November 6, 2008 (see Press Release No. 08/275). The IMF mission worked in close cooperation with a parallel mission from the European Commission, carried out in the context of the European Union (EU) balance of payments assistance. At the conclusion of the visit, Mr. Rosenberg made the following statement:

“The Hungarian economy has begun to recover from the deep crisis of 2008-09, driven mostly by strong exports. Domestic demand remains weak, however, owing to difficult lending conditions and a soft labor market. Overall, real GDP is projected to grow by 0.6 percent in 2010. Inflation has been declining and the large current account deficits from 2008 and earlier have been eliminated. The 2011 outlook envisages a continued pickup in real GDP growth—to the 2½-2¾ range depending on the external environment and the strength of policies—and a further decline in inflation to the central bank’s target.

“Supported by the SBA, the Hungarian authorities have made good progress in helping their economy recover through prudent macroeconomic policies and strengthened financial sector policies, including improved banking supervision. Adherence to SBA targets—both quantitative and structural—has been broadly satisfactory through June.

“At the same time, more remains to be done to cement these gains and put Hungary on a strong and sustainable growth path. In an environment of heightened market scrutiny of government deficits and debt levels, the fiscal deficit targets previously announced—3.8 percent of GDP in 2010 and below 3 percent of GDP in 2011—remain an appropriate anchor for the necessary consolidation process and debt sustainability, and should be adhered to, but additional measures will need to be taken to achieve these objectives.  Sustainable consolidation will require durable, non-distortive measures, which the authorities need more time to develop. Difficult decisions will be needed not only on the revenue side--where the high financial sector levy, which is likely to adversely affect lending and growth, is planned to be temporary--but also on the spending side. In addition, the large loss-making state-owned enterprises need to be restructured to reduce their burden on the budget. In this context of fiscal adjustment, it is important that the vulnerable continue to be protected from the impact of the weak economy, although any further support should be provided in a targeted and transparent manner.

“Over the past two weeks, the IMF mission has conducted intensive discussions with the authorities covering these issues. While there is much common ground, a range of issues remain open. The mission will therefore return to Washington, D.C. The IMF will continue to actively engage with the authorities with a view to bridging remaining differences.”