EC: Positive changes in Hungarian macroeconomy, risks remain

Summing up findings of a surveillance visit, the EC mission expressed appreciation of recent positive changes in the macroeconomic environment, highlighting the fact that in addition to net export, domestic demand now also contributes to economic recovery, even if this involved indirect fiscal stimulus measures.

Increased absorption of EU funds is expected to gradually step up economic growth, the memo said.

“The continued current and capital account surpluses decreased external debt and the market-based financing of the public debt was smoothly ensured. At the same time, important vulnerabilities remain, characterized notably by still high private and public debt levels, high financing costs, and a low growth potential, linked also to persistently weak lending and a series of non-market friendly policy measures,” it added.

An EC delegation was in Hungary between December 4 and 10 for a surveillance visit to review measures introduced in connection with EU balance of payments assistance between 2008 and 2010. This has been the fourth such surveillance visit since the expiry of the financial assistance programme in November 2010.

Since the lifting of the excessive deficit procedure in June 2013, the government’s commitment to fiscal discipline “appears to be broadly maintained,” the memo said.

“However, there is no margin for possible slippages in the 2014 budget; any further deficit-increasing measures or negative developments, unless they are fully offset by compensatory measures, would increase the deficit above the 3pc of GDP threshold,” the report added.

According to the EC memo, the mission stressed the need to pursue growth-friendly fiscal consolidation, focusing on expenditure savings, and to preserve a sound fiscal position in compliance with Hungary’s medium-term objective. Also, the sustainability of the fiscal correction would be enhanced by improving the transparency and the predictability of the budgetary planning.

“The mission expressed concern about continued obstacles to the banking sector to contribute to economic growth. Bank lending continues to be hindered by excessive and further increasing burdens on banks and a high share of non-performing and restructured loans,” it said.
At the same time, the mission welcomed the central bank’s intention to ease financing conditions for small and medium-sized enterprises.

“In this regard the Funding for Growth scheme can provide a temporary improvement in access to credit, but raises concerns about potential fiscal costs and the risk of unsustainable price competition. Restoring normal lending to the economy in a sustainable manner would require an improved and predictable operational environment for the financial sector, conducive to enhanced portfolio cleaning as well as capital accumulation,” the memo said.

“The mission highlighted that reinforcing the medium-term growth prospects, also with a view to putting the public debt-to-GDP ratio on a firm downward path, would necessitate significant improvements in the business environment. Barriers to entry and limited competition in several segments of the service sector put a drag on productivity and foreign direct investment. The mission discussed with the Hungarian authorities possible structural reform steps to stimulate growth, notably in the financial sector, labour and product markets, in line with the Council’s Recommendation of July 9, 2013, addressed to Hungary in the context of the European Semester,” the memo concluded.