IMF’s report shows much improvement in Hungarian economic developments when it comes to enhancement of bank supervision and resolution as well as fiscal consolidation, which was accomplished under the program to set the basis for fiscal sustainability in the medium-term. The report points out that these achievements were obtained despite political uncertainty, institutional constraints, and an unprecedented global financial crisis.
In October 2008, Hungary requested a Stand-By Arrangement (SDR 10.5 billion, 1015 percent of quota) in the context of a rapidly spreading global financial crisis. This program represented the first case of a joint EU/Fund-supported program, setting a precedent for future requests by EU members. At the time of the request, access at SDR 10.5 billion placed the Hungary program as the largest Fund arrangement since Turkey in 2002 and Korea in 1997. The access request was justified by large balance of payments needs through end-2009.
Despite considerable efforts since the start to reach broad political support, the program lapsed upon disagreement with the newly elected government about additional fiscal measures. Although the program was able to deliver a considerable fiscal adjustment, much of the structural fiscal adjustment has since been reversed. Hungary’s stock vulnerabilities arising from high public and external debt call for continued fiscal consolidation efforts and completion of the financial reform agenda, notably the reform of the bank resolution regime.
The 2008 SBA with Hungary successfully stabilized financial market conditions – averting a major banking crisis and regional contagion – and strengthened the economy through sizable fiscal consolidation and important structural reforms, despite significant challenges.
The timely request by the authorities and the prompt response by the Fund and the EU with a large and front-loaded financing package were critical in stabilizing market confidence and together with strengthened policies laid the ground for a successful program. Funding pressures receded, parent banks supported their subsidiaries consistently with their initial commitments, and the government tapped international markets earlier than expected
Two years after the crisis outbreak, Hungary’s private and public debt vulnerabilities remain its main challenge
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