IMF: Hungarian economy performing well, vulnerability declined

Ratings

The Hungarian economy is performing very well and its vulnerability to shocks has declined substantially, although debt levels and financing needs remain high, IMF staff said in a report based on their preliminary findings gathered as part of the IMFʼs regular consultation with Hungarian authorities, according to Hungarian news agency MTI.

According to the IMF, solid growth and a sharp reduction in unemployment are largely due to supportive macroeconomic policies, a favourable external environment and high utilization of EU funds. 

Output growth is projected to moderate slightly this year owing to the expected deceleration in the utilization of EU funds. Headline inflation would remain low on account of low import prices, and slowly reach the 3% target as food and energy prices recover, and the labor market tightens. 

The current account has been in record surplus, while external debt, especially FX-denominated, and gross public debt have continued their downward path.

The IMF believes Hungary is now less vulnerable to external shocks, however, financing needs remain high, and an abrupt sharp deterioration in global or emerging market risk perception could lead to capital outflows.

Accommodative fiscal and monetary policies have been helping on the growth front, they have also expanded the stateʼs role in the economy and shifted risks to the public sector, the report said.

The mission projects the 2016 headline deficit at 2.1% of GDP, implying a structural fiscal relaxation of about 0.66 percentage points of GDP, and a moderate decline in public debt.

The reduction in the bank levy and continued efforts to improve tax administration are welcome. However, the continued shifting of items to the lower VAT rate complicates tax administration and introduces distortions in the tax system, which remains burdened by sectoral taxes. 

At the same time, the budget relies on sizeable one-off revenues and a number of new initiatives, most importantly the housing support scheme, although expected to have a positive impact on growth, it could become an open-ended drag on the budget.

In the missionʼs view, more needs to be done to further reduce vulnerabilities, especially given the fragile external environment, and to transition to growth driven by a vibrant private sector.

In the IMF missionʼs baseline scenario, current fiscal plans imply a structural fiscal deficit of 1.75% of GDP over the medium term and a moderate reduction in the public debt ratio to around 70% by 2021, leaving Hungary vulnerable to shocks. 

Growth-friendly fiscal consolidation would help build buffers, while more ambitious structural reforms aimed at improving the business environment, enhancing competitiveness, and addressing labor market weaknesses would boost the economyʼs growth potential.

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