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IMF raises GDP growth forecast for Hungary

The International Monetary Fund (IMF) raised its projection for Hungaryʼs GDP growth this year to 4.6% in its fresh World Economic Outlook published Tuesday, up from 3.6% in its April forecast. Separately, IMF staff made various recommendations to bolster competitiveness after a regular visit to Budapest.

The governmentʼs official forecast for 2019 GDP growth is 4.0% based on the spring update of Hungaryʼs Convergence Program, noted state news agency MTI. However, it added, after Q2 data released at the end of August showed higher than expected growth, Minister of Finance Mihály Varga said that the full-year figure could reach 4.3-4.4%.

The IMF sees Hungaryʼs GDP growth slowing to 3.3% in 2020.

At the same time, the IMF projects average annual inflation will pick up to 3.4% in both 2019 and 2020, climbing over the mid-term target of the National Bank of Hungary (MNB) of 3.0%. The projection is up from its 3.2% forecast in April.

The IMF sees the unemployment rate dropping further to 3.5% in 2019, and to 3.4% in 2020.

The current account deficit is set to widen to 0.9% of GDP in 2019, before narrowing to 0.6% of GDP in 2020, it adds.

The IMF notes that fiscal projections for Hungary include the IMF staff’s projections of the macroeconomic framework and of the impact of recent legislative measures, as well as fiscal policy plans announced in the 2018 budget.

IMF staff make recommendations

The IMF recommends Hungary simplify regulations for SMEs, streamline administrative processes, reverse the procyclical fiscal stance, and keep the monetary stance accommodative, according to a staff report issued after a visit to Budapest as part of regular Article IV consultations, by which the IMF attempts to assess each countryʼs economic health and forestall future financial problems.

The IMF staff say the governmentʼs “Program for a More Competitive Hungary” and the central bankʼs extensive agenda to improve competitiveness, especially of SMEs, rightly seek to boost potential output.

At the same time, the report sees a need for “timely implementation of prioritized reform measures,” such as simplifying processes required to obtain building permits and business licenses and continuing to speed up the connection to utilities. Additional efforts to enhance governance and public procurement practices would also be necessary, it adds.  

The report praises the “commendable effort to increase participation in the labor market, especially for women,” but adds that it should be complemented by improvements in the efficiency and quality of education, vocational training, and public services.

The governmentʼs target of fiscal consolidation to eventually eliminate the deficit over the medium term would help reduce domestic demand pressures and create fiscal space that can be used during future downturns, the report continues. Such consolidation, it adds, would reverse the procyclical fiscal stance of the past few years and allow monetary policy to remain accommodative for a longer period, helping preserve Hungaryʼs competitiveness. 

At the same time, the IMF staff note that in the absence of specific measures, the staffʼs baseline scenario implies somewhat higher deficits. It recommends a mix of growth-friendly revenue and expenditure measures, in particular, reducing exemptions and preferential regimes, as well as broadening the tax base while continuing to phase out sectoral taxes.

Real estate booming

The IMF staff report also notes that the Hungarian real estate market is booming, particularly in Budapest, and macroprudential policies are helping to preserve financial stability and limit the risk of a credit-fueled housing boom.

It adds that “reviewing the various fiscal incentives for house purchases, basing them on means-testing and targeting, reducing impediments to doing business in the construction sector, improving the transportation network and commuting options, and proactively facilitating an increase in housing supply over time via effective urban planning” would help moderate price increases.

The report notes that the economy is expected to finish 2019 on a strong footing, growing well above 4%. Over the medium term, the fiscal position is expected to improve, public and external debts to decline further, and domestic credit growth to remain buoyant. 

“Given global headwinds to activity, the accommodative monetary stance is appropriate, but policymakers should be ready to respond to building inflationary pressure,” the report concludes.