IMF says Hungary’s outlook is ‘favorable’ but ‘subject to risks’

The IMF staff said Hungaryʼs GDP growth is projected to reach about 3% this year, driven by a recovery in absorption of EU funding and strong consumption as wage increases boost disposable income. Employment is projected to grow further and the economy may begin to operate at full capacity in the course of 2017, they added.

They put a weakening in the eurozone, a further slowdown in global trade and increased financing costs as monetary policy normalizes among the risks to Hungaryʼs outlook. Domestically, rising demand and an expanded home subsidy scheme could inflate asset prices, the staff added.

These risks would be mitigated by the improved current account and international investment position, as well as by “the enhanced market sentiment towards Hungary”, the staff said.

IMF recommends additional fiscal measures to bring down debt

Hungary’s economic strength provides an opportunity to advance growth-friendly fiscal consolidation, the staff said. “Such consolidation would focus on enhancing the quality of expenditure and composition of revenue, while gradually improving the cyclically-adjusted fiscal balance,” they added.

They also said such a strategy would “enable monetary policy to stay accommodative for a longer time”.

Fiscal policy should continue to aim for a “marked reduction” in state debt over the medium-term, the staff said and recommended the adoption of additional fiscal measures that would reduce state debt to about 60% of GDP over the projection period. This would imply a deficit of 2.2% of GDP for 2017, slightly below the budget target, and for 2018 and beyond “appreciable annual reductions”, the staff said.

The staff stressed that the fiscal reform must be “growth friendly” and aim to rationalize government spending while improving the tax system by reducing exemptions and continuing to build on the “commendable success” in bettering tax administration.

The staff welcomed the reduction in the tax wedge and in some “distortive” sectoral taxes. They also encouraged the authorities to continue reducing such taxes as well as streamlining multiple VAT rates and exemptions for fuel and tobacco excises.

Monetary policy can ‘remain accommodative’ in near-term  

The staff said the National Bank of Hungaryʼs decision to continue to ease monetary policy was “appropriate” and welcomed the central bankʼs decision to wind up its Funding for Growth Scheme by the end of March 2017.

Monetary policy can “remain accommodative” in the near-term in view of a sluggish pickup in new lending, prudent pre-emptive measures to improve lending practices and increased global risks, the staff said. They added that the central bank should be ready to remove some stimulus as underlying inflationary pressure picks up.

“Staff welcomes the [MNB]’s intention to continue to enhance supervisory practices and guidelines, including in view of the large write-back of provisions and rapid increase in real estate prices,” the statement said.

Benefits of advancing structural reforms

The staff said Hungary would benefit from advancing structural reforms that ensure the effective utilization of EU funds, improve vocational training, shift fostered workers to the primary labor market and boost labor force activity rates, especially among women.

“Finally, it would be essential to enhance the business environment by addressing perceived corruption through improved transparency, enhancing policy predictability, continuing to improve the ease of paying taxes, and streamlining regulations,” the statement said.

The IMF staff visited Budapest between February 23 and March 8, meeting with Minister for National Economy Mihaly Varga, National Bank of Hungary Governor Gyorgy Matolcsy, other senior officials and representative of the private sector and think tanks.