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Record low deficit posted for 2015

Eurostat may rain on the government’s parade by insisting that Eximbankʼs lending is included in the deficit accounting.

No fooling: Economics Minister Mihály Varga announces good news on the government deficit at the April 1 press conference. (Photo: MTI/Lajos Soós)

The general government deficit as a proportion of GDP was 1.9% in 2015, the lowest such figure recorded, the Central Statistical Office reported on April 1. As preliminary data reveals, the HUF 625.5 billion deficit is 0.4 of a percentage point lower as a proportion of GDP than the deficit in 2014. 

While this record low is no April fools, Eurostat has raised questions about Hungary’s accounting that could change the bottom line.

Economy Minister Mihály Varga boasted of the 1.9% of GDP budget gap at a press conference following the KSH release. Varga noted that the debt-to-GDP ratio also turned out better than expected and was 75.3% last year instead of the planned 76.1%. The latter figure is well below the EU average, he added. The Hungarian government sent its Excessive Deficit Procedure (EDP) report, which complies with the methodological requirements of the European System of Accounts (ESA 2010), to the statistical bureau of the European Union, Eurostat, on April 1.

In the meantime, the external vulnerability of the country continued to improve in the last quarter of 2015. The annual value of net lending rose to nearly 9% of GDP, and market players also repaid a massive amount of foreign loans. In light of these, the net external debt of Hungary decreased further and reached the level recorded in Poland. At the same time, short-term external debt had dropped to €21 bln by the end of the year, and the level of foreign exchange reserves thus remains well above investors’ expectations.

Hungary ready to take legal action

However, some factors might yet jeopardize the victorious reports of Hungary’s sharply falling public debt, as Hungarian authorities are in dispute with Eurostat. According to portfolio.hu, the statistical bureau advised Hungary to classify state-owned Eximbank within the general government. If it did so, and the government included the lending of the bank in the general government finances, that would result in a rise in the country’s public debt for the past few years. Eurostat later confirmed portfolio.hu’s information.

Consultations are currently in progress, and there are several hundreds of billions of forints at stake. The ESA 2010 criteria appears to give Eurostat a valid argument in this case through its definition of “captive financial institution” as an institutional unit which does not engage in financial intermediation or in financial auxiliary services. As a general rule, such entities controlled by government should be classified in the general government sector and not in the financial corporations’ sector.

“If the professional debate ends unfavorably for us then we will turn to the courts,” Hungarian Economy Minister Mihály Varga insisted at a press conference. “We find the issue raised by Eurostat slightly targeted,” said Varga. He said that Eximbank’s lending takes the form of business loans that will return.

Varga also stressed that Eurostat had failed to inform the Hungarian government about the issue. However, as portfolio.hu pointed out, the statistical office raised its concerns in 2014. “These kinds of activities could indicate that they are undertaken on the behalf of government in the context of implementation of economic and social policies. It would be important to confirm whether the institution has changed its own activities or taken over new activities from the year 2012, and whether those activities have been directed by the government or not,” reads a report on Eurostat’s final findings after an EDP dialogue visit to Hungary in June 2014.

Industry slow-down lingers while retail sales take off

The poor performance of Hungarian industry continued, as the volume of industrial production dropped further in February 2016. On a month-on-month basis, industrial production was down 0.8%, which marks the fourth consecutive month of contraction. The production (adjusted for the leap-year effect) rose only 1.8% year-on-year in February. Detailed data will only be published next week, but the January trend seems likely to continue, when it was also vehicle production that performed more poorly than expected.

The volume of retail sales, on the other hand, increased further in February, and showed a 6.5% (6.4% adjusted to calendar effects) increase from the same period last year. In January-February 2016, the volume of sales – also according to calendar adjusted data – was 4.3% higher than in the corresponding period of the previous year. Analysts expect further increases in the volume of retail sales in the remaining months of the year.

Further good news arrived from the labor market at the end of March. As data released by KSH shows, the primary labor market employed nearly four million people between December 2015 and February 2016, some 62,000 more than a year before. KSH reported 4.241 million people employed during that period, of which 219,000 were part of the public works program. The number of Hungarians working abroad increased to 115,000. Hungary’s unemployment rate dropped to 6.1% between December 2015 and February 2016, compared with 6.2% a month earlier.

Numbers to watch in the coming weeks

March inflation data and external trade in goods for February will be published on April 8. We’ll find out more details about the lingering industrial production on April 13, to be followed by February’s construction figures the next day. We’ll also learn about Hungarian salaries in January and February on April 20.