IMF Executive Board Concludes 2013 Article IV Consultation and Third Post-Program Monitoring Discussions with Hungary

Public Information Notice (PIN) No. 13/38
March 29, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2013 Article IV Consultation with Hungary is also available.

On March 18, 2013 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation and Third Post-Program Monitoring discussions with Hungary.1


Hungary’s economy has not yet recovered to pre-crisis levels. After a modest recovery in 2011, real GDP is estimated to have contracted by 1.7 percent in 2012. Continued weakness in private consumption and investment, compounded by a sizable fiscal consolidation, contributed to the downturn. Net exports, buoyed by the expansion of the car industry, were a key source of growth.

The outlook remains challenging. The economy is projected to stagnate in 2013 amid continued weakness in domestic demand and only a mild improvement of external conditions. Consumption is still hampered by the ongoing repair of households’ balance sheets and the business climate and investment have weakened. Banks remain under stress, reflecting the heavy tax burden, high Non-Performing Loans (NPLs), and weak growth outlook. Labor participation, while somewhat increasing, remains low. In this context, the economy’s growth potential is subdued, thus, amplifying the cost and risks related to the large imbalances in the economy.

With regard to policies, significant strides were made toward fiscal consolidation in 2012, with the general government deficit declining to around 2½ percent of GDP. Some two-thirds of the adjustment was due to revenue measures, including unconventional taxes on the banking, telecom, electricity, and retail sectors. The government is aiming for a fiscal deficit of 2¾ percent of GDP in 2013, maintaining a broadly neutral cyclical stance.

In line with global trends, market sentiment toward Hungary improved markedly in recent months. After spiking near the end of 2011, risk spreads narrowed and the exchange rate strengthened during 2012. Taking advantage of the situation, Hungary’s National Bank (MNB) started a monetary policy easing cycle in the second half of 2012.

While financing constraints have eased, Hungary’s economy remains vulnerable. Strong non-resident investor appetite for domestically issued government securities and the recent bond placement in international capital markets have helped cover a large part of this year’s foreign exchange financing requirement. However, with still large external and public financing needs, continued access to the markets remains critical. In addition, currency mismatches in the economy remain sizable and leave balance sheets exposed to exchange rate volatility.

Executive Board Assessment

Executive Directors noted that Hungary has preserved financial stability despite challenging domestic and external environments, and has successfully returned to the international bond market. However, high public and external financing needs leave the economy exposed to shifts in market sentiment, while weak investment and low labor participation undermine long-term prospects. Accordingly, Directors agreed that robust and credible policies are needed to support confidence, reduce uncertainty, improve competitiveness, and raise potential growth.

Directors welcomed the authorities’ commitment to fiscal consolidation. They noted, however, that additional efforts are needed to durably reduce the high public debt-to-GDP ratio. To make the adjustment more balanced and growth-friendly, these efforts should focus on streamlining expenditure, which could pave the way to lower taxes and a rationalization of the tax system. In addition, Directors saw room to improve tax collection by strengthening revenue administration, particularly the VAT system. Many Directors noted that strengthening the fiscal framework, including by enhancing the resources and independence of the Fiscal Council, would help improve fiscal policy credibility.

Directors agreed that improved external financial conditions have supported the recent monetary loosening, but a pause to the easing cycle would now be prudent. In this regard, they noted that inflation is not well anchored and the projected deceleration in 2013 mainly reflects administrative price cuts. Directors underscored the importance of preserving the legal and operational independence of the central bank, which is crucial for price and financial stability and the credibility of the inflation targeting regime.

Directors noted that weak financial intermediation remains an obstacle to economic recovery. They called for improving the operational environment for banks, including by gradually cutting back the heavy tax burden and putting in place the necessary conditions to facilitate an orderly clean up of banks’ and households’ balance sheets. Ad hoc initiatives to stimulate lending, including by state-owned banks, are less likely to be effective in reviving credit and may have undesired effects on credit quality.

Directors welcomed recent steps to improve labor participation, but encouraged the authorities to pursue a broader structural reform agenda. In particular, they saw the need to promote competition and a level playing field in product markets. Further advances in restructuring of loss-making state-owned enterprises should also remain a priority.

Hungary: Selected Economic Indicators, 2008–14


2008 2009 2010 2011 2012 2013 2014
          Est. Proj. Proj.
  (Percentage change, unless otherwise noted)

Real economy


Real GDP (percentage change)

0.9 -6.8 1.3 1.6 -1.7 0.0 1.2

Total domestic demand (contribution to growth) 1/

0.7 -10.4 -0.4 0.1 -3.0 -1.0 0.4

Private consumption 2/

-0.2 -5.6 -3.3 0.4 -2.9 -0.9 0.5

Government consumption

-0.2 2.6 3.8 -0.3 -2.0 -0.7 0.5

Gross fixed investment

2.9 -11.1 -9.5 -3.6 -5.5 -2.5 0.5

Foreign balance (contribution to growth)

0.2 3.6 1.8 1.5 1.4 1.0 0.7


5.7 -10.2 14.2 6.3 1.7 2.9 3.5


5.5 -14.8 12.7 5.0 0.2 2.0 3.0

CPI inflation (average)

6.1 4.2 4.9 3.9 5.7 3.2 3.5

CPI inflation (end year)

3.5 5.6 4.7 4.1 5.0 4.0 3.3

Unemployment rate (average)

7.9 10.1 11.2 11.0 11.0 11.1 10.9
  (Percent of GDP)

Gross domestic investment (percent of GDP) 3/

21.7 20.7 18.3 17.9 17.1 16.5 16.3

Gross national saving (percent of GDP, from BOP)

14.4 20.5 19.4 18.8 18.8 18.6 18.1

General government (GFSM 2001 basis) 4/


Overall balance

-3.7 -4.5 -4.5 4.3 -2.5 -3.2 -3.4

Primary balance

0.0 -0.2 -0.6 7.9 1.5 0.9 0.5

Primary structural balance, in percent of potential GDP

-1.4 1.3 -1.2 -1.3 1.7 1.9 1.2

Gross debt

73.0 79.8 81.8 81.4 79.0 79.9 80.3
  (Percentage change)

Money and credit (end-of-period)


Broad money

7.7 4.4 3.0 5.9 -8.8 7.2 6.0

Lending to the private sector, flow-based

12.2 -2.3 -2.4 -6.9 -7.4 -3.0 3.0

Interest rates


T-bill (90-day, average)

8.9 8.2 5.4 6.0 6.9 ... ...

Government bond yield (5-year, average)

9.4 7.6 7.9 8.9 7.8 ... ...

5-year sovereign CDS (average in bps; for 2013, as of as of January 29)

196 335 282 379 450 276  
  (Percent of GDP, unless otherwise noted)

Balance of payments


Goods and services trade balance

0.3 4.7 6.4 6.6 7.8 8.2 8.1

Current account

-7.3 -0.2 1.1 0.9 1.7 2.1 1.8

Reserves (in billions of euros)

24.0 30.7 33.7 37.8 33.9 33.9 35.0

Gross external debt 5/

116.9 150.1 143.1 132.1 126.4 121.0 112.6

Gross official reserves (percent of short-term debt at remaining maturity)

71.3 83.6 75.0 88.2 90.7 86.8 105.8

Exchange rate


Exchange regime


Present rate (January 29, 2013)

Ft. 297 = €1; Ft. 238 = CHF1

Nominal effective rate (2000=100, average)

93.3 102.6 102.7 104.2 ... ...  

Real effective rate, CPI basis (2000=100, average)

70.4 74.8 72.4 72.6 ... ...  

Quota at the Fund

SDR 1,038.4 million

Memorandum Items


Nominal GDP (billions of forints)

26,543 25,626 26,607 27,886 28,549 29,228 30,402

Sources: Hungarian authorities; IFS; Bloomberg; and IMF staff estimates.

1/ Includes change in inventories.

2/ Actual final consumption of households.

3/ Excludes change in inventories.

4/ Consists of the central government budget, social security funds, extra budgetary funds, and local governments.

5/ Excluding Special Purpose Entities. Including inter-company loans, and nonresident holdings of forint-denominated assets.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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