## 1hunea2019001

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### CONTEXT
- Hungary experienced an "impressive recovery" from the global financial crisis and, in 2018, was "one of the fastest growing economies in Europe."
- Key indicators:
  - Public debt declined 10 percentage points to 70.2 percent of GDP over 2011–18.
  - Unemployment fell threefold to 3.7 percent.
- Challenges:
  - Structural fiscal position "still appears procyclical."
  - Rapid wage rises amid labor shortages.
  - Lagging structural reforms to raise labor participation.

### BACKGROUND AND RECENT DEVELOPMENTS: GOING STRONG
- Growth and inflation:
  - Real GDP growth in 2018: 5.1 percent.
  - Growth averaged 5.1 percent in the first two quarters of 2019.
  - Inflation hovered close to the upper end of the tolerance band (3±1 percent); headline inflation driven by food, energy, and excise increases.
- Labor market and wages:
  - Unemployment below 4 percent since late-2017.
  - Wage growth in 2018: 10.6 percent; remained strong in 2019.
  - Limited spillover from wages to inflation due to low wage share in production costs, high profitability, well-anchored inflation expectations, reduced social security contributions, and low imported inflation.
- Fiscal developments:
  - Overall deficit deteriorated somewhat in 2017 and improved only slightly in 2018 despite above-potential growth.
  - Primary structural (PS) balance worsened by about two percentage points over 2017–18.
  - 2018 deficit slightly outperformed the budget target of 2.4 percent of GDP due to higher-than-expected VAT collection and lower spending on goods and services.
- Monetary and financial sector:
  - MNB tightened modestly in Spring 2019: overnight deposit rate increased from -15 to -5 bp; reduced FX liquidity swap rollovers.
  - Bank lending to non-financial companies and households increased by 10.6 percent, y-o-y, during 2018 and remained buoyant in 2019.
  - NPL ratio declined to 2.5 percent at end-2018.
  - System-wide liquidity above prudential requirements; profits solid.
- External sector:
  - Hungary’s external position in 2018 estimated moderately stronger than medium-term fundamentals and desirable policy settings.
  - Current account receded towards a deficit but remains somewhat stronger than the estimated current account norm.
  - HUF depreciated against the euro throughout 2019 but remained stable in real effective terms.
  - Reserves increased significantly; adequacy indicators improved.
  - Deleveraging contributed to reduced portfolio flows and a rating upgrade.

### OUTLOOK AND RISKS: A BALANCING ACT
- Baseline outlook:
  - Growth projected to decelerate from 2019 highs but to remain in the "3.5-2.0 percent range in the medium term" despite negative demographics.
  - Inflation expected to hover around 3 percent.
  - Current account expected to be in a slight deficit reflecting buoyant imports and slowing EU growth.
  - Household savings increase and completed deleveraging supportive of consumption.
- Downside risks:
  - Deteriorating global growth prospects, trade tensions, slowdown in Germany, and higher trade barriers could pressure exports.
  - Potential delays or scaling down of high-tech automotive and battery investments could weaken export gains.
- Upside domestic risks:
  - Continued demand boom, higher-than-estimated capacity, increased labor participation, or inward migration by ethnic Hungarians could boost growth.
- Authorities’ views:
  - Agreed on balance of risks: key downside risks are global slowdown, Brexit, and trade protectionism; upside risks include stronger labor supply, household consumption, and competitiveness reforms.

### POLICY AGENDA — OVERARCHING MESSAGE
- Use strong growth to build fiscal space, improve expenditure quality, and address long-standing structural challenges.
- Less procyclical fiscal policy would aid monetary normalization and ease demand pressures, including in housing.
- Favorable cyclical position is an opportune time for reforms to improve potential growth; staff welcomed the government’s "Program for a More Competitive Hungary."

### A. FISCAL POLICY: CREATING SPACE WHILE ENHANCING QUALITY
- 2019 fiscal stance and measures:
  - Overall fiscal deficit target for 2019: decline to 1.8 percent of GDP; data indicate the budget deficit will likely be met.
  - Revenue losses from 2018–19 tax rate reductions being offset by higher labor market receipts, rapid private consumption growth, and gains in tax collection efficiency.
  - Several fiscal stimulus measures introduced in 2019 aimed at improving demographics; cost expected to be fully covered by a general budgetary reserve of about 0.6–1.0 percent of GDP over 2019–21.
  - With output above potential, structural primary balance projected to deteriorate by about 0.3 percentage points to around -0.8 percent in 2019.
- Fiscal vulnerabilities and financing:
  - Public debt slightly above 70 percent of GDP as of end-2018.
  - General government financing needs (GFN) among the highest in the EU in 2018: around 20 percent of GDP.
  - Staff assesses Hungary’s fiscal space to be at risk, though GFN projected to decline over short and medium terms under standard stress tests.
- Debt strategy and MÁP+ retail bond:
  - Continue to lengthen maturities while balancing reduced foreign exposure and containing interest expenditure.
  - New retail bond (MÁP+) is reducing rollover and FX risks and attracting household savings, but its much higher yield than other government bonds has led to subscriptions surpassing expectations.
  - Staff concerns:
    - Opportunity cost of "such an expensive funding" and potential crowding-out effects.
    - Lack of an upper subscription limit per individual or household makes the program potentially regressive and increases arbitrage risk.
    - Staff suggested capping the size of the total current offering and anchoring interest rates of future offerings closer to the government bond market yield curve.
  - MÁP+ initial interest rate schedule:
    - 3.5 percent the first half year
    - 4 percent the second half year
    - then increases by 50-basis point each year leading to an interest rate of 6 percent by the end of its maturity.
- 2020 and medium-term plans:
  - 2020 budget foresees further reduction in the overall deficit to 1 percent of GDP.
  - Staff welcomes planned consolidation but notes it implies only modest fiscal withdrawal.
  - Authorities plan to achieve 2020 target via tax collection improvements and lower public investment; staff projects a somewhat higher deficit (1.5 percent of GDP).
  - Authorities’ medium-term targets (2019 "Convergence Programme") aim for overall and cyclically-adjusted balances close to zero by 2023; underlying measures not fully specified.
  - Staff’s medium-term baseline implies somewhat higher deficits than authorities’ plan due to lower growth projections and absence of explicit consolidation measures beyond possible reductions in public investment.

### FISCAL CONSOLIDATION: RECOMMENDED MEASURES AND IMPACT
- Revenue measures:
  - (i) reduce exemptions and preferential regimes;
  - (ii) further phase out sectoral taxes;
  - (iii) offset any further tax rate cuts with other revenue through broadening the tax base.
- Expenditure measures:
  - (i) reduce spending on goods and services, which is above the peers’ average;
  - (ii) continue to reduce the public wage bill, focusing on rationalizing employment in the public sector while ensuring adequate provision of quality public services;
  - (iii) rationalize generalized subsidies, including on energy and transport, while adequately protecting the poor through better targeting.
- Cumulative Fiscal Impact of Staff-Recommended Measures (In percent of GDP, 2020-24):
  - Total 1.4
  - Revenue -0.4
  - Phasing out of sector-specific taxes -1.0
  - Streamlining VAT rates 0.4
  - Elimination of excise exemptions for fuel 0.2
  - Expenditure 1.8
  - Reduction in the wage bill 1/0.8
  - Rationalization of spending on goods and services 2/0.6
  - Rationalization of generalized subsidies 0.4
- Notes on implementation:
  - 1/ Reduce employment (rather than wages) through consolidation of institutions and responsibilities, attrition; and rationalization of local government employment.
  - 2/ Savings largely associated with the proposed public sector consolidation and limiting discretionary spending of the central government.
- Projected outcomes:
  - Proposed average annual adjustment of around 0.3 percentage points over the next five years would lead to public debt falling to 50 percent of GDP and a structural primary surplus of about 2 percent of GDP by 2024.
  - Any additional savings beyond the recommended amount can be used to boost infrastructure investment in the outer years of the medium term to compensate for the projected decline in EU funds.
- Authorities’ views:
  - Continue to increase efficiency of tax collection and reduce public investment as needed.
  - Substantial reserves programmed on the expenditure side provide buffers.
  - Success in cutting more than 20 percent of staff positions across the central government administrative level in 2018–19.
  - Consider further rationalization of public employment based on identification of inefficiencies, progress in digitalization and improvements in processes.
  - View most remaining sectoral taxes as turnover taxes with less distortive impact; could be reduced if efficiency gains lead to lower profits and price reductions for consumers.
  - Plan to further reduce the tax burden on labor whenever the economic situation allows.
  - Retail bond MÁP+ seen as contributing to lengthening maturities, reducing external vulnerabilities, and containing consumption and imports as well as pressure in the real estate market.

### MONETARY POLICY: STANCE AND UNCONVENTIONAL TOOLS
- Near-term stance:
  - Monetary policy can afford to be somewhat more patient with removing accommodation, given the weaker global outlook and downside risks.
  - Inflationary pressures have abated since May 2019.
  - Staff projects average inflation to stay around 3.4 percent in 2019 and move back towards the midpoint of the tolerance band over the medium term.
  - Projection premised on current staff projection for growth and imported inflation, and the MNB maintaining the money market rates at current levels in the near term.
  - If data point to upward inflationary pressure building up, the MNB will need to take prompt action given transmission lags; clear and timely communication is key.
- Unconventional arrangements and monitoring:
  - Two measures—the MNB’s mortgage bond purchase scheme and its sales of unconditional interest rate swaps—were phased out by end-2018.
  - FX liquidity swaps calibrated to achieve intended money market rates within the interest rate corridor, with the MNB becoming a net provider of liquidity to banks.
  - January 2019: “Funding for Growth Scheme Fix” introduced to encourage long-term fixed-rate lending to SMEs.
  - July 2019: “Bond Funding for Growth” scheme rolled out to develop the corporate bond market.
  - Staff advice: continuously assess effectiveness to minimize market distortions.
- Authorities’ views on monetary risks and tools:
  - MNB considers downside risks to inflation have recently increased due to disinflationary impact from the slowdown in Europe.
  - Continue to assess pass-through effects from the eurozone, monetary policy stance of major central banks, effect of the new retail government security on savings, impact of the counter-cyclical fiscal policy, and other domestic factors.
  - New unconventional tools are not intended to achieve immediate monetary policy objectives as their liquidity impact is being sterilized; objectives are to enhance financial stability and develop the corporate bond market.

### FINANCIAL SECTOR: STABILITY, HOUSING MARKET, AND MACROPRUDENTIAL MEASURES
- Banking system health:
  - System remains, on average, well capitalized, profitable, and liquid.
  - NPL ratio continues to decline due to improved repayment capacity, NPL sales, and credit growth.
  - MNB stress tests show all banks observe the solvency test and most can meet the regulatory liquidity requirement without adjustments.
  - Integration of many credit cooperatives into one banking group is continuing.
  - Final decision on the privatization of Budapest Bank currently being worked out; important that consolidation remains market-based.
  - Some amendments to insolvency legislation increase creditors’ ability to enforce interests and improve recovery; further improvements needed.
  - Staff welcomed intention to review legislative and institutional framework for bankruptcy and liquidation proceedings in 2020.
- Housing market pressures and policy responses:
  - 2018: housing price growth was in double digits, especially in Budapest, partly supported by high wage growth, fiscal incentives, and labor scarcity in construction.
  - Budapest house prices appear high compared to fundamentals.
  - Large part of purchases paid with private savings, including by foreign citizens, and often for investment purposes.
  - Tightening macroprudential measures (loan-to-value and debt service-to-income (DSTI)) may not be sufficient to contain house price inflation but can reduce likelihood of risky mortgages.
  - Moderating price increases aided by:
    - Reviewing fiscal incentives for house purchases, basing them on means-testing and targeting;
    - Reducing impediments to doing business to spur construction;
    - Improving transportation network and commuting options;
    - Improving urban planning to increase housing supply over time.
  - Continue AML/CFT efforts; Hungary remains on enhanced follow-up based on Moneyval’s 2016 assessment; continue to monitor large purchases of luxury real estate.
- Measures to reduce mortgage interest rate risk:
  - Most new housing loans now have longer interest fixation periods—likely facilitated by MNB Certified Consumer-Friendly Housing Loans and DSTI requirements—yet a high portion of existing housing loans have variable rates.
  - MNB agreement with banks: inform clients about interest rate risk and offer to convert to fixed-rates; impact so far limited.
  - From 2020 a small risk-weight will be assigned to FX performing project loans when calculating the systemic risk buffer to contain potential risks from FX exposure of some commercial real estate companies.
- Authorities’ views on housing and macroprudential policy:
  - Monitoring housing prices, especially in Budapest, though still much lower than comparable Western European cities.
  - Assessment models may not capture that many purchases are for investment and generate rental income.
  - Additional tightening of macroprudential measures unlikely to have significant impact.
  - Preliminary evidence that retail bond MÁP+ coincided with a decline in apartment sales transactions in Budapest.
  - Some MNB proposals in the Competitiveness Program—tightening rules for purchases of residences for investment purposes and expanding construction capacity—could help moderate the market.

### STRUCTURAL REFORMS AND COMPETITIVENESS
- Need for reforms:
  - Improvements in competitiveness are needed to sustain high income convergence and address demographic challenges.
  - Rising wages against low labor productivity, decelerated export growth, and business environment shortcomings underscore the need for prioritised reform implementation.
  - Government’s Program for a More Competitive Hungary and the Central Bank’s agenda seek to boost potential output; timely implementation of prioritized reform measures is required.
  - Prioritization should focus on leveling the playing field for SMEs, improving governance and transparency, increasing labor participation, and enhancing education and vocational training.
- SME and tax policy recommendations:
  - Staff lauded increased focus on enhancing productivity of SMEs.
  - Ongoing efforts to simplify the tax system for SMEs will be helpful.
  - Staff supported authorities’ intention to reduce the large number of taxes and advised phasing out sector-specific taxes.
  - Merit in removing sectoral exemptions and applying a modern competition policy framework broadly.
  - Importance of closely monitoring implementation of R&D investments supported by grants to safeguard transparency and maximize value and efficiency.
- Business environment improvements and remaining challenges:
  - Improvements made: digital land registry map and data service to improve construction permit procedures; reduced time to connect to utilities; registration for most common types of companies free of charge; tax payer data synchronized to remove local registration.
  - Remaining challenges: high frequency of issuing regulations, protecting minority investors, getting electricity, perceived corruption, and public procurement practices.
  - Introduction of central electronic public procurement system in line with EU Public Procurement Directive is positive; need to address remaining concerns and ensure transparent and competitive procurement processes in line with EC recommendations.
- SOEs and governance:
  - SOEs’ productivity lagged since 2012; SOEs constitute about 7 percent of value added.
  - Staff advocated improving oversight of risks from SOEs and introducing clear rules for fiscal support to maintain competitive neutrality, good governance, and budgetary transparency.
- Labor market and participation:
  - Labor market shortages should be addressed through further increasing participation rates and scaling down the PWS.
  - Participation rates have registered one of the fastest rises among EU members and now stand slightly below the EU average of 74 percent.
  - Further progress in adult education and vocational training and increasing daycare centers will help raise active labor force, especially among women.
  - Releasing labor from PWS decreased participants from a peak of 202,000 to around 100,000 in 2019; authorities intend to further reduce this number but keep the scheme operational for those with greatest difficulties entering the primary market.
- Authorities’ views on competitiveness agenda:
  - Broad concurrence with staff recommendations; competitiveness agenda deemed comprehensive and broad-based.
  - Actions taken to strengthen monitoring of implementation: identification of tasks and deadlines for line ministries and setup of a monitoring system; first report to be published soon.
  - MNB will monitor progress through the “Competitiveness Mirror” assessing implementation of 330 competitiveness recommendations.
  - New procurement system with simplified procedures and lower administrative burdens expected to help improve doing business indicators and perceived governance rankings.
  - Advertising tax suspended till 2022.
  - Determination to support innovation, especially by SMEs, including through a recently introduced cash incentive scheme to encourage technology-oriented investments and R&D spending.

### STAFF APPRAISAL: OUTLOOK AND POLICY PRIORITIES
- Recent performance and outlook:
  - Over the last decade, Hungary achieved further income convergence at an impressive speed and has become less vulnerable to shocks.
  - Over the medium-term, fiscal balance is expected to further improve; public and external debts would continue to decline; domestic credit growth envisaged to remain buoyant.
  - Short-term prospects clouded by wavering global growth, trade tensions, and Brexit.
  - Hungary’s growth likely to decelerate unless structural reform efforts are redoubled to improve productivity and boost potential.
- Fiscal policy assessment:
  - Government’s medium-term fiscal policy targets are appropriate but specific measures are needed to secure them.
  - Envisaged consolidation would gradually reverse the procyclical fiscal stance and allow monetary policy to remain accommodative longer.
  - Mix of growth-friendly revenue and expenditure measures recommended to achieve targets: reduce exemptions and preferential regimes, broaden tax base, phase out sectoral taxes, moderately reduce spending on goods and services and the public wage bill, rationalize generalized transport and energy subsidies with improved targeting.
  - Additional savings can finance infrastructural investment to compensate for eventual decline in EU funds.
  - Important to enhance monitoring of SOEs to improve efficiency and reduce contingent liabilities.
  - While reducing currency risks is prudent for public debt management, merit in avoiding a large increase in interest costs and achieving further lengthening of maturities.
- Monetary and financial sector assessment:
  - Given recent moderation of inflation and weaker external environment, appropriate for monetary stance to remain accommodative, with attention to emerging price pressures.
  - Clear and timely communication remains essential for effective forward guidance.
  - Close monitoring of unconventional arrangements warranted to assess objectives while reducing market distortions.
  - To help contain real estate price pressures: review fiscal incentives for house purchases, base them on means-testing and targeting, and reduce impediments to doing business in construction sector.

### EXTERNAL POSITION ASSESSMENT
- On balance, staff judges the external position in 2018 was "moderately stronger than medium-term fundamentals and desired policy settings."
- Model indications:
  - CA and ES methods point to a stronger position; REER model provides some offsetting evidence.
  - Exchange rate gaps from CA and ES models: around 10 percent.
  - Preliminary 2019 CA gap: towards 2 percent.
- Policy implications:
  - Reduce the external debt ratio further to support a higher CA norm relative to the baseline model.
  - Advance structural reforms to raise private investment; this would initially widen the current account due to investment imports but align the external position with fundamentals over the medium term.

### PUBLIC SECTOR DEBT SUSTAINABILITY — BASELINE (SELECTED FIGURES, AS OF SEPTEMBER 30, 2019)
- Nominal gross public debt: 75.0 (2017), 72.9 (2018), 70.2 (2019), 66.5 (2020), 64.0 (2021), 61.7 (2022), 59.8 (2023), 58.0 (2024), 56.2 (projection)
- Public gross financing needs: 14.7 (2017), 22.8 (2018), 21.6 (2019), 18.3 (2020), 15.5 (2021), 11.4 (2022), 10.8 (2023), 11.5 (2024), 12.4 (projection)
- Real GDP growth (in percent): 0.8 (2017), 4.3 (2018), 5.1 (2019), 4.9 (2020), 3.5 (2021), 3.0 (2022), 2.6 (2023), 2.4 (2024), 2.2 (projection)
- Inflation (GDP deflator, in percent): 3.0 (2017), 3.7 (2018), 4.5 (2019), 3.0 (2020–2024)
- Nominal GDP growth (in percent): 3.8 (2017), 8.2 (2018), 9.9 (2019), 8.0 (2020), 6.6 (2021), 6.1 (2022), 5.7 (2023), 5.5 (2024), 5.3 (projection)
- Effective interest rate (in percent): 5.8 (2017), 3.8 (2018), 3.6 (2019), 3.1 (2020), 3.2 (2021), 3.1 (2022), 3.2 (2023), 3.4 (2024), 3.6 (projection)
- Change in gross public sector debt (cumulative): 1.6 (2017), -2.6 (2018), -2.7 (2019), -3.7 (2020), -2.5 (2021), -2.2 (2022), -1.9 (2023), -1.8 (2024); cumulative -14.0
- Identified debt-creating flows (cumulative): 1.4 (2017), -3.1 (2018), -3.6 (2019), -3.3 (2020), -2.5 (2021), -2.2 (2022), -1.9 (2023), -1.8 (2024); cumulative -13.4
- Primary deficit: -0.5 (2017), -0.2 (2018), 0.0 (2019), -0.1 (2020), -0.4 (2021), -0.3 (2022), -0.5 (2023), -0.6 (2024), -0.8 (projection); cumulative -2.7

### RISK ASSESSMENT AND STRESS TESTS (SELECTED OUTCOMES)
- Alternative scenarios (selected underlying assumptions, in percent):
  - Baseline scenario (2019–2024):
    - Real GDP growth: 4.6 (2019), 3.3 (2020), 2.9 (2021), 2.6 (2022), 2.4 (2023), 2.2 (2024)
    - Inflation: 3.0 (2019–2024)
    - Primary Balance: 0.2 (2019), 0.4 (2020), 0.4 (2021), 0.5 (2022), 0.6 (2023), 0.8 (2024)
    - Effective interest rate: 3.2 (2019), 3.2 (2020), 3.1 (2021), 3.2 (2022), 3.4 (2023), 3.6 (2024)
  - Historical scenario:
    - Real GDP growth: 4.6 (2019), 1.6 (2020–2024)
    - Inflation: 3.0 (2019–2024)
    - Primary Balance: 0.2 (2019), 0.5 (2020–2024)
    - Effective interest rate: 3.2 (2019), 3.2 (2020), 3.5 (2021), 3.9 (2022), 4.3 (2023), 4.7 (2024)
  - Constant Primary Balance Scenario:
    - Primary Balance: 0.2 (2019–2024)
- Stress-test examples:
  - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock and Contingent Liability Shock — with severe downside paths such as Primary balance falling to -9.4 (2020) under contingent liability shock scenarios and effective interest rate rising to 5.6 (2023) under combined shocks.

### EXTERNAL DEBT AND EXTERNAL SECTOR HIGHLIGHTS
- Gross external debt (selected years): 118.4 (2014), 107.0 (2015), 95.7 (2016), 83.3 (2017), 79.6 (2018), 69.5 (2019), 63.0 (2020), 58.5 (2021), 54.7 (2022), 51.8 (2023), 49.1 (2024)
- Net IIP: about -59.6 percent of GDP (2017), improved to about -54.2 percent of GDP (2018)
- International reserves: increased by €4 billion in 2018 mainly due to EU transfers; reserve coverage of short-term debt increased to 155 percent (benchmark 100 percent).
- External position assessment: Hungary’s external position is assessed to be moderately stronger than the medium-term fundamentals and desirable policies; REER approaches suggest an overvaluation between 10 and 20 percent, with a large residual up to about 24 percent not explained by policy variables.

### BOX 1 — GLOBAL AUTOMOTIVE INDUSTRY: HUNGARY’S PARTICIPATION AND PROSPECTS
- Recent developments:
  - Vehicle production in 2018 fell (by 6 percent) for the first time since the Global Financial Crisis.
  - Sales (and exports) were also weak; the downturn was synchronized across markets.
  - Contributing factors included China phasing-out tax credits, tighter lending conditions for auto loans in large markets, technological changes (electric cars, car sharing), and higher environmental standards; policy shocks such as tariffs and emissions issues also mattered.
- Hungary’s exposure:
  - Motor vehicle industry accounted for 4.9 percent of gross value added in 2017, and over 7 percent considering input linkages.
  - Cars and related products accounted for 16 percent of total exports.
  - Germany is Hungary's most important trading partner (27 percent share).
- Risks to output (examples):
  - Demand shock: a 10 percent decline in demand for German finished vehicles could reduce Hungary’s gross output by -0.25 percentage points and value added by -0.15 percentage points.
  - Supply shock: a 22.5 pps car tariff increase by the US on Hungarian car exports could shave off around 0.25 pps from Hungary's growth.
- Mitigating factors and opportunities:
  - Production concentrated on high-end vehicles cushions demand elasticity risks.
  - FDI in battery production and electric car lines (Samsung, GS Yuasa, SK Innovations) are opportunities.
  - Policy recommendations: increase productivity through targeted skills training and automation; upgrade transport and digital infrastructure; reduce impediments to doing business for domestic companies to become GVC suppliers and exporters.

### DATA, FUND RELATIONS, AND ANNEX IV HIGHLIGHTS
- Implementation of past Fund recommendations:
  - 2018 general government balance slightly overperformed budget target and public debt ratio declined moderately, but underlying structural balance deteriorated.
  - MNB tightened policy in 2019 and unwound some unconventional measures but introduced new ones.
  - PWS participation reduced and child-care facilities increased.
  - Competitiveness Agenda rolled out but falls short of addressing some weaknesses.
- Fund relations and technical assistance:
  - Membership: Joined May 6, 1982; Article VIII.
  - Quota: 1940.00 SDR Million, 100.00 percent.
  - Fund holdings of currency: 1640.76 SDR Million, 84.58 percent.
  - Reserve tranche position: 299.24 SDR Million, 15.42 percent.
  - Stand-By Nov 6, 2008 – Oct 5, 2010; Amount Approved: 10,537.50 SDR Million; Amount Drawn: 7,637.00 SDR Million.
  - Technical Assistance (FY2010–2016) examples across MCM, LEG, FAD.
- Statistical issues:
  - Data provision is adequate for surveillance.
  - Authorities compile comprehensive annual and quarterly accrual-based GFS according to ESA 2010; improvements needed in timely monthly cash-basis central government accounts and regular provision of SOE financial statements.
- Statement by Szilard Benk (Authorities’ views) — summary:
  - Hungary registered 5.1 percent growth in 2018; similar performance expected in 2019.
  - Unemployment close to 3 percent; investment rate exceeded 26 percent by 2019.
  - Public debt-to-GDP decreased from above 80 percent in 2011 to around 68 percent by end-2019 and expected to decline further.
  - 2020 budget foresees overall deficit reduced to 1 percent; contingency reserves of about 1 percent of GDP budgeted.
  - Medium-term aim: zero overall deficit.
  - MNB policy rate unchanged at 0.9 percent since 2016; new instruments: FGSfix and BGS; banking sector strong capital adequacy and liquidity.
  - Structural reform agenda: Program for a More Competitive Hungary; SME strategy; MNB’s 330-point proposal with progress reported.
  - Authorities disagree with staff’s categorization of fiscal space as "at risk" and consider "some fiscal space" more appropriate.

### KEY NUMERIC TABLE EXCERPTS — MACRO OUTLOOK (SELECTED)
- Real GDP (percentage change): 2014: 4.2; 2015: 3.8; 2016: 2.2; 2017: 4.3; 2018: 5.1; 2019: 4.9; 2020 (Proj.): 3.5
- CPI inflation (average): 2014: -0.2; 2015: -0.1; 2016: 0.4; 2017: 2.4; 2018: 2.8; 2019: 3.4; 2020 (Proj.): 3.4
- Unemployment rate (average, ages 15-64): 2014: 7.7; 2015: 6.8; 2016: 5.1; 2017: 4.2; 2018: 3.7
- Gross fixed capital formation (percent of GDP): 2014: 22.1; 2015: 22.3; 2016: 19.7; 2017: 22.2; 2018: 25.2; 2019: 26.6; 2020 (Proj.): 26.7
- General government overall balance (percent of GDP): 2014: -2.8; 2015: -2.0; 2016: -1.8; 2017: -2.4; 2018: -2.3; 2019: -1.8; 2020 (Proj.): -1.6
- Public debt (Maastricht definition, percent of GDP): 2014: 76.8; 2015: 76.1; 2016: 75.5; 2017: 72.9; 2018: 70.2; 2019: 66.5; 2020 (Proj.): 64.0
- Broad money (M3) growth (end-of-period): 2014: 5.1; 2015: 6.3; 2016: 7.1; 2017: 7.8; 2018: 11.8; 2019: 9.1; 2020 (Proj.): 7.3
- NPLs (90 days overdue) to gross loans: 2014: 15.6; 2015: 11.7; 2016: 7.4; 2017: 4.2; 2018: 2.5; 2019: 2.4; 2019 Q2: 2.0

*International Monetary Fund. HUNGARY — 2019 staff report (staff team: Messrs. Sakr (head), Lybek, and Dybczak, and Ms. Vtyurina).*

### 2019. Staff team comprised Messrs. Sakr (head), Lybek, and Dybczak,

### 1hunea2019001 - 2019. Staff team comprised Messrs. Sakr (head), Lybek, and Dybczak,

### CONTEXT
- Hungary experienced an "impressive recovery" from the global financial crisis and, in 2018, was "one of the fastest growing economies in Europe."
- Key indicators:
  - Public debt declined 10 percentage points to 70.2 percent of GDP over 2011–18.
  - Unemployment fell threefold to 3.7 percent.
- Challenges noted:
  - The structural fiscal position "still appears procyclical."
  - Rapid wage rises amid labor shortages.
  - Lagging structural reforms to raise labor participation.

### BACKGROUND AND RECENT DEVELOPMENTS: GOING STRONG
- Growth and inflation:
  - Real GDP growth in 2018: 5.1 percent.
  - Growth averaged 5.1 percent in the first two quarters of 2019.
  - Inflation hovered close to the upper end of the tolerance band (3±1 percent); headline inflation driven by food, energy, and excise increases.
- Labor market and wages:
  - Unemployment below 4 percent since late-2017.
  - Wage growth in 2018: 10.6 percent; remained strong in 2019.
  - Spillover from wages to inflation limited by low wage share in production costs, high profitability, well-anchored inflation expectations, reduced social security contributions, and low imported inflation.
- Fiscal developments:
  - Overall deficit deteriorated somewhat in 2017 and improved only slightly in 2018 despite above-potential growth.
  - Primary structural (PS) balance worsened by about two percentage points over 2017–18.
  - 2018 deficit slightly outperformed the budget target of 2.4 percent of GDP due to higher-than-expected VAT collection and lower spending on goods and services.
- Monetary and financial sector:
  - MNB tightened modestly in Spring 2019: overnight deposit rate increased from -15 to -5 bp; reduced FX liquidity swap rollovers.
  - Bank lending to non-financial companies and households increased by 10.6 percent, y-o-y, during 2018 and remained buoyant in 2019.
  - NPL ratio declined to 2.5 percent at end-2018.
  - System-wide liquidity above prudential requirements; profits solid.
- External sector:
  - Hungary’s external position in 2018 estimated moderately stronger than medium-term fundamentals and desirable policy settings.
  - Current account receded towards a deficit but remains somewhat stronger than the estimated current account norm.
  - HUF depreciated against the euro throughout 2019 but remained stable in real effective terms.
  - Reserves increased significantly; adequacy indicators improved.
  - Deleveraging contributed to reduced portfolio flows and a rating upgrade.

### OUTLOOK AND RISKS: A BALANCING ACT
- Baseline outlook:
  - Growth projected to decelerate from 2019 highs but to remain in the "3.5-2.0 percent range in the medium term" despite negative demographics.
  - Inflation expected to hover around 3 percent.
  - Current account expected to be in a slight deficit reflecting buoyant imports and slowing EU growth.
  - Household savings increase and completed deleveraging supportive of consumption.
- Downside risks:
  - Deteriorating global growth prospects, trade tensions, slowdown in Germany, and higher trade barriers could pressure exports.
  - Potential delays or scaling down of high-tech automotive and battery investments could weaken export gains.
- Upside domestic risks:
  - Continued demand boom, higher-than-estimated capacity, increased labor participation, or inward migration by ethnic Hungarians could boost growth.
- Authorities’ views:
  - Agreed on balance of risks: key downside risks are global slowdown, Brexit, and trade protectionism; upside risks include stronger labor supply, household consumption, and competitiveness reforms.

### POLICY AGENDA
- Overarching message:
  - Use strong growth to build fiscal space, improve expenditure quality, and address long-standing structural challenges.
  - Less procyclical fiscal policy would aid monetary normalization and ease demand pressures, including in housing.
  - Favorable cyclical position is an opportune time for reforms to improve potential growth; staff welcomed the government’s "Program for a More Competitive Hungary."

A. Fiscal Policy: Creating Space While Enhancing Quality
- 2019 fiscal stance and measures:
  - Overall fiscal deficit target for 2019: decline to 1.8 percent of GDP; data indicate the budget deficit will likely be met.
  - Revenue losses from 2018–19 tax rate reductions being offset by higher labor market receipts, rapid private consumption growth, and gains in tax collection efficiency.
  - Several fiscal stimulus measures introduced in 2019 aimed at improving demographics; cost expected to be fully covered by a general budgetary reserve of about 0.6–1.0 percent of GDP over 2019–21.
  - With output above potential, structural primary balance projected to deteriorate by about 0.3 percentage points to around -0.8 percent in 2019.
- Fiscal vulnerabilities and financing:
  - Public debt slightly above 70 percent of GDP as of end-2018.
  - General government financing needs (GFN) among the highest in the EU in 2018: around 20 percent of GDP.
  - Staff assesses Hungary’s fiscal space to be at risk, though GFN projected to decline over short and medium terms under standard stress tests.
- Debt strategy and MÁP+ retail bond:
  - Policy should continue to lengthen maturities while balancing reduced foreign exposure and containing interest expenditure.
  - New retail bond (MÁP+) is reducing rollover and FX risks and attracting household savings, but its much higher yield than other government bonds has led to subscriptions surpassing expectations.
  - Staff concerns:
    - Opportunity cost of "such an expensive funding" and potential crowding-out effects.
    - Lack of an upper subscription limit per individual or household makes the program potentially regressive and increases arbitrage risk.
    - Staff suggested capping the size of the total current offering and anchoring interest rates of future offerings closer to the government bond market yield curve.
  - MÁP+ initial interest rate schedule (as presented in the report):
    - 3.5 percent the first half year
    - 4 percent the second half year
    - then increases by 50-basis point each year leading to an interest rate of 6 percent by the end of its maturity.
- 2020 and medium-term plans:
  - 2020 budget foresees further reduction in the overall deficit to 1 percent of GDP.
  - Staff welcomes planned consolidation but notes it implies only modest fiscal withdrawal.
  - Authorities plan to achieve 2020 target via tax collection improvements and lower public investment; staff projects a somewhat higher deficit (1.5 percent of GDP) due to lower GDP growth assumptions and smaller decline in expenditure.
  - Authorities’ medium-term targets (2019 "Convergence Programme") aim for overall and cyclically-adjusted balances close to zero by 2023, creating room for fiscal maneuver and a downward debt path; underlying measures not fully specified.
  - Staff’s medium-term baseline implies somewhat higher deficits than authorities’ plan due to lower growth projections and absence of explicit consolidation measures beyond possible reductions in public investment.

*International Monetary Fund. HUNGARY — 2019 staff report (staff team: Messrs. Sakr (head), Lybek, and Dybczak, and Ms. Vtyurina).*

### 17.      To achieve the authorities’ targets, staff recommended a mix of growth-friendly

### 17.      To achieve the authorities’ targets, staff recommended a mix of growth-friendly

### Fiscal consolidation: recommended measures and impact
- Recommended mix of growth-friendly revenue and expenditure measures (Figure 5).
- Revenue measures:
  - (i) reduce exemptions and preferential regimes;
  - (ii) further phase out sectoral taxes;
  - (iii) offset any further tax rate cuts with other revenue through broadening the tax base.
- Expenditure measures:
  - (i) reduce spending on goods and services, which is above the peers’ average;
  - (ii) continue to reduce the public wage bill, focusing on rationalizing employment in the public sector (which is substantially higher than in peers), while ensuring adequate provision of quality public services (Figure 6);
  - (iii) rationalize generalized subsidies, including on energy and transport, while adequately protecting the poor through better targeting.
- Cumulative Fiscal Impact of Staff-Recommended Measures (In percent of GDP, 2020-24):
  - Total 1.4
  - Revenue -0.4
  - Phasing out of sector-specific taxes -1.0
  - Streamlining VAT rates 0.4
  - Elimination of excise exemptions for fuel 0.2
  - Expenditure 1.8
  - Reduction in the wage bill 1/0.8
  - Rationalization of spending on goods and services 2/0.6
  - Rationalization of generalized subsidies 0.4
- Notes on implementation:
  - 1/ Reduce employment (rather than wages) through consolidation of institutions and responsibilities, attrition; and rationalization of local government employment.
  - 2/ Savings largely associated with the proposed public sector consolidation and limiting discretionary spending of the central government.
- Projected outcomes:
  - Proposed average annual adjustment of around 0.3 percentage points over the next five years would lead to public debt falling to 50 percent of GDP and a structural primary surplus of about 2 percent of GDP by 2024 (Figure 5).
  - Any additional savings beyond the recommended amount can be used to boost infrastructure investment in the outer years of the medium term to compensate for the projected decline in EU funds.
- Authorities’ views on fiscal measures:
  - Continue to increase the efficiency of tax collection and reduce public investment as needed.
  - Substantial reserves programmed on the expenditure side provide buffers.
  - Success in cutting more than 20 percent of staff positions across the central government administrative level in 2018–19.
  - Consider further rationalization of public employment based on identification of inefficiencies, progress in digitalization and improvements in processes.
  - View most remaining sectoral taxes as turnover taxes with less distortive impact; could be reduced in the future if efficiency gains lead to lower profits and price reductions for consumers.
  - Plan to further reduce the tax burden on labor whenever the economic situation allows.
  - Retail bond MÁP+ seen as contributing to lengthening maturities, reducing external vulnerabilities, and containing consumption and imports as well as pressure in the real estate market.

### Monetary policy: stance and unconventional tools
- Near-term stance:
  - Monetary policy can afford to be somewhat more patient with removing accommodation, given the weaker global outlook and downside risks.
  - Inflationary pressures have abated since May 2019.
  - Staff projects average inflation to stay around 3.4 percent in 2019 and move back towards the midpoint of the tolerance band over the medium term.
  - Projection premised on current staff projection for growth and imported inflation, and the MNB maintaining the money market rates at current levels in the near term.
  - If data point to upward inflationary pressure building up, the MNB will need to take prompt action given transmission lags; clear and timely communication is key.
- Unconventional arrangements and monitoring:
  - Two measures—the MNB’s mortgage bond purchase scheme and its sales of unconditional interest rate swaps—were phased out by end-2018.
  - FX liquidity swaps calibrated to achieve intended money market rates within the interest rate corridor, with the MNB becoming a net provider of liquidity to banks.
  - January 2019: “Funding for Growth Scheme Fix” introduced to encourage long-term fixed-rate lending to SMEs.
  - July 2019: “Bond Funding for Growth” scheme rolled out to develop the corporate bond market.
  - Staff advice: continuously assess effectiveness to minimize market distortions.
- Authorities’ views on monetary risks and tools:
  - MNB considers downside risks to inflation have recently increased due to disinflationary impact from the slowdown in Europe.
  - Continue to assess pass-through effects from the eurozone, monetary policy stance of major central banks, effect of the new retail government security on savings, impact of the counter-cyclical fiscal policy, and other domestic factors.
  - New unconventional tools are not intended to achieve immediate monetary policy objectives as their liquidity impact is being sterilized; objectives are to enhance financial stability and develop the corporate bond market.

### Financial sector: stability, housing market, and macroprudential measures
- Banking system health:
  - System remains, on average, well capitalized, profitable, and liquid.
  - NPL ratio continues to decline due to improved repayment capacity, NPL sales, and credit growth.
  - MNB stress tests show all banks observe the solvency test and most can meet the regulatory liquidity requirement without adjustments.
  - MNB recommendations to use independent evaluators for collateral appraisals appear to have harmonized evaluation practices.
  - Integration of many credit cooperatives into one banking group is continuing.
  - Final decision on the privatization of Budapest Bank currently being worked out; important that consolidation remains market-based.
  - Some amendments to insolvency legislation increase creditors’ ability to enforce interests and improve recovery, but further improvements are needed.
  - Staff welcomed intention to review legislative and institutional framework for bankruptcy and liquidation proceedings in 2020.
- Housing market pressures and policy responses:
  - 2018: housing price growth was in double digits, especially in Budapest, partly supported by high wage growth, fiscal incentives, and labor scarcity in construction (Figure 3).
  - Budapest house prices appear high compared to fundamentals.
  - Large part of purchases paid with private savings, including by foreign citizens, and often for investment purposes.
  - Tightening macroprudential measures (loan-to-value and debt service-to-income (DSTI)) may not be sufficient to contain house price inflation but can reduce likelihood of risky mortgages.
  - Moderating price increases aided by:
    - Reviewing fiscal incentives for house purchases, basing them on means-testing and targeting;
    - Reducing impediments to doing business to spur construction;
    - Improving transportation network and commuting options;
    - Improving urban planning to increase housing supply over time.
  - Continue AML/CFT efforts; Hungary remains on enhanced follow-up based on Moneyval’s 2016 assessment; continue to monitor large purchases of luxury real estate.
- Measures to reduce mortgage interest rate risk:
  - Most new housing loans now have longer interest fixation periods—likely facilitated by MNB Certified Consumer-Friendly Housing Loans and DSTI requirements—yet a high portion of existing housing loans have variable rates.
  - MNB agreement with banks: inform clients about interest rate risk and offer to convert to fixed-rates; impact so far limited.
  - To contain potential risks from FX exposure of some commercial real estate companies, from 2020 a small risk-weight will be assigned to FX performing project loans when calculating the systemic risk buffer.
- Authorities’ views on housing and macroprudential policy:
  - Monitoring housing prices, especially in Budapest, though still much lower than comparable Western European cities.
  - Assessment models may not capture that many purchases are for investment and generate rental income.
  - Additional tightening of macroprudential measures unlikely to have significant impact.
  - Preliminary evidence that retail bond MÁP+ coincided with a decline in apartment sales transactions in Budapest.
  - Some MNB proposals in the Competitiveness Program—tightening rules for purchases of residences for investment purposes and expanding construction capacity—could help moderate the market.

### Structural reforms and competitiveness
- Need for reforms:
  - Improvements in competitiveness are needed to sustain high income convergence and address demographic challenges.
  - Rising wages against low labor productivity, decelerated export growth, and business environment shortcomings underscore the need for prioritised reform implementation.
  - Government’s Program for a More Competitive Hungary and the Central Bank’s agenda seek to boost potential output; timely implementation of prioritized reform measures is required.
  - Prioritization should focus on leveling the playing field for SMEs, improving governance and transparency, increasing labor participation, and enhancing education and vocational training.
- SME and tax policy recommendations:
  - Staff lauded increased focus on enhancing productivity of SMEs.
  - Ongoing efforts to simplify the tax system for SMEs will be helpful.
  - Staff supported authorities’ intention to reduce the large number of taxes and advised phasing out sector-specific taxes.
  - Merit in removing sectoral exemptions and applying a modern competition policy framework broadly.
  - Importance of closely monitoring implementation of R&D investments supported by grants to safeguard transparency and maximize value and efficiency.
- Business environment improvements and remaining challenges:
  - Improvements made: digital land registry map and data service to improve construction permit procedures; reduced time to connect to utilities; registration for most common types of companies free of charge; tax payer data synchronized to remove local registration.
  - Remaining challenges: high frequency of issuing regulations, protecting minority investors, getting electricity, perceived corruption, and public procurement practices.
  - Introduction of central electronic public procurement system in line with EU Public Procurement Directive is positive; need to address remaining concerns and ensure transparent and competitive procurement processes in line with EC recommendations.
- State-owned enterprises (SOEs) and governance:
  - SOEs’ productivity lagged since 2012; SOEs constitute about 7 percent of value added.
  - Authorities intend to monitor SOE efficiency and services provided by state agencies.
  - Staff advocated improving oversight of risks from SOEs and introducing clear rules for fiscal support to maintain competitive neutrality, good governance, and budgetary transparency (Figure 7).
- Labor market and participation:
  - Labor market shortages should be addressed through further increasing participation rates and scaling down the PWS.
  - Participation rates have registered one of the fastest rises among EU members and now stand slightly below the EU average of 74 percent.
  - Further progress in adult education and vocational training and increasing daycare centers will help raise active labor force, especially among women.
  - Releasing labor from PWS decreased participants from a peak of 202,000 to around 100,000 in 2019; authorities intend to further reduce this number but keep the scheme operational for those with greatest difficulties entering the primary market.
- Authorities’ views on competitiveness agenda:
  - Broad concurrence with staff recommendations; competitiveness agenda deemed comprehensive and broad-based.
  - Actions taken to strengthen monitoring of implementation: identification of tasks and deadlines for line ministries and setup of a monitoring system; first report to be published soon.
  - MNB will monitor progress through the “Competitiveness Mirror” assessing implementation of 330 competitiveness recommendations.
  - New procurement system with simplified procedures and lower administrative burdens expected to help improve doing business indicators and perceived governance rankings.
  - Advertising tax suspended till 2022.
  - Determination to support innovation, especially by SMEs, including through a recently introduced cash incentive scheme to encourage technology-oriented investments and R&D spending.

### Staff appraisal: outlook and policy priorities
- Recent performance and outlook:
  - Over the last decade, Hungary achieved further income convergence at an impressive speed and has become less vulnerable to shocks.
  - Over the medium-term, fiscal balance is expected to further improve; public and external debts would continue to decline; domestic credit growth envisaged to remain buoyant.
  - Short-term prospects clouded by wavering global growth, trade tensions, and Brexit.
  - Hungary’s growth likely to decelerate unless structural reform efforts are redoubled to improve productivity and boost potential.
- Fiscal policy assessment:
  - Government’s medium-term fiscal policy targets are appropriate but specific measures are needed to secure them.
  - Envisaged consolidation would gradually reverse the procyclical fiscal stance and allow monetary policy to remain accommodative longer.
  - Mix of growth-friendly revenue and expenditure measures recommended to achieve targets: reduce exemptions and preferential regimes, broaden tax base, phase out sectoral taxes, moderately reduce spending on goods and services and the public wage bill, rationalize generalized transport and energy subsidies with improved targeting.
  - Additional savings can finance infrastructural investment to compensate for eventual decline in EU funds.
  - Important to enhance monitoring of SOEs to improve efficiency and reduce contingent liabilities.
  - While reducing currency risks is prudent for public debt management, merit in avoiding a large increase in interest costs and achieving further lengthening of maturities.
- Monetary and financial sector assessment:
  - Given recent moderation of inflation and weaker external environment, appropriate for monetary stance to remain accommodative, with attention to emerging price pressures.
  - Clear and timely communication remains essential for effective forward guidance.
  - Close monitoring of unconventional arrangements warranted to assess objectives while reducing market distortions.
  - To help contain real estate price pressures: review fiscal incentives for house purchases, base them on means-testing and targeting, and reduce impediments to doing business in construction sector.

*Source: IMF staff report content.*

### 36.      Improvements in competitiveness are needed to boost potential output. It is important

### Improvements in competitiveness are needed to boost potential output. It is important

### Main findings and recommendations on competitiveness and governance
- Further simplify and shorten the processes required to obtain building permits and business licenses.
- Continue to speed up connection to utilities.
- Enhance governance, including in public procurement practices.
- Simplify regulations for SMEs and change them less frequently to support growth and development of SMEs.
- Complement increased labor market participation (especially for women) with:
  - the above regulatory and governance reforms, and
  - improving the quality of education, vocational training, and public services.
- Continue the timely downsizing of the PWS, with a view of releasing workers to the very tight primary labor market.

### Institutional and governance indicators (selected observations)
- World Economic Forum Global Competitiveness Index — selection displays Hungary's 9 lowest-performance indicators out of the total 12 (Index 1–7 as worst to best performer).
- SOE Governance Index (composite, higher better) shown for countries including EST, LVA, SVN, LTU, ROU, BGR, SVK, HUN, POL, CZE, HRV with subcomponents: Ownership policy; Oversight framework; Fiscal links; Governance (low scores indicates weaker governance).
- Control of Corruption, 2017: comparisons provided for Hungary, CESEE Average w/o Hungary, Euro Area Average (confidence intervals estimated with 2 standard deviations of the standard error).
- Corruption Index, 2018: Hungary compared with CESEE Average w/o Hungary and Euro Area Average.
- Corruption Perception Index, 2018: Hungary compared with CESEE Average w/o Hungary and Euro Area Average.

### Doing Business improvements (annual percent change of score from 0–100 as worst to best performer)
- Hungary: Improvements in Doing Business indicators highlighted for categories including:
  - Enforcing Contracts
  - Registering Property
  - Getting Credit
  - Trading Across Borders
  - Protecting Minority Investors
  - Starting a Business
  - Paying Taxes
- Time-series labels shown for 2019 and 2020.

### Macro outlook — key real economy and inflation figures (selected from Table 1 and Table 2)
- Real GDP (percentage change):
  - 2014: 4.2
  - 2015: 3.8
  - 2016: 2.2
  - 2017: 4.3
  - 2018: 5.1
  - 2019: 4.9
  - 2020 (Proj.): 3.5
- Total domestic demand (contribution to growth):
  - 2014: 4.9
  - 2015: 2.3
  - 2016: 1.6
  - 2017: 4.8
  - 2018: 6.7
  - 2019: 7.0
  - 2020 (Proj.): 5.2
- CPI inflation (average):
  - 2014: -0.2
  - 2015: -0.1
  - 2016: 0.4
  - 2017: 2.4
  - 2018: 2.8
  - 2019: 3.4
  - 2020 (Proj.): 3.4
- CPI inflation (end year):
  - 2014: -0.9
  - 2015: 0.9
  - 2016: 1.8
  - 2017: 2.1
  - 2018: 2.7
  - 2019: 3.4
  - 2020 (Proj.): 3.2
- Unemployment rate (average, ages 15-64):
  - 2014: 7.7
  - 2015: 6.8
  - 2016: 5.1
  - 2017: 4.2
  - 2018: 3.7
- Gross fixed capital formation (percent of GDP):
  - 2014: 22.1
  - 2015: 22.3
  - 2016: 19.7
  - 2017: 22.2
  - 2018: 25.2
  - 2019: 26.6
  - 2020 (Proj.): 26.7
- Gross national saving (percent of GDP, from BOP):
  - 2014: 23.4
  - 2015: 24.6
  - 2016: 24.2
  - 2017: 24.5
  - 2018: 24.6
  - 2019: 25.7
  - 2020 (Proj.): 26.0
- Output gap (percent of potential GDP):
  - 2014: -2.7
  - 2015: -1.6
  - 2016: -1.7
  - 2017: -0.2
  - 2018: 1.2
  - 2019: 2.2
  - 2020 (Proj.): 2.0
- Potential GDP growth:
  - 2014: 1.8
  - 2015: 2.7
  - 2016: 2.3
  - 2017: 2.8
  - 2018: 3.6
  - 2019: 3.9
  - 2020 (Proj.): 3.7

### Public finances (selected from Table 3)
- General government overall balance (percent of GDP):
  - 2014: -2.8
  - 2015: -2.0
  - 2016: -1.8
  - 2017: -2.4
  - 2018: -2.3
  - 2019: -1.8
  - 2020 (Proj.): -1.6
- Primary balance:
  - 2014: 1.0
  - 2015: 1.4
  - 2016: 1.3
  - 2017: 0.2
  - 2018: 0.0
  - 2019: 0.1
  - 2020 (Proj.): 0.4
- Structural general government balance (percent of potential GDP):
  - 2014: -1.7
  - 2015: -1.1
  - 2016: -1.3
  - 2017: -2.5
  - 2018: -2.8
  - 2019: -2.8
  - 2020 (Proj.): -2.5
- Public debt (Maastricht definition, percent of GDP):
  - 2014: 76.8
  - 2015: 76.1
  - 2016: 75.5
  - 2017: 72.9
  - 2018: 70.2
  - 2019: 66.5
  - 2020 (Proj.): 64.0

### Financial, monetary, and external sector highlights (select figures)
- Broad money (M3) growth (end-of-period, from Table 5):
  - 2014: 5.1
  - 2015: 6.3
  - 2016: 7.1
  - 2017: 7.8
  - 2018: 11.8
  - 2019: 9.1
  - 2020 (Proj.): 7.3
- Lending to the private sector, flow-based (current prices, eop) 1/:
  - 2014: -0.9
  - 2015: -10.9
  - 2016: 2.0
  - 2017: 6.5
  - 2018: 10.7
  - 2019: 12.0
  - 2020 (Proj.): 10.0
- Current account (percent of GDP):
  - 2014: 1.3
  - 2015: 2.4
  - 2016: 4.5
  - 2017: 2.3
  - 2018: -0.5
  - 2019: -0.9
  - 2020 (Proj.): -0.7
- Gross external debt (percent of GDP):
  - 2014: 118.4
  - 2015: 107.0
  - 2016: 95.7
  - 2017: 83.3
  - 2018: 79.6
  - 2019: 69.5
  - 2020 (Proj.): 63.0
- International reserves (billions of Euros):
  - 2014: 34.6
  - 2015: 30.3
  - 2016: 24.4
  - 2017: 23.4
  - 2018: 27.4
  - 2019: 29.2
  - 2020 (Proj.): 28.5

### Financial soundness indicators (banking sector, selected end-of-period ratios)
- Regulatory capital to risk-weighted assets:
  - 2014: 16.9
  - 2015: 16.9
  - 2016: 18.0
  - 2017: 18.1
  - 2018: 18.5
  - 2019: 17.5
  - 2019 Q2: 17.9
- NPLs (90 days overdue) to gross loans:
  - 2014: 15.6
  - 2015: 11.7
  - 2016: 7.4
  - 2017: 4.2
  - 2018: 2.5
  - 2019: 2.4
  - 2019 Q2: 2.0
- ROA:
  - 2014: -2.2
  - 2015: 0.2
  - 2016: 1.6
  - 2017: 1.9
  - 2018: 1.9
  - 2019: 1.4
  - 2019 Q1: 1.8

### Institutional recommendation on IMF consultations
- It is recommended to hold the next Article IV Consultation on the standard 12-month cycle.

*Source: Hungary staff report (IMF) — extracted content from the provided chapter/section.*

### Box 1. Global Automotive Industry: Hungary’s Participation and Prospects

### Box 1. Global Automotive Industry: Hungary’s Participation and Prospects

### Recent developments
- Vehicle production in 2018 fell (by 6 percent) for the first time since the Global Financial Crisis.
- Sales (and exports) were also weak; the downturn was synchronized across markets.
- Contributing factors:
  - China phased-out tax credits on car purchases.
  - Tighter lending conditions for auto loans were observed in large car buyers (US, UK, China).
  - Structural changes: technological changes (demand for electric cars, car sharing) and higher environmental standards.
  - Policy and compliance shocks: increased tariffs on steel and aluminum, issues with emissions compliance in Germany, and expectations of the rise in car tariffs.

### Hungary’s exposure
- Motor vehicle industry in Hungary accounted for 4.9 percent of gross value added in 2017, and over 7 percent considering input linkages.
- Cars are Hungary’s top exports, followed by vehicle parts, and spark-ignition engines, all accounting for 16 percent of total exports.
- Germany is Hungary's most important trading partner (27 percent share), notably due to linkages with the German Value Chain.
- Hungary is a net exporter of car components; the ratio of export to import of car parts remained unchanged between 2007–17 compared to a decline in some competitors.

### Risks to output
- Demand shock example: a demand shock of a 10 percent decline in the demand for (and subsequently production of) German finished vehicles would lead to reductions in Hungary of:
  - Gross output: -0.25 percentage points.
  - Value added: -0.15 percentage points.
  (Source: Bank of Spain, 2019)
- Supply shock example: a supply shock of a 22.5 pps car tariff increase by the US on Hungarian car exports could shave off around 0.25 pps from Hungary's growth. (Source: Morgan Stanley Research (2019) based on latest available data as of 2014)
- Notes on transmission:
  - Economies directly exposed experience somewhat smaller declines as part of the shock is 'exported' to their main trading partners through reduced demand for intermediate goods imports.
  - Hungary’s direct car exposure to the US has declined in recent years.

### Mitigating factors and opportunities
- Demand cushioning:
  - Assuming lower demand elasticities for more expensive goods, Hungary is somewhat cushioned because production is concentrated on high-end (German brand) vehicles, unlike in Slovakia and to some extent in Czech Republic.
- Industry adaptation and FDI:
  - Several manufacturers are opening electric car production lines in their plants.
  - Battery production and exports are gaining speed due to FDI: Samsung, GS Yuasa, SK Innovations (Convergence Program, 2019).
- Policy recommendations to mitigate exposure and adapt to industry trends:
  - Increase productivity, including through targeted skills training and automation.
  - Upgrade transport and digital infrastructure.
  - Reduce impediments to doing business for domestic companies to become GVC suppliers and exporters.

*Prepared by S. Vtyurina.*

### 7.      Risks to debt sustainability, however, can be weighed against a number of mitigating

### 7.      Risks to debt sustainability, however, can be weighed against a number of mitigating factors.

### Mitigating factors
- Investor base:
  - Debt is now held predominantly by domestic financial institutions and households, with the non-resident component decreasing and estimated below 40 percent of total debt.
  - This factor—coupled with ample liquidity in the system and still relatively low demand for private sector credit—has incentivized banks to purchase sovereign debt.
- Buffers:
  - There is a cash cushion in the form of deposits accumulated by the public sector, which is around 5 percent of GDP.
  - This implies a lower public debt-to-GDP ratio on a net basis and some liquidity cushion that could help cover financing needs for a few months.

### Public sector debt sustainability baseline (selected figures, as of September 30, 2019)
- Nominal gross public debt: 75.0 (2017), 72.9 (2018), 70.2 (2019), 66.5 (2020), 64.0 (2021), 61.7 (2022), 59.8 (2023), 58.0 (2024), 56.2 (projection)
- Public gross financing needs: 14.7 (2017), 22.8 (2018), 21.6 (2019), 18.3 (2020), 15.5 (2021), 11.4 (2022), 10.8 (2023), 11.5 (2024), 12.4 (projection)
- Sovereign spreads:
  - EMBIG (bp) 3/100
  - 5Y CDS (bp) 79.8
- Real GDP growth (in percent): 0.8 (2017), 4.3 (2018), 5.1 (2019), 4.9 (2020), 3.5 (2021), 3.0 (2022), 2.6 (2023), 2.4 (2024), 2.2 (projection)
- Inflation (GDP deflator, in percent): 3.0 (2017), 3.7 (2018), 4.5 (2019), 3.0 (2020–2024)
- Nominal GDP growth (in percent): 3.8 (2017), 8.2 (2018), 9.9 (2019), 8.0 (2020), 6.6 (2021), 6.1 (2022), 5.7 (2023), 5.5 (2024), 5.3 (projection)
- Effective interest rate (in percent) 4/: 5.8 (2017), 3.8 (2018), 3.6 (2019), 3.1 (2020), 3.2 (2021), 3.1 (2022), 3.2 (2023), 3.4 (2024), 3.6 (projection)
- Change in gross public sector debt (cumulative): 1.6 (2017), -2.6 (2018), -2.7 (2019), -3.7 (2020), -2.5 (2021), -2.2 (2022), -1.9 (2023), -1.8 (2024); cumulative -14.0
- Identified debt-creating flows (cumulative): 1.4 (2017), -3.1 (2018), -3.6 (2019), -3.3 (2020), -2.5 (2021), -2.2 (2022), -1.9 (2023), -1.8 (2024); cumulative -13.4
- Primary deficit: -0.5 (2017), -0.2 (2018), 0.0 (2019), -0.1 (2020), -0.4 (2021), -0.3 (2022), -0.5 (2023), -0.6 (2024), -0.8 (projection); cumulative -2.7
- Primary (noninterest) revenue and grants: 45.9 (2017), 44.5 (2018), 44.3 (2019), 44.4 (2020), 43.9 (2021), 43.0 (2022), 42.6 (2023), 42.3 (2024), 42.3 (projection); cumulative 258.6
- Primary (noninterest) expenditure: 45.4 (2017), 44.3 (2018), 44.3 (2019), 44.3 (2020), 43.5 (2021), 42.7 (2022), 42.2 (2023), 41.7 (2024), 41.5 (projection); cumulative 255.9
- Automatic debt dynamics 5/ (cumulative): 1.9 (2017), -2.9 (2018), -3.6 (2019), -3.2 (2020), -2.1 (2021), -1.8 (2022), -1.4 (2023), -1.2 (2024), -0.9 (projection); cumulative -10.7
  - Interest rate/growth differential 6/: 1.2 (2017), -2.9 (2018), -4.1 (2019), -3.2 (2020), -2.1 (2021), -1.8 (2022), -1.4 (2023), -1.2 (2024), -0.9 (projection); cumulative -10.7
  - Of which: real interest rate: 1.9 (2017), 0.1 (2018), -0.7 (2019), 0.0 (2020), 0.1 (2021), 0.0 (2022), 0.1 (2023), 0.2 (2024), 0.3 (projection); cumulative 0.6
  - Of which: real GDP growth: -0.7 (2017), -3.0 (2018), -3.4 (2019), -3.2 (2020), -2.2 (2021), -1.8 (2022), -1.5 (2023), -1.4 (2024), -1.2 (projection); cumulative -11.3
- Exchange rate depreciation 7/: 0.6 (2017), 0.0 (2018), 0.5 (2019)
- Other identified debt-creating flows and contingent liabilities: 0.0 across presented years
- Residual, including asset changes 8/: 0.3 (2017), 0.5 (2018), 0.9 (2019), -0.4 (2020), 0.0 (2021–2024); cumulative -0.6

### Risk assessment and stress tests (selected outcomes and scenarios)
- Heat‑map and indicators (2018 benchmarks and country values):
  - Public debt held by non-residents: 41% (2018)
  - EMBIG: 136 bp (three-month average 11/1/2018–1/30/2019)
  - External financing requirement benchmarks: lower 5 percent of GDP, upper 15 percent of GDP
- Alternative scenarios (selected underlying assumptions, in percent):
  - Baseline scenario (2019–2024):
    - Real GDP growth: 4.6 (2019), 3.3 (2020), 2.9 (2021), 2.6 (2022), 2.4 (2023), 2.2 (2024)
    - Inflation: 3.0 (2019–2024)
    - Primary Balance: 0.2 (2019), 0.4 (2020), 0.4 (2021), 0.5 (2022), 0.6 (2023), 0.8 (2024)
    - Effective interest rate: 3.2 (2019), 3.2 (2020), 3.1 (2021), 3.2 (2022), 3.4 (2023), 3.6 (2024)
  - Historical scenario:
    - Real GDP growth: 4.6 (2019), 1.6 (2020–2024)
    - Inflation: 3.0 (2019–2024)
    - Primary Balance: 0.2 (2019), 0.5 (2020–2024)
    - Effective interest rate: 3.2 (2019), 3.2 (2020), 3.5 (2021), 3.9 (2022), 4.3 (2023), 4.7 (2024)
  - Constant Primary Balance Scenario:
    - Primary Balance: 0.2 (2019–2024)
- Stress test examples (selected projected paths for shocks, 2019–2024):
  - Primary Balance Shock: Primary balance 0.2 (2019), -0.2 (2020), -0.2 (2021), 0.5 (2022), 0.6 (2023), 0.8 (2024)
  - Real GDP Growth Shock: Real GDP growth 4.6 (2019), -0.2 (2020), -0.6 (2021), 2.6 (2022), 2.4 (2023), 2.2 (2024)
  - Real Interest Rate Shock: Effective interest rate 3.2 (2019), 3.2 (2020), 3.7 (2021), 4.3 (2022), 4.9 (2023), 5.5 (2024)
  - Real Exchange Rate Shock: Inflation 3.0 (2019), 7.4 (2020), 3.0 (2021–2024)
  - Combined Shock and Contingent Liability Shock: Primary balance can fall to -9.4 (2020) under contingent liability shock scenarios; effective interest rate can rise to 5.6 (2023) under combined shocks
- Stress-test outputs are presented in terms of:
  - Gross Nominal Public Debt (in percent of GDP) under baseline and shocks (2019–2024)
  - Gross Nominal Public Debt (in percent of Revenue) under baseline and shocks (2019–2024)
  - Public Gross Financing Needs (in percent of GDP) under baseline and shocks (2019–2024)

### External debt sustainability and external sector assessment (selected findings)
- External debt developments:
  - Gross external debt: 83.3 percent of GDP (2017), 79.6 percent of GDP (2018); projected toward 50 percent of GDP by 2024 under baseline
  - Net IIP: about -59.6 percent of GDP (2017), improved to about -54.2 percent of GDP (2018)
- Key external metrics (2014–2024 table excerpts):
  - Baseline: External debt: 118.4 (2014), 107.0 (2015), 95.7 (2016), 83.3 (2017), 79.6 (2018), 69.5 (2019), 63.0 (2020), 58.5 (2021), 54.7 (2022), 51.8 (2023), 49.1 (2024)
  - Change in external debt examples: 1.3 (2014), -11.4 (2015), -11.3 (2016), -12.3 (2017), -3.7 (2018), -10.1 (2019)
  - External debt-to-exports ratio: 121.4 (2014), 118.4 (2015), 105.2 (2016), 101.2 (2017), 90.1 (2018), 83.4 (2019), 76.2 (2020), 70.2 (2021), 64.9 (2022), 60.8 (2023), 56.3 (2024)
  - Gross external financing need (in billions of US dollars): 44.4 (2014), 33.7 (2015), 11.5 (2016), 17.5 (2017), 21.7 (2018), 20.7 (2019), 18.5 (2020), 14.6 (2021), 12.5 (2022), 10.1 (2023), 13.1 (2024)
- Annex II — External Sector Assessment (selected points):
  - Current account: switched into deficit in 2018; current account surplus declined from 2.3 percent of GDP (2017) to a deficit of 0.5 percent of GDP (2018).
  - Drivers: continuing strong domestic consumption and import-intensive investment; deficit on primary income increased mainly due to higher profit earned by foreign investors.
  - Medium-term projection: current account projected to improve somewhat as new capacities from recent large FDI start generating exports and investment-related imports wind down.
  - International reserves: increased by €4 billion in 2018 mainly due to EU transfers; reserve coverage of short-term debt increased to 155 percent (benchmark 100 percent).
  - External position assessment: Hungary’s external position is assessed to be moderately stronger than the medium-term fundamentals and desirable policies.
    - REER approaches suggest an overvaluation between 10 and 20 percent, with a large residual up to about 24 percent not explained by policy variables.
    - External Sustainability (ES) approach suggests the exchange rate may be undervalued by close to 11 percent, conditional on stabilizing NFA/GDP at its recent level consistent with a medium-term current account deficit of 2.5 percent of GDP.
    - CA approach estimates current account norm at -2.5 percent of GDP, implying an exchange rate undervaluation of about 6 percent; model estimates a current account gap of 2.4 percent of GDP in 2017, of which 2 percentage points are attributed to identified policies and 0.4 percentage points to the residual. A large part of the explained current account gap is attributed by the model to weak private sector credit.

*Source: IMF staff.*

### 5.      On balance, staff judges the external position in 2018 was moderately stronger than

### 1hunea2019001 - 5. On balance, staff judges the external position in 2018 was moderately stronger than

### External position assessment
- On balance, staff judges the external position in 2018 was "moderately stronger than medium-term fundamentals and desired policy settings."
- Estimates of CA gaps from CA and ES methods point to a stronger position, although the REER model provides some offsetting evidence.
- The exchange rate gaps from CA and ES models are around 10 percent, consistent with a moderately stronger external position.
- Despite sizable deleveraging in recent years, the external debt ratio should be reduced further, implying a higher CA norm than in the baseline model.
- The preliminary 2019 estimates suggest that the CA gap further narrowed towards 2 percent.
- Implementation of structural reforms would encourage more private investment (with attendant imports of investment goods), which would help move the external position closer towards the medium-term fundamentals and desired policy settings.

### Key indicators and metrics (as presented)
- Exchange rate gaps from CA and ES models: around 10 percent.
- Preliminary 2019 CA gap: towards 2 percent.
- Projections period referenced for reserves and short-term debt: 2019-24.
- FX turnover and volatility data points shown with dates: Jan-07, Oct-08, Aug-10, Jun-12, Apr-14, Jan-16, Nov-17; figure label: Aug-19.
- International Investment Position and Financial Account components presented as percent of GDP in figures.

### Policy implications and recommendations
- Reduce the external debt ratio further to support a higher CA norm relative to the baseline model.
- Advance structural reforms to raise private investment, acknowledging that increased investment imports would initially widen the current account but align the external position with fundamentals over the medium term.

### Risk Assessment Matrix (selected risks, likelihoods, impacts, and policy responses)
- Global: Sharp tightening of global financial conditions (short-term).
  - Relative Likelihood: High
  - Impact if Realized: Higher debt service and refinancing risks; stresses on leveraged firms, households, and vulnerable sovereigns; possible capital-account pressures.
  - Policy Response: Monetary policy may need tightening if capital outflows threaten the inflation target; fiscal policy should be attuned to evolving growth and financing conditions; public debt strategy might have to be revisited.
- Global: Rising protectionism and retreat from multilateralism (short to medium-term).
  - Relative Likelihood: High
  - Impact if Realized: Reduced trade, capital and labor flows; weaker growth through trade and confidence channels.
  - Policy Response: Allow automatic stabilizers to operate if near-term growth slows; keep monetary policy accommodative; advance structural reforms.
- Global: Weaker-than-expected global growth (short to medium-term).
  - Relative Likelihood: High/Medium
  - Impact if Realized: Hurt exports and tourism; weigh on economic growth.
  - Policy Response: Allow automatic stabilizers to operate if financing conditions allow; advance structural reforms to accelerate transition to higher sustainable growth.
- Domestic: Faster than expected wage growth or weaker investment activity (short/medium term).
  - Relative Likelihood: Medium
  - Impact if Realized: Faster wage growth could accelerate inflation; weaker investment (including smaller-than-expected EU fund disbursement) would dampen growth.
  - Policy Response: Trigger need for earlier monetary tightening; accelerate implementation of structural reforms to raise productivity and encourage investment.
- Domestic: Continued pro-cyclical policy mix (short/medium-term).
  - Relative Likelihood: Medium
  - Impact if Realized: Overheating, worsened debt sustainability, asset price bubbles, rising household indebtedness.
  - Policy Response: 1) Adopt a growth-friendly fiscal adjustment strategy. 2) Start unwinding unconventional monetary tools and tighten macroprudential ratios. 3) Raise the policy interest rate.

*Source: 1hunea2019001 - 5. On balance, staff judges the external position in 2018 was moderately stronger than*

### Annex IV. Response to Past Fund Policy Advice

### Annex IV. Response to Past Fund Policy Advice

### Implementation of Key Fund Recommendations
- Take advantage of the strong economic conditions and implement a growth-friendly fiscal consolidation to achieve a faster decline in public debt and deficit.
  - In 2018 the general government balance slightly overperformed the budget target and the public debt ratio declined moderately.
  - GDP growth and lower interest payments contributed substantially to the outcome.
  - The underlying structural balance deteriorated further, contrary to staff recommendation.
- Keep the monetary policy stance under review, in light of inflationary pressures and pro-cyclicality of fiscal policy.
  - As inflation remained below expectations in 2018, the MNB continued with accommodating monetary policy.
  - The MNB tightened policy in 2019 and unwound some unconventional measures but introduced new ones.
- Remain prudent and guard from financial sector risks, including those that can arise from the real estate market.
  - The MNB has pre-emptively tightened its macroprudential tools and is monitoring the real estate market.
  - Fiscal incentives continue to stimulate demand.
- Improve labor market policies.
  - The number of participants in the PWS has been reduced and the number of child-care facilities is being increased.
- Improve competitiveness indicators and remove impediments to doing business, especially for the SMEs sector.
  - Some measures have been taken to ease regulation, improve access to utility services, and reduce tax burden and para-fiscal costs on SMEs.
  - Competitiveness Agenda has been rolled out; while comprehensive, it falls short of addressing some weaknesses recommended by staff and other observers.

### Fund Relations and Technical Assistance (selected elements)
- Membership Status: Joined on May 6, 1982; Article VIII.
- Quota and holdings:
  - Quota: 1940.00 SDR Million, 100.00 percent.
  - Fund holdings of currency (Holdings Rate): 1640.76 SDR Million, 84.58 percent.
  - Reserve tranche position: 299.24 SDR Million, 15.42 percent.
- SDR Department:
  - Net cumulative allocation: 991.05 SDR Million, 100.00 percent.
  - Holdings: 2.67 SDR Million, 0.27 percent.
- Outstanding Purchases and Loans: None.
- Latest Financial Arrangements (selected):
  - Stand-By Nov 6, 2008 – Oct 5, 2010; Amount Approved: 10,537.50 SDR Million; Amount Drawn: 7,637.00 SDR Million.
- Technical Assistance (FY2010–2016) examples:
  - MCM Banking Supervision — June 2009.
  - LEG Bank Resolution Framework — September 2009.
  - FAD Expenditure Policy — October 2009, June 2010.
  - MCM Monetary Policy — February 2010.
  - FAD Tax Policy — September 2010.
  - MCM Monetary and Foreign Exchange Policy — June 2011, November 2011.
  - FAD PIT and CIT Micro-Simulation — January 2018.
  - FAD VAT Gap Analysis — February 2018.

### Statistical Issues and Data Adequacy
- General assessment: Data provision is adequate for surveillance.
- Government Finance Statistics:
  - Authorities compile and disseminate comprehensive general government annual and quarterly accrual based data according to the ESA 2010 methodology.
  - Data include non-financial accounts, financial accounts, and financial balance sheet, and are bridged into the GFSM 2014 framework and provided to the Fund through Eurostat for the IFS and GFS yearbooks.
  - Improvements needed: provision of monthly cash-basis central government accounts on an automatic basis, and regular provision of data on revenue and expenditure arrears, local government revenues and expenditures, and financial statements of state-owned enterprises to facilitate closer monitoring on an accrual basis.
- Data Standards and Quality:
  - Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since May, 1996.
  - Published ROSC Data Module in 2001 with updates; latest update cited: Hungary: Report on the Observance of Standards and Codes—Data Module, 2004 Update (July 2004).

### Table of Common Indicators (as of September 30, 2019) — selected entries and metadata
- Exchange Rates: Latest observation 10/30/2019; Date received 11/2/2019; Frequency: Daily and Monthly.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation August 2019; Date received 09/30/2019 (Preliminary); Frequency Monthly.
- Reserve/Base Money: Latest observation September 2019; Date received 10/30/2019; Frequency Monthly.
- Broad Money: Latest observation September 2019; Date received 10/30/2019; Frequency Monthly.
- Central Bank Balance Sheet, Consolidated Balance Sheet of the Banking System, Interest Rates, Consumer Price Index, Revenue/Expenditure/Balance for General and Central Government: Latest observations September 2019; Date received 10/30/2019; Frequency Monthly.
- Stocks of Central Government and Central Government-Guaranteed Debt: Latest observation December 2018; Date received 10/30/2019; Frequency Quarterly.
- External Current Account Balance, Exports and Imports of Goods and Services, GDP/GNP, Gross External Debt, International Investment Position: Latest observation Q2 2019; Date received 10/30/2019; Frequency Quarterly.
- Data quality assessments use the O/LNO/LN O/NO scale for methodological soundness and accuracy and reliability; assessments referenced to ROSC and Substantive Update findings from May 2001 and July 2004.

### Statement by Szilard Benk, Alternate Executive Director (summary of authorities’ views)
- Economic performance:
  - Hungary registered 5.1 percent growth in 2018; similar performance expected in 2019.
  - Unemployment is at historic low levels at close to 3 percent.
  - Investment rate exceeded 26 percent by 2019.
  - Public debt-to-GDP ratio decreased from above 80 percent in 2011 to around 68 percent by the end of 2019, and is expected to decline further.
- Fiscal policy and plans:
  - After a 1.8 percent deficit in 2019, the 2020 budget foresees a further reduction in the overall deficit to 1 percent.
  - Exceptionally high contingency reserves of about 1 percent of GDP are budgeted as a buffer.
  - Medium-term aim: zero overall deficit, aligned with staff’s proposed medium-term target.
  - Improvements in tax collection and whitening of the economy credited to on-line cash registers and electronic billing; VAT-gap now well below the EU average.
- Monetary and financial sector policies:
  - MNB policy rate unchanged at 0.9 percent since 2016; minor tightening of the interest rate corridor in March (year not specified in this extract).
  - New MNB instruments: Funding for Growth Scheme Fix (FGSfix) launched beginning of 2019 targeting SMEs; Bond Funding for Growth Scheme (BGS) launched in July (year not specified in this extract) targeting larger enterprises, purchasing bonds with at least B+ rating.
  - Banking sector: strong capital adequacy ratios and liquidity coverage ratio well above regulatory requirements; banks expanding loans to the private sector.
  - MNB recommendations on mortgages: advise banks to offer customers with variable-rate mortgage loans the option to transition to a fixed-rate scheme.
  - MNB initiatives: frameworks for “Certified Consumer Friendly Housing Loans” and “Certified Consumer Friendly House Insurance”; FinTech strategy published in October (year not specified in this extract) with 24 initiatives.
- Structural reform agenda:
  - Government’s Program for a More Competitive Hungary covers employment, business environment, taxation, public sector, education and healthcare.
  - New SME strategy targets access to finance, reduced administrative burdens, and targeted support including innovation and access to export markets.
  - MNB’s 330-point proposal to unlock growth potential: of 330 points, progress in 165 points, with 33 partially or fully completed.
- Authorities’ assessment of Fund advice:
  - Broad agreement with staff’s assessment and appreciation of policy dialogue and recommendations.
  - Disagreement with staff’s categorization of fiscal space as “at risk” in the pilot Fiscal Space Assessment Framework; authorities consider “some fiscal space” more appropriate.
  - Commitment to prudent policies focused on promoting growth, sustainable debt reduction, improving competitiveness, and reducing financial vulnerabilities.

*Source: Annex IV. Response to Past Fund Policy Advice, staff report excerpts and statement by Szilard Benk (Hungary), IMF informational annex content as provided.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1hunea2019001.pdf_