## Macro-Financial Vulnerabilities (_cr09105)

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### I. Introduction and summary
- Policy implementation: in line with the program; economic outlook worsened and financial market stress persists.
- 2008Q4 compliance: performance criteria, indicative target, structural performance criterion and benchmarks met.
- Revised program objectives:
  - Fiscal: combine permanent spending reductions with a temporary slowing of headline fiscal consolidation to avoid an excessively large negative impulse to demand.
  - Financial stability: ensure continuity of bank safety net; strengthen remedial action and resolution regimes; improve HFSA capabilities.
  - Monetary/exchange rate: continue to target inflation over the medium term while prepared to act to mitigate financial stability risks.
- Implementation risks:
  - Major risks: further deterioration in trading-partner outlook; delay in global financial improvement; sharper contraction in domestic demand.
  - Political context: ruling party short of a parliamentary majority; Fund staff extensive outreach.
- Cooperation: EU first tranche €2 billion disbursed December 2008; second disbursement €2 billion expected in March; regular Fund–EC–World Bank consultations.

### Box 1 — Key vulnerabilities (summary)
- Public debt and fiscal history:
  - Fiscal deficits averaged more than 8 percent of GDP between 2002 and 2006.
  - General government debt estimated 72 percent of GDP at end-2008.
- Private sector and external debt:
  - Gross external debt estimated at 114 percent of GDP at end-2008.
  - Rapid private sector debt growth following EU accession; large unhedged foreign currency debts.
- Banking and currency exposure:
  - Widespread bank lending in foreign currencies; sizeable unhedged household and corporate foreign currency debts.
  - Private-sector vulnerability to forint depreciation would deteriorate banking-sector credit quality.

### II. Recent developments (late 2008–early 2009)
- FX and sovereign debt markets:
  - Forint: slight appreciation after program announcement; considerable depreciation since turn of year, roughly in line with some Central European currencies.
  - Government securities: short-term bill auctions generally went well but bid-to-cover fell and bid spreads rose; long-term bond auctions resumed in February; secondary-market yields increased since start-2009; CDS spread returned to October levels.
- Banking sector:
  - Banks accumulated liquid assets; lending to economy came to a standstill.
  - Foreign currency funding became expensive and short-term for many banks.
  - Profits fell sharply in 2008Q4 due to higher funding costs and provisions; loan delinquencies have begun to rise.
- External financing and reserves:
  - Parent bank funding to Hungarian subsidiaries increased in 2008Q4 then remained stable.
  - Nonresident holdings of forint government securities fell sharply through December.
  - Hungary’s external debt estimated 114 percent of GDP at end-2008.
- Real economy and prices:
  - Real GDP (preliminary) 2008: 0.6 percent (2008 as a whole; original program: 1.8 percent).
  - Industrial output down 23 percent in January (y-o-y).
  - PMI and economic sentiment at all-time lows in January.
  - Unemployment rate: 8.4 percent in three months to January.
  - CPI inflation: 6.7 percent in June 2008 → 3.0 percent in February 2009.
  - Private sector wage growth excl. bonuses: 6.8 percent y-o-y in December.
  - 2008Q4 current account deficit expected ≈ 8 percent of GDP, 2 percentage points higher than original program.

### III. Policy discussions — Macroeconomic framework and projections
- Growth and inflation (revised):
  - Real GDP growth projected: -3.3 percent for 2009 (original program: -1.0 percent).
  - Average inflation in 2009 projected: 3.8 percent (original program: 4.5 percent).
- Banking and credit:
  - Bank credit to the economy (excluding valuation changes): expected to contract in nominal terms.
  - Deposit growth: projected stagnation as corporations draw down deposits; household deposits may increase.
- External sector:
  - Current account deficit expected to narrow to 3.9 percent of GDP.
  - Adjustment relative to 2008 roughly 4 percent of GDP (in line with original program).
  - External financing assumptions:
    - Parent banks roll over 80 percent of funding to subsidiaries.
    - Rollover rates for other debt forms assumed 70 percent.
  - Gross reserves still do not cover short-term debt at remaining maturity despite net international reserves above floor in 2008Q4.
  - Available instruments to mitigate downward exchange rate pressure: FX swaps, bank support package, intervention in disorderly markets.
  - Use of such resources in projections would exceed EU and World Bank disbursements → gradual decline in central bank NFA; central bank sterilizes by injecting forint liquidity.
  - Government deposits at central bank roughly stable as EU and World Bank disbursements finance fiscal deficit and external obligations.
- Medium-term outlook and debt paths:
  - Growth anticipated to recover slowly; real depreciation and partner growth to stimulate exports.
  - External debt-to-GDP expected to peak at 131 percent at end-2009 (higher than original program) then decline.
  - A steady rise in the primary surplus essential to keep government debt-to-GDP on a declining path under adverse shocks; further depreciation would worsen debt outlook significantly.

### III.B Fiscal policy — performance, revisions, structural measures
- 2008 fiscal outturn:
  - Central government system primary surplus: 0.8 percent of GDP (above program floor).
  - Overall central government system deficit 2008: 3.3 percent of GDP (accrual and cash), 0.1 percentage point better than original program.
  - Expenditure control aided by freeze of most budgetary reserves; revenue performance good despite corporate income tax shortfalls and higher tax arrears due to bankruptcies.
- Revised 2009 objectives and measures:
  - Revenue shortfall vs. 2009 budget: estimated about 1.1 percent of GDP.
  - To limit demand impact, program allows temporary slowing of headline consolidation if accompanied by measures assuring future adjustment.
- Structural measures to enhance fiscal sustainability:
  - Core: pension reform (performance criterion), better targeting of social transfers, rationalizing subsidies.
  - Staff view: new pension indexation formula is complicated and procyclical; lower long-term savings than straight price indexation; further reforms desirable.
  - Budgetary savings from program measures expected to grow to 1.2 percent of GDP in 2010 and 1.4 percent of GDP in 2011.
- 2009 deficit target and adjustment composition:
  - Fiscal deficit target for 2009 relaxed from 2.6 percent of GDP to 2.9 percent of GDP.
  - Targeted structural adjustment increased from 2.5 percentage points of GDP to 3.3 percentage points of GDP.
  - Authorities preferred general government deficit target (accrual basis) below 3 percent of GDP.
  - Measures expected to yield savings ≈ ¾ percent of GDP, largest from line-ministry allocations, agricultural subsidies, and health care expenditures.
  - Scoring uncertainties: better targeting of disability pensions and reduction in energy subsidies.
  - Higher deficit financed by greater use of official financing from EU and World Bank.

### Risks to program targets and fiscal outlook
- Key risk channels:
  - Growth, inflation, and interest payments could be less favorable than forecast → higher overall fiscal deficit.
  - Tax revenue underperformance due to declining compliance during crisis.
  - Implementation risks in spending cuts for public health institutions and farm subsidies.
- Contingency and fiscal stance:
  - Contingency buffer in budget: 0.3 percent of GDP.
  - Further measures required in 2010–11 to attain envisaged consolidation.
  - No supplementary budget needed as planned reduction in spending does not exceed 5 percent threshold.

### Fiscal reform, tax measures, and institutions
- Comprehensive tax reform objectives/timing:
  - Shift tax burden from labor to consumption; revenue-neutral (LOI ¶16).
  - Enactment expected by June 2009; mostly effective July 1, 2009.
  - Additional measures for 2011, including proposal for a central property tax to replace inefficient local property taxes gradually.
- Labor tax reform specifics (preserve numeric fidelity):
  - Employers’ social security contributions reduced by 5 percentage points:
    - effective July 1, 2009 for income up to twice the minimum wage;
    - effective in 2010 for whole income.
  - Personal income tax payments reduced via increased tax brackets.
  - Individual solidarity tax of 4 percent and corporate solidarity tax eliminated as of 2010.
  - Offsets:
    - Normal VAT rate raised by 3 percentage points (effective July 1, 2009).
    - Excise duties on alcohol, tobacco and fuel increased by 5 percent on average.
    - From 2010: corporate income tax base broadened and normal rate set at 19 percent; personal income tax base to include all fringe benefits and universal social benefits; most deductions abolished except family allowance and allowance for long term saving.
- Fiscal institutions:
  - Fiscal Responsibility Law adopted November 2008 (structural benchmark).
  - Fiscal Council appointed; authorities committed to provide funding (LOI ¶11).

### Financial sector policies, risks, and safeguards
- Banking system indicators and exposures:
  - Forint liquidity positions improved; capital positions well above regulatory requirements (Table 8 and LOI ¶17).
  - NPLs end-2008: 2.9 percent of gross loans.
  - Largest domestic bank (no foreign parent): consolidated capital adequacy ratio 15.3 percent (Tier I 11.2 percent).
  - More than 70 percent of loans to households denominated in foreign currencies, notably Swiss francs.
- Emerging risks:
  - External funding likely expensive and constrained; rollover risk higher for banks without strong foreign parent.
  - FX swap market volatile with short maturities.
  - Rising unemployment and corporate defaults will increase loan delinquencies.
  - Further exchange rate weakening could trigger significant deterioration in banks’ asset quality and sharp fall in profitability due to higher funding costs and loan–loss provisions.
- Supervisory strengthening and action plan:
  - HFSA action plan to strengthen on-site bank examination capabilities to be developed by end-May 2009 (structural benchmark).
  - HFSA to conduct comprehensive reviews of end-2008 reports and expand on-site inspections starting Q2 2009 with World Bank support.
  - Strengthen cooperation with foreign supervisors.
- Bank support framework and safeguards:
  - Financial Stability Act (December 2008) allows government guarantees for newly issued bank debt and capital enhancement by voluntary or mandatory means (LOI ¶18).
  - Conditions: limits on management compensation; issuance of preferred share to state with veto rights.
  - EC confirmed schemes comply with EU state aid rules.
  - Program measures:
    - Deadline for capital enhancement applications extended end-March 2009 → end-2009.
    - Clarified mandatory capital enhancement conditions; strengthened provisions protecting public resources on acquisition of shareholders’ stakes.
    - Government allowed to lend directly to banks; loans and pricing to follow EU guidelines.
    - Safeguards: government board seat, information access, enhanced monitoring by Financial Stability Committee subcommittee (structural performance criterion end-March 2009; continuous structural benchmark for consultation with Fund staff).
- Remedial action and resolution regime reforms:
  - HFSA emergency powers established December 2008; proposed remedial framework changes (structural benchmark).
  - HFSA may impose additional reporting requirements and intervene at higher capital adequacy ratio (4.8 percent versus 4.0 percent).
  - HFSA to gain powers to intervene in subsidiaries of troubled parent banks.
  - Further broadening of HFSA and special administrator powers to be passed by end-June 2009 (structural benchmark), constrained by constitutional shareholder protections.
- Loan restructuring and borrower support:
  - Voluntary agreement on loan maturity extensions, temporary repayment easing, and FX→forint conversion extended until end-2009.
  - Law passed early March to provide temporary state guarantees for mortgage payments of the unemployed.
  - Work to amend corporate bankruptcy regime; personal bankruptcy at concept stage.

### Monetary and exchange rate policy stance and instruments
- Inflation and policy rate actions:
  - CPI inflation December 2008: 3.5 percent (original program projection: 5.1 percent).
  - Lower inner band of inflation consultation mechanism (4.1 percent) breached.
  - Policy rate: raised 300 bps in October; cut four times by 50 bps each between November and January; unchanged in February.
- Policy guidance:
  - Aim: prevent too rapid fall in inflation while safeguarding financial stability.
  - Mid-point targets under inflation consultation mechanism set at 3.0 percent for all 2009 review dates (LOI ¶23).
  - Further interest rate cuts should be gradual and cautious to avoid excessive exchange-rate depreciation and balance-sheet instability.
  - Central bank ready to act to mitigate disruptive exchange-rate movements and modify/expand liquidity facilities as needed.
- Liquidity and FX swap facilities:
  - New facilities introduced to improve domestic and foreign currency liquidity and strengthen banks’ lending incentives (Figure 3, LOI ¶25).
  - Temporary 6-month FX swap facility (early March) open to banks that maintain/expand long-term external funding and maintain corporate lending; seven banks applied, including four of six largest foreign-parent subsidiaries.
  - 3-month FX swap facility priced at least 50 bps above 6-month facility.

### Program modalities, conditionality, and safeguards
- Stand-By Arrangement parameters:
  - Access: SDR 10.5 billion (1015 percent of quota). 
  - Length: 17 months (through end-March 2010).
  - Phasing:
    - SDR 4.2 billion made available after Board approval on November 6, 2008.
    - Second tranche subject to first review: SDR 2.1 billion.
    - Subsequent disbursements contingent on further quarterly reviews.
- Quantitative and structural conditionality highlights:
  - Quantitative performance criteria: floor on CGS primary cash balance; band around 12-month CPI; floor on change in net international reserves; non-accumulation of external debt arrears.
  - Indicative target: ceiling on total debt stock of the CGS.
  - Structural performance criteria by end-March 2009: submission of pension reform legislative changes; submission of amendments to Financial Stability Act; establishment of Financial Stability Committee subcommittee to monitor banks receiving government support.
  - Structural benchmarks: passage of HFSA remedial powers amendments by end-June 2009; development of HFSA action plan by end-May 2009; operation of subcommittee and consultation with Fund staff (continuous).
- Safeguards assessment:
  - Central bank safeguards assessment finalized January 2009: relatively strong framework; recommendations to improve program data reporting and strengthen audit oversight; authorities taking steps per timeline.
- Letter of Intent modifications:
  - Adjust performance criterion for net international reserves upward to lock in end-December overperformance.
  - Set inflation consultation bands around central bank target.
  - Propose three new structural performance criteria and three new structural benchmarks (deadlines as above).
  - No change to level of access or purchase schedule.

### Staff appraisal and program support
- Staff judgments:
  - Policy implementation largely in line with program; quantitative criteria for 2008Q4 met.
  - CPI inflation in December 2008 below inner band due largely to exogenous global energy price declines.
  - Continued global strains and worse macro outlook pose significant challenges; external financing difficult amid deleveraging.
  - Revised measures aim to strengthen fiscal sustainability while avoiding excessive negative demand impulse; pension and tax reforms to yield medium-term benefits.
  - Essential measures: enact technical Financial Stability Act amendments, strengthen bank resolution regime and HFSA remedial powers, develop HFSA action plan.
- Staff recommendation:
  - Support completion of the first review under the Stand-By Arrangement.
  - Primary prescription: implement policies consistent with the program to maximize chances to weather current difficulties.

### Key projections and indicators (selected exact figures)
- Real GDP growth (staff illustrative medium-term scenario): 2005: 4.0; 2006: 4.0; 2007: 1.1; 2008: 0.6; 2009: -3.3; 2010: -0.4; 2011: 2.5.
- Selected domestic demand components (2005–11, selected):
  - Private consumption: 2009: -3.7; 2010: -0.8; 2011: 1.0.
  - Gross fixed capital formation: 2009: -5.0; 2010: 1.1; 2011: 5.0.
  - Exports of GNFS: 2009: -3.2; 2010: 3.8; 2011: 4.6.
  - Imports of GNFS: 2009: -4.3; 2010: 3.0; 2011: 4.3.
- Inflation (CPI average): 2009: 3.8.
- Unemployment rate (average): 2009: 8.5.
- General government balances (ESA-95, percent of GDP):
  - Overall balance: 2008: -3.3; 2009 (prog): -2.9; 2010 (prog): -2.5; 2011 (prog): -2.2.
  - Primary balance: 2008: 0.6; 2009 (prog): 1.5.
- Gross public debt (percent of GDP): 2008: 67.4; 2009 (prog): 72.2; 2010 (prog): 75.9; 2011 (prog): 72.0.
- External position:
  - Current account (percent of GDP): 2008: -7.8; 2009 (prog): -3.9; 2010 (proj): -3.4; 2011 (proj): -3.1.
  - Gross external debt (percent of GDP): 2008: 106.4; 2009 (prog): 114.4; 2010 (prog): 131.1; 2011 (proj): 127.2.
  - Gross official reserves (EUR millions): 2008: 24,040.
- Stand-By Arrangement schedule (selected):
  - Approval: November 6, 2008 — 4,215.0 million SDRs (40.59 percent of quota).
  - First review: March 25, 2009 — 2,107.5 million SDRs (20.30 percent of quota).
  - Total access: 10,537.5 million SDRs (1014.8 percent of quota) across schedule.

### Public sector debt sustainability (Appendix Table 1 — selected entries)
- External debt, baseline (percent of GDP): 2008: 114.4; 2009: 131.0; 2010: 127.1; 2011: 123.1; 2012: 116.3; 2013: 108.5; 2014: 100.7.
- Change in external debt (percent of GDP): 2009: 17.2; 2010: 16.7; 2011: -3.9; 2012: -4.0; 2013: -6.8; 2014: -7.8.
- Gross external financing need (EUR billions): 2009: 54.3; 2010: 44.8; 2011: 43.6; 2012: 48.3; 2013: 54.7; 2014: 55.1.
- Gross external financing need (percent of GDP): 2009: 59.0; 2010: 45.8; 2011: 41.8; 2012: 42.6; 2013: 44.5; 2014: 39.2.
- Automatic debt dynamics (contribution, percent of GDP): 2009: 10.7; 2010: 6.8; 2011: 3.3.
- Contribution from nominal interest rate (percent of GDP): 2009: 6.3; 2010: 6.2; 2011: 6.3.
- Contribution from real GDP growth (percent of GDP): 2009: 4.4; 2010: 0.6; 2011: -3.0.
- External debt-to-exports ratio (percent): 2009: 148.6; 2010: 143.1; 2011: 141.2.
- Scenario with key variables at historical averages (selected): 2009: 131.0; 2010: 125.9; 2011: 124.8; 2014: 125.3.

### Key program monitoring definitions and targets (selected)
- CPI consultation framework:
  - Central point for end-quarter inflation: 3 percent.
  - Consultation bands: lower and upper bands of ±1 and ±2, respectively.
  - End-March 2009 and end-June 2009: performance criteria; end-September 2009 and end-December 2009: indicative targets.
  - Accountability: authorities to report public reasons for any inner-band breach and policy response; MNB to consult with Fund staff if inner band breached; if outer band breached, consultation before further purchases.
- Cash primary balance of Central Government System (cum. from Jan 1, 2009, billions of HUF):
  - End-March 2009 (performance criterion): -280
  - End-June 2009 (performance criterion): -55
  - End-September 2009 (indicative target): 155
  - End-December 2009 (indicative target): 440
- Indicative ceiling on overall stock of CGS debt (HUF billions):
  - End-December 2008 (actual): 15,925
  - End-March 2009 (indicative ceiling): 15,872
  - End-June 2009 (indicative ceiling): 15,645
  - End-September 2009 (indicative ceiling): 15,526
  - End-December 2009 (indicative ceiling): 15,487
- Net EU transfers (HUF billions, program projection):
  - End-March 2009: 207.65
  - End-June 2009: 12.62
  - End-September 2009: -103.40
  - End-December 2009: -167.59
- Cash reserves at Single Treasury Account (HUF billions, program projection):
  - End-March 2009: 295.93
  - End-June 2009: 452.11
  - End-September 2009: 120.53
  - End-December 2009: 118.97
- NIR outstanding stock:
  - End-December 2008: 18,493.8 (in millions of euros)
- External program disbursements (cumulative from end-December 2008, EUR millions):
  - End-March 2009 (program projection): 2,000
  - End-June 2009: 4,000
  - End-September 2009: 4,000
  - End-December 2009: 5,500

### Policy implications and priorities (from analysis and projections)
- Fiscal:
  - Maintain and implement program fiscal consolidation measures to stabilize public debt and secure projected primary balance.
  - Implement structural fiscal reforms (pension reform, better targeting of transfers, subsidy rationalization) to yield medium-term savings (1.2 percent of GDP in 2010; 1.4 percent in 2011).
- External liquidity:
  - Safeguard external liquidity through program financing and coordination with EU and multilateral partners to address short-term financing gaps and reserve volatility.
- Financial sector:
  - Support banking-sector resilience: monitor FX exposures, ensure adequate provisioning, preserve rollover support from parent banks to limit spillovers.
  - Strengthen HFSA operational capacity (action plan by end-May 2009) and legal remedial/resolution framework (benchmarks by end-June 2009).
- Program implementation:
  - Ensure timely completion of program reviews (staff supports first review completion) to unlock scheduled Fund disbursements and broader program financing.
  - Continue careful program monitoring and policy dialogue with the Fund; authorities committed to adjust policies as necessary.

*Source: _cr09105 - 1. Macro-Financial Vulnerabilities; Appendix Table 1 and IMF staff report excerpts provided in the prompt.*

### 1. Macro-Financial Vulnerabilities ................................................................................5

### 1. Macro-Financial Vulnerabilities

### I. Introduction and summary
- Policy implementation has been in line with the program, but the economic outlook has worsened and financial market stress persists.
- Performance criteria, indicative target, structural performance criterion and benchmarks for 2008Q4 were all met.
- The program was revised to reflect the deterioration in the macroeconomic outlook:
  - Additional fiscal measures aim to strengthen fiscal sustainability while avoiding an excessively large negative impulse to demand by combining permanent reductions in spending with a temporary slowing of headline fiscal consolidation.
  - The revised program emphasizes measures to help preserve financial stability, including ensuring the continuity of the safety net for banks, strengthening remedial action and resolution regimes, and improving the HFSA’s capabilities.
  - Monetary and exchange rate policy will continue to target inflation over the medium term while being prepared to act as needed to mitigate risks to financial stability.
- Implementation risks remain:
  - Major risks: a further deterioration in the outlook for trading partners; a further delay in the expected improvement in the global financial environment; a sharper-than-projected contraction in domestic demand.
  - Political context: the ruling party is short of a majority in parliament; Fund staff have undertaken extensive outreach to the media and the political opposition.
- Continued cooperation with the European Commission (EC) and World Bank:
  - First tranche (€2 billion) of the EU’s balance of payment support was disbursed in December 2008.
  - Second disbursement (€2 billion) is expected in March; EC fielded a parallel mission.
  - Fund and EC staff consulted regularly; Fund staff cooperated closely with World Bank staff.

### Box 1 — Hungary: Macro-Financial Vulnerabilities (key findings)
- Financial market strains result from the confluence of global deleveraging and high underlying balance sheet vulnerabilities.
- Public debt:
  - Fiscal deficits averaged more than 8 percent of GDP between 2002 and 2006.
  - General government debt is estimated to be 72 percent of GDP at end-2008.
  - Government refinancing needs are substantial.
- Private sector and external debt:
  - Private sector debt grew rapidly, fueled by capital inflows following EU accession.
  - Gross external debt is estimated at 114 percent of GDP for end-2008.
- Banking and currency exposure:
  - Bank lending in foreign currencies is widespread.
  - Households and corporations accumulated sizeable and largely unhedged foreign currency debts.
  - Private sector vulnerability to a depreciation of the Hungarian forint would translate into deteriorating credit quality for the banking sector.

### II. Recent developments
- Financial market developments (late 2008–early 2009):
  - The forint appreciated slightly after the program announcement but depreciated considerably since the turn of the year, roughly in line with some other Central European currencies.
  - Government securities market: short-term bill auctions generally went well, but bid-to-cover ratio fell and bid spread rose; government auctioned long-term bonds in February for the first time since October, but plans for further auctions were canceled; secondary market yields increased across the board since start of 2009; CDS spread returned to October levels.
  - Banks’ operating environment deteriorated: banks accumulated liquid assets, lending to the economy came to a standstill; foreign currency funding has become expensive and short-term for many banks; profits fell sharply in 2008Q4 due to higher funding costs and provisions; loan delinquencies have begun to rise.
  - External financing: parent bank funding to Hungarian subsidiaries increased in 2008Q4 but then remained stable; nonresidents’ holdings of forint-denominated government securities fell sharply through December.
  - Hungary’s external debt is estimated to have increased to 114 percent of GDP at end-2008.
- Real economy and prices:
  - Real GDP (preliminary) for 2008: 0.6 percent for 2008 as a whole (compared to 1.8 percent under the original program).
  - Industrial output fell by 23 percent in January (y-o-y), driven by declines in car and consumer electronics industries.
  - Purchasing Managers Index and economic sentiment index fell to all-time lows in January.
  - Unemployment rate increased to 8.4 percent in the three months to January.
  - Real estate prices flat amid low turnover.
  - CPI inflation declined from 6.7 percent in June 2008 to 3.0 percent in February 2009.
  - Private sector wage growth excluding bonuses slowed to 6.8 percent y-o-y in December.
  - Current account: 2008Q4 current account deficit expected to be about 8 percent of GDP, 2 percentage points of GDP higher than under the original program; both imports and exports contracted sharply.

### III. Policy discussions
#### A. Macroeconomic framework (revised projections and assumptions)
- Growth and inflation:
  - Real GDP growth projected at -3.3 percent for 2009 (compared to -1.0 percent under the original program).
  - Average inflation in 2009 projected at 3.8 percent (compared to 4.5 percent under the original program).
- Banking and credit:
  - Bank credit to the economy (excluding valuation changes) is expected to contract in nominal terms.
  - Deposit growth projected to stagnate as corporations draw down deposits; household deposits may increase due to precautionary savings.
- Current account and external financing:
  - Current account deficit expected to narrow to 3.9 percent of GDP.
  - Adjustment relative to 2008 is roughly 4 percent of GDP, in line with the original program projections.
  - Projections for both imports and exports revised down.
  - Continued cautious external financing assumptions retained:
    - Parent banks assumed to roll over 80 percent of funding to their subsidiaries.
    - Rollover rates for other forms of debt, including corporate debt, assumed to be 70 percent.
  - Despite an increase in net international reserves above the program floor in 2008Q4, gross reserves still do not cover short-term debt at remaining maturity.
  - Available official instruments to mitigate downward exchange rate pressure: foreign exchange swaps, the bank support package, and intervention in disorderly market conditions.
  - Use of such resources in program projections would exceed disbursements from the EU and the World Bank, resulting in a gradual decline in the central bank’s net foreign assets (NFA). The central bank would sterilize the fall in NFA by injecting forint liquidity.
  - Government deposits at the central bank would remain roughly stable as EU and World Bank disbursements finance the fiscal deficit and help meet external debt obligations.
- Medium-term outlook:
  - Growth anticipated to recover only slowly.
  - Real depreciation of the exchange rate and rebound in partner-country growth should stimulate exports.
  - Moderation of global financial market stress expected to support private investment; fiscal measures under the program expected to buttress fiscal sustainability.
- Debt paths:
  - Program aims to put government and external debt on sustainable paths.
  - A steady rise in the primary surplus is essential to keep government debt-to-GDP on a declining path under a broad range of adverse shocks.
  - External debt-to-GDP ratio expected to peak at 131 percent at end-2009 (higher than under the original program) and then gradually decline.
  - The debt outlook would worsen significantly if the exchange rate were to depreciate further.

#### B. Fiscal policy (performance, revisions, and structural measures)
- 2008 fiscal performance:
  - Primary surplus of the central government system was 0.8 percent of GDP, slightly above the program floor (performance criterion).
  - Overall deficit of the central government system for 2008 estimated at 3.3 percent of GDP (both on an accrual and cash basis), or 0.1 percentage point better than under the original program.
  - Expenditure control aided by freeze of most budgetary reserves; revenue performance was good despite shortfalls in corporate income tax and higher tax arrears (mainly owing to bankruptcies).
  - The budget for 2009 (adopted in December 2008) was consistent with the fiscal adjustment envisaged under the program, though the decline in the wage bill was smaller than expected (mainly offset by smaller reserves).
- Revised program objectives and measures:
  - Immediate issue: address revenue shortfall associated with weaker macroeconomic outlook (estimated to be about 1.1 percent of GDP relative to the 2009 budget).
  - Given fragile external financing conditions, reducing the government’s financing need between 2008 and 2009 is essential to build confidence in fiscal sustainability.
  - To limit the negative impact on demand, the program allows a temporary slowing of headline fiscal consolidation if accompanied by measures assuring future adjustment.
- Structural measures to enhance fiscal sustainability:
  - Core measures: pension reform (performance criterion), improving targeting of social transfers, and rationalizing subsidies.
  - Staff view: the new indexation formula for pensions is complicated and procyclical, and entails lower long-term savings than straight price indexation; further reforms of social transfers (such as maternity leave and housing subsidies) remain desirable.
  - Budgetary savings from measures in the program are expected to grow over time, reaching 1.2 percent of GDP in 2010 and 1.4 percent of GDP in 2011.
- 2009 deficit target and composition of adjustment:
  - Fiscal deficit target for 2009 relaxed from 2.6 percent of GDP to 2.9 percent of GDP.
  - Given weaker economic activity, this implies an increase in the targeted structural adjustment from 2.5 percentage points of GDP to 3.3 percentage points of GDP.
  - Authorities preferred a general government deficit target (accrual basis) of below 3 percent of GDP in line with EU commitments.
  - Staff suggested a mix of well-targeted tax and expenditure measures to limit the impact on demand; authorities preferred spending cuts given high government expenditure.
  - Measures in the revised program expected to yield savings of about ¾ percent of GDP, with largest contributions from cuts in allocations to line ministries, agricultural subsidies, and health care expenditures.
  - Scoring of some measures is uncertain, particularly better targeting of disability pensions (relying on stricter enforcement of existing rules) and reduction in energy subsidies (linked to prices).
  - Higher deficit will be financed by greater use of official financing from the EU and the World Bank.

*Source: _cr09105 - 1. Macro-Financial Vulnerabilities (PDF chapter) — IMF content provided in the prompt*

### 14.      There are important risks to achieving the program targets for 2009. First,

### There are important risks to achieving the program targets for 2009.

### Risks to program targets and fiscal outlook
- Growth, inflation, and interest payments could turn out less favorably than currently forecast, negatively affecting the overall fiscal balance.
- Tax revenue may underperform as compliance may decline during the crisis.
- Implementation risks: spending cuts in public health institutions and reductions in farm subsidies.
- Contingency measures and fiscal stance:
  - The program includes a contingency buffer of 0.3 percent of GDP in the budget.
  - With respect to 2010-11, further measures will be required to attain the fiscal consolidation envisaged under the program.
  - A supplementary budget is not needed as the planned reduction in spending does not exceed the 5 percent threshold.

### Fiscal reform, tax measures, and institutional fiscal rules
- Comprehensive tax reform objectives and timing:
  - Shift the tax burden from labor to consumption and encourage job creation; expected to be revenue neutral (LOI ¶16).
  - Expected enactment by June 2009 and mostly come into force on July 1, 2009.
  - Additional tax measures expected for 2011, including a new proposal for a central property tax to gradually replace inefficient and uneven local property taxes.
- Structural spending cuts and labor market effects:
  - Structural spending cuts combined with tax changes are intended to boost labor market participation over the medium term.
- Fiscal institutions:
  - Parliament adopted the Fiscal Responsibility Law in November 2008 (structural benchmark).
  - The Fiscal Council has now been appointed (LOI ¶11).
  - Authorities committed to provide appropriate funding for the Fiscal Council.

### Financial sector policies, risks, and safeguards
- Current bank balance-sheet and liquidity indicators:
  - Banks’ forint liquidity positions have improved and capital positions remain well above regulatory requirements (Table 8 and LOI ¶17).
  - Nonperforming loans at end-2008 were 2.9 percent of gross loans.
  - Hungary’s largest bank (no foreign parent) increased its consolidated capital adequacy ratio to 15.3 percent (Tier I to 11.2 percent).
- Emerging risks:
  - External funding likely to remain expensive and constrained, increasing rollover risk, especially for banks without a strong foreign parent.
  - Foreign currency swap market remains volatile with short maturities.
  - Rising unemployment and corporate defaults will increase loan delinquencies.
  - Exchange rate depreciation has increased the debt service burden of foreign currency loans: more than 70 percent of loans to households are denominated in foreign currencies, notably Swiss francs.
  - A substantial further weakening of the exchange rate could trigger a significant deterioration in banks’ asset quality.
  - Profitability will fall sharply due to higher funding costs and more loan–loss provisions.
- Supervisory strengthening and action plan:
  - Authorities will develop an action plan to strengthen the HFSA’s capabilities in on-site bank examinations; plan to be developed by end-May 2009 (structural benchmark).
  - HFSA will conduct more comprehensive reviews of banks’ end-2008 financial reports and expand on-site inspections starting in the second quarter of 2009, with support from the World Bank.
  - HFSA will strengthen cooperation with supervisors in countries where Hungarian banks have subsidiaries.
- Bank support framework and program measures:
  - Financial Stability Act approved by Parliament in December 2008 allows government guarantees for banks’ newly issued debt and enhancement of banks’ capital base by voluntary or mandatory means (LOI ¶18).
  - Conditions include limits on management compensation and issuance of a preferred share to the state with veto rights.
  - European Commission confirmed both schemes are in line with EU state aid rules.
  - Program measures to preserve safety net continuity:
    - Deadline for capital enhancement scheme applications extended from end-March 2009 to end-2009.
    - Clarification of conditions for mandatory capital enhancement.
    - Strengthening provisions regarding government acquisition of shareholders’ stakes to protect public resources.
    - Authorities allow government to lend directly to banks; such loans and pricing expected to be in line with EU guidelines.
    - Safeguards: government seat on bank’s board, access to information, enhanced monitoring by a sub-committee of the Financial Stability Committee.
  - Establishment of such a sub-committee to monitor bank support from the government is a structural performance criterion for end-March 2009 and its consultation with Fund staff on its work program is a continuous structural benchmark.
- Remedial action and resolution regime reforms:
  - New emergency powers for the HFSA established in December 2008; proposed changes to remedial action framework (structural benchmark).
  - HFSA can impose additional reporting requirements and, once changes adopted, intervene with extraordinary measures at a higher capital adequacy ratio (4.8 percent versus 4.0 percent).
  - HFSA will have new powers to intervene in subsidiaries whose parent banks are in severe difficulties.
  - Further broadening of HFSA and special administrator powers to facilitate efficient bank resolution is a structural benchmark for end-June 2009, though constrained by constitutional protections of shareholders’ rights.
- Loan restructuring and borrower support:
  - Government and banks extended until the end of 2009 the November 2008 voluntary agreement on loan maturity extensions, temporary easing of repayments, and conversion of foreign currency loans into forint.
  - Parliament passed a law in early March to provide temporary state guarantees for mortgage payments of the unemployed.
  - Work underway to amend the corporate bankruptcy regime; a personal bankruptcy regime is at the concept stage.

### Monetary and exchange rate policy
- Inflation and policy rate developments:
  - CPI inflation in December 2008 was 3.5 percent, compared to 5.1 percent projected under the original program.
  - The lower inner band of the inflation consultation mechanism (4.1 percent) was breached.
  - Central bank policy rate moves:
    - Interest rates were raised by 300 bps in October.
    - Between November and January, the policy rate was cut four times by 50 bps each time.
    - The policy rate was kept unchanged in February.
- Policy objectives and guidance:
  - Monetary and exchange rate policy aims to prevent too rapid a fall in inflation while safeguarding financial stability.
  - With actual inflation close to the central bank’s medium-term objective of 3 percent, the mid-point targets under the inflation consultation mechanisms were set at 3.0 percent for all review dates in 2009 (LOI ¶23).
  - Further interest rate cuts should be gradual and cautious to avoid excessive exchange rate depreciation and balance-sheet instability stemming from large unhedged foreign currency borrowing.
  - The central bank stands ready to act to mitigate the risk of disruptive exchange rate movements.
- Liquidity facilities and FX swap operations:
  - Central bank introduced new facilities to improve liquidity provision in domestic and foreign currency and strengthen banks’ incentives to lend (Figure 3, LOI ¶25).
  - Temporary 6-month FX swap facility set up in early March; open to banks that maintain or expand long-term external funding and maintain current level of corporate lending. Seven banks applied, including four of the six largest subsidiaries of foreign parent banks.
  - A 3-month FX swap facility was put in place, priced at least 50 bps above the 6-month facility.

### Program modalities, conditionality, and safeguards assessment
- Stand-By Arrangement key parameters (Box 2):
  - Access: SDR 10.5 billion (1015 percent of quota).
  - Length: 17 months (through end-March 2010).
  - Phasing:
    - SDR 4.2 billion was made available after the Board’s approval of the arrangement on November 6, 2008.
    - The second tranche, subject to completion of this (first) review, amounts to SDR 2.1 billion.
    - Subsequent disbursements contingent upon completion of further quarterly reviews.
- Conditionality highlights:
  - Quantitative performance criteria include: floor on central government system primary cash balance; band around 12-month CPI inflation; floor on change in net international reserves; non-accumulation of external debt arrears.
  - Quantitative indicative target: ceiling on total debt stock of the central government system.
  - Structural performance criteria (all by end-March 2009):
    - Submission to parliament of legislative changes required to implement pension reform (LOI ¶15).
    - Submission to parliament of amendments to the Financial Stability Act (LOI ¶18).
    - Establishment of a subcommittee of the Financial Stability Committee to monitor banks receiving government capital or funding support (LOI ¶18).
  - Structural benchmarks:
    - Passage by parliament of amendments strengthening remedial powers of HFSA and bank resolution regime (by end-June 2009).
    - Development of an action plan to strengthen HFSA on-site examination capabilities (by end-May 2009).
    - Operation of the subcommittee described in LOI ¶18 as long as any government capital or funding support outstanding to banks exists, and consultation of the subcommittee with Fund staff on its work program (continuous).
- Safeguards assessment:
  - Safeguards assessment for the central bank was finalized in January 2009.
  - Assessment confirms central bank has a relatively strong safeguards framework; control environment well established and audit and financial reporting practices adhere to international standards.
  - Assessment recommends improving program data reporting to the Fund and strengthening audit oversight; authorities have taken steps in line with proposed timeline.
- Program modifications proposed in the Letter of Intent:
  - Adjust performance criterion for net international reserves upward to lock in higher-than-programmed end-December outcome.
  - Set inflation consultation bands around the central bank’s inflation target.
  - Propose three new structural performance criteria and three new structural benchmarks (deadlines as above).
  - No changes proposed to the level of access or the schedule of purchases.

### Staff appraisal (key judgments)
- Implementation and outcomes to date:
  - Policy implementation largely in line with the program.
  - Quantitative performance criteria and indicative target, and the structural performance criterion and benchmarks for 2008Q4 were all met.
  - CPI inflation in December 2008 was below the lower inner band due largely to exogenous factors (faster-than-expected decline in global energy prices).
- Outlook and policy priorities:
  - Continued global financial strains and worse macroeconomic outlook pose significant challenges; external financing remains difficult amid global deleveraging.
  - Sharper global downturn is exacerbating Hungary’s recession, weakening government revenue and banks’ credit quality.
  - Strengthened policies are critical to support external financing and economic activity.
  - Revised program measures aim to strengthen fiscal sustainability while avoiding an excessively large negative impulse to demand; pension reform and tax reform expected to yield medium-term benefits.
  - Essential to implement measures to preserve financial stability: enact technical amendments to Financial Stability Act, strengthen bank resolution regime and HFSA remedial powers, and develop HFSA action plan.

*Source: _cr09105 - 14.*

### 33.      Monetary and exchange rate policy will continue to target inflation over the

### _cr09105 - 33.      Monetary and exchange rate policy will continue to target inflation over the

### Monetary and exchange rate policy stance and actions
- Monetary and exchange rate policy will continue to target inflation over the medium term, while being prepared to act as needed to mitigate risks to financial stability.
- In light of the fall in projected inflation, the reductions in the policy interest rate thus far have been appropriate.
- Looking forward, any further interest rate cuts should be gradual and cautious, and commensurate with improvements in investor confidence.
- The central bank is ready to take action if necessary to mitigate the risk of disruptive movements in the exchange rate.
- The central bank is ready to modify or expand its liquidity-providing facilities as needed.

### Authorities’ commitments, vulnerabilities, and program risks
- The authorities’ commitments provide a strong policy anchor, but risks remain.
- The new measures address Hungary's two most significant vulnerabilities: the high level of government debt and potential risks to the stability of the banking system.
- The path of underlying fiscal adjustment has been accelerated, and financial supervision and the safety net for banks are being strengthened.
- Identified risks to the program include:
  - a more severe than currently projected economic downturn,
  - the impact of continued stress in global financial markets on emerging market financing,
  - lack of necessary political support for key measures.
- To address these risks, the authorities recognize the need for continued careful program monitoring and for ongoing policy dialogue with the Fund, and are committed to make policy adjustments that may become necessary.

*Source: IMF staff report text (paragraphs 33–34).*

### 35.      Implementation of policies consistent with the program provides the best chance

### 35.      Implementation of policies consistent with the program provides the best chance

### Program support and immediate policy recommendation
- Staff support the authorities’ request for completion of the first review under the Stand-By Arrangement.
- Primary policy prescription: Implementation of policies consistent with the program provides the best chance for Hungary’s economy to weather the current difficulties.

### Macroeconomic outlook and key real-economy indicators
- Real GDP growth (staff illustrative medium-term scenario): 2005: 4.0; 2006: 4.0; 2007: 1.1; 2008: 0.6; 2009: -3.3; 2010: -0.4; 2011: 2.5.
- Domestic demand and components (2005–11, selected):
  - Private consumption: 2005: 3.6; 2006: 2.4; 2007: -1.8; 2008: 0.6; 2009: -3.7; 2010: -0.8; 2011: 1.0.
  - Gross fixed capital formation: 2005: 8.0; 2006: -5.7; 2007: 1.5; 2008: -2.4; 2009: -5.0; 2010: 1.1; 2011: 5.0.
  - Exports of GNFS: 2005: 11.5; 2006: 18.4; 2007: 15.9; 2008: 7.3; 2009: -3.2; 2010: 3.8; 2011: 4.6.
  - Imports of GNFS: 2005: 6.9; 2006: 15.0; 2007: 13.1; 2008: 6.7; 2009: -4.3; 2010: 3.0; 2011: 4.3.
- Inflation:
  - CPI (average): 2005: 3.6; 2006: 3.9; 2007: 7.9; 2008: 6.3; 2009: 3.8.
  - CPI (end year): 2005: 3.3; 2006: 6.5; 2007: 7.4; 2008: 5.1; 2009: 4.3.
- Unemployment rate (average): 2005: 7.2; 2006: 7.5; 2007: 7.4; 2008: 7.8; 2009: 8.5.

### Public finances and fiscal projections
- General government balances (ESA-95 basis, percent of GDP):
  - Overall balance: 2005: -7.8; 2006: -9.3; 2007: -4.9; 2008: -3.3; 2009 (prog): -2.9; 2010 (prog): -2.5; 2011 (prog): -2.2.
  - Primary balance: 2005: -3.7; 2006: -5.4; 2007: -0.9; 2008: 0.6; 2009 (prog): 1.5.
- Gross public debt (percent of GDP): 2005: 61.7; 2006: 65.6; 2007: 65.8; 2008: 67.4; 2009 (prog): 72.2; 2010 (prog): 75.9; 2011 (prog): 72.0.
- Consolidated general government (2006–11, percent of GDP, selected):
  - Total revenues: 2006: 44.9; 2007: 45.3; 2008 (orig. prog.): 45.9.
  - Total expenditures: 2006: 49.8; 2007: 48.7; 2008 (orig. prog.): 48.4.
  - General government balance (convergence program columns): -9.3; -4.9; -3.4; -3.3; -2.6; -2.9; -2.5; -2.2.
- Debt dynamics indicators:
  - Baseline public sector debt (percent of GDP): 2008: 72.2; 2009: 75.9; 2010: 72.2; 2011: 69.0; 2012: 66.2; 2013: 62.4; 2014: 59.0.
  - Debt-stabilizing primary balance: -0.3 (latest table entry).

### External position and balance of payments
- Current account (percent of GDP): 2005: -7.5; 2006: -7.5; 2007: -6.4; 2008: -7.8; 2009 (prog): -3.9; 2010 (proj): -3.4; 2011 (proj): -3.1.
- Gross external debt (percent of GDP): 2005: 75.0; 2006: 90.4; 2007: 97.2; 2008: 106.4; 2009 (prog): 114.4; 2010 (prog): 131.1; 2011 (proj): 127.2.
- Gross official reserves (in millions of euros): 2005: 15,721; 2006: 16,397; 2007: 16,385; 2008: 24,040.
- Balance of payments (selected flows, in millions of euros):
  - Current Account (2007–10, revised program): 2007: -6,510; 2008: -2,492; 2009 (various quarters shown) projecting annual deficits and improvements to -3,364 (2010 projection).
  - Financial Account (2007–10): 2007: 7,100; 2008: 2,723; 2009: projections vary with notable outflows in program scenarios.

### Monetary and financial conditions
- Broad money (M3) year-on-year percent change: 2005: 14.5; 2006: 13.6; 2007: 11.0; 2008: 9.1.
- Credit to nongovernment, flow-based (percent): 2005: 15.4; 2006: 17.3; 2007: 15.9; 2008: 10.6.
- Interest rates (end-period/averages):
  - T-bill (90-day, average): 2005: 6.7; 2006: 7.0; 2007: 7.6; 2008: 8.9.
  - Government bond yield (5-year, average): 2005: 6.8; 2006: 7.4; 2007: 7.0; 2008: 9.3.
- Monetary accounts (central bank and banks, selected):
  - Net foreign assets of central bank (in billions of forints, end-period line): 2008 series include 3,673; 3,383; 3,839; 3,941; with staff calculations and inclusions of IMF, EU and WB funds noted.
  - Broad money (in billions of forints): series indicates growth from 1,120,411 (2007?) to a program-affected path in 2008–09.

### Financial sector soundness and risks
- Banking sector prudential indicators (2005–08, end-period):
  - Regulatory capital to risk-weighted assets: 2005: 11.6; 2006: 11.0; 2007: 10.4; 2008: 11.1.
  - Non-performing loans to gross loans (NPLs): 2005: 2.5; 2006: 2.5; 2007: 2.5; 2008: 2.9.
  - Provisions to NPLs: 2005: 54.4; 2006: 53.9; 2007: 58.1; 2008: 80.3.
  - Loans to deposits: 2005: 107.7; 2006: 109.9; 2007: 121.6; 2008: 125.0.
  - FX liabilities (excluding own capital) to total liabilities (excluding own capital): 2005: 34.4; 2006: 39.3; 2007: 42.4; 2008: 45.6.
  - Share of foreign currency loans in total credit (mem. items): corporates: 47.7; households: 32.6; other loans: 75.2 (2005 sample).
- Financial vulnerabilities noted:
  - High gross external debt and reliance on foreign currency funding.
  - Short-term external financing pressures and projected negative short-term financing for banks in 2009 absent program support.
  - Sensitivity to exchange rate movements: net open position in FX to capital rose (end-period) from 3.5 percent to 17.0 percent over 2005–08.

### Program financing and Fund support
- Stand-By Arrangement schedule (Table of reviews and purchases):
  - Approval: November 6, 2008 — 4,215.0 million SDRs (40.59 percent of quota).
  - First review: March 25, 2009 — 2,107.5 million SDRs (20.30 percent of quota).
  - Subsequent scheduled purchases (May 15, Aug 15, Nov 15, 2009; Feb 15, 2010) totaling 10,537.5 million SDRs (1014.8 percent of quota) across the schedule.
- Indicators of Fund credit (stock and percent of quota/GDP):
  - Stock evolves from 4,215 (end-2008) to 10,538 (2009) million SDRs in projection tables.
  - Stock in percent of quota: 2008: 405.9; 2009: 974.2; 2010: 1014.8.
  - Stock in percent of GDP: 2008: 4.3; 2009: 12.3; 2010: 12.0.
- Program financing projections and identified prospective financing include EU, World Bank, and Bank Guarantee Fund elements; projected program financing lines of 2,000 million euros from the EU in multiple quarters and other multilateral support.

### Debt sustainability and scenarios
- Baseline and scenario outputs (public sector debt, percent of GDP):
  - Baseline public sector debt: 2008: 72.2; 2009: 75.9; 2010: 72.2; 2011: 69.0; 2012: 66.2; 2013: 62.4; 2014: 59.0.
  - Scenario with key variables at historical averages shows debt paths (table entries).
  - Scenario with no policy change (constant primary balance) in 2009–2014 yields higher debt ratios (e.g., 2009: 78.9).
- Key macro-fiscal assumptions underlying baseline:
  - Average nominal interest rate on public debt (percent): 2004: 8.3; 2005: 7.4; 2006: 6.9; 2007: 6.6; 2008: 6.4; 2009: 6.0; 2010: 6.5.
  - Inflation (GDP deflator): 2005: 4.4; 2006: 2.2; 2007: 3.9; 2008: 5.7; 2009: 4.4; 2010 onward: 3.0 (projected).
  - Primary deficit (percent of GDP): 2005: 2.0; 2006: 3.7; 2007: 5.4; 2008: 0.9; 2009: -0.7; 2010: -1.5; 2011: -2.2.

### Policy implications and priorities (derived from analysis and projections)
- Maintain and implement the program’s fiscal consolidation measures to stabilize public debt: aim to secure or improve the projected primary balance and contain primary expenditure growth consistent with the baseline.
- Safeguard external liquidity through program financing and coordination with EU and multilateral partners to address short-term external financing gaps and reserve volatility.
- Support banking-sector resilience: monitor FX exposures, ensure adequate provisioning, and preserve rollover support from parent banks to limit spillovers to the domestic economy.
- Ensure timely completion of program reviews (staff supports first review completion) to unlock scheduled Fund disbursements and broader program financing.

*Sources: Hungarian authorities; IMF, International Financial Statistics; Bloomberg; Magyar Nemzeti Bank; and IMF staff estimates.*

### Appendix Table 1. Hungary: Public Sector Debt Sustainability Framework, 2004-14

### _cr09105 - Appendix Table 1. Hungary: Public Sector Debt Sustainability Framework, 2004-14

### External debt levels and changes (baseline projections)
- External debt, baseline (in percent of GDP) by year:
  - 2004: 67.0
  - 2005: 75.1
  - 2006: 90.5
  - 2007: 97.2
  - 2008: 114.4
  - 2009: 131.0
  - 2010: 127.1
  - 2011: 123.1
  - 2012: 116.3
  - 2013: 108.5
  - 2014: 100.7
- Debt-stabilizing non-interest current account (long-run constant balance) shown as:
  - -6.5 (percent of GDP)
- Change in external debt (year-on-year, in percent of GDP):
  - 2005: 12.5
  - 2006: 8.1
  - 2007: 15.4
  - 2008: 6.7
  - 2009: 17.2
  - 2010: 16.7
  - 2011: -3.9
  - 2012: -4.0
  - 2013: -6.8
  - 2014: -7.8
  - 2014 (last listed period): -7.8

### Identified external debt-creating flows and components
- Identified external debt-creating flows (sum of listed components) (in percent of GDP):
  - 2005: -5.2
  - 2006: 2.4
  - 2007: 9.2
  - 2008: 4.5
  - 2009: 7.7
  - 2010: 12.9
  - 2011: 6.0
  - 2012: -1.3
  - 2013: -4.4
  - 2014: -5.5
  - final: -3.8
- Current account deficit, excluding interest payments (in percent of GDP):
  - 2004: 5.8
  - 2005: 4.6
  - 2006: 4.4
  - 2007: 2.8
  - 2008: 2.6
  - 2009: -2.3
  - 2010: -2.8
  - 2011: -3.1
  - 2012: -4.5
  - 2013: -5.7
  - 2014: -6.3
- Deficit in balance of goods and services (in percent of GDP):
  - 2004: 2.7
  - 2005: 1.2
  - 2006: 0.9
  - 2007: -1.4
  - 2008: -1.4
  - 2009: -4.9
  - 2010: -5.4
  - 2011: -5.7
  - 2012: -6.5
  - 2013: -7.3
  - 2014: -7.8
- Exports (in percent of GDP):
  - 2004: 65.0
  - 2005: 67.7
  - 2006: 76.7
  - 2007: 79.9
  - 2008: 80.5
  - 2009: 88.2
  - 2010: 88.8
  - 2011: 87.1
  - 2012: 84.6
  - 2013: 82.4
  - 2014: 77.0
- Imports (in percent of GDP):
  - 2004: 67.7
  - 2005: 68.9
  - 2006: 77.6
  - 2007: 78.6
  - 2008: 79.1
  - 2009: 83.3
  - 2010: 83.4
  - 2011: 81.4
  - 2012: 78.1
  - 2013: 75.0
  - 2014: 69.1
- Net non-debt creating capital inflows (negative = outflows) (in percent of GDP):
  - 2004: -5.4
  - 2005: -0.6
  - 2006: 4.1
  - 2007: 7.0
  - 2008: 4.5
  - 2009: 4.5
  - 2010: 2.0
  - 2011: -1.4
  - 2012: -2.5
  - 2013: -2.2
  - 2014: -0.5

### Automatic debt dynamics (contributions) and residuals
- Automatic debt dynamics (in percent of GDP):
  - 2004: -5.5
  - 2005: -1.6
  - 2006: 0.8
  - 2007: -5.3
  - 2008: 0.5
  - 2009: 10.7
  - 2010: 6.8
  - 2011: 3.3
  - 2012: 2.5
  - 2013: 2.4
  - 2014: 3.1
- Contribution from nominal interest rate (in percent of GDP):
  - 2004: 2.6
  - 2005: 2.9
  - 2006: 3.2
  - 2007: 3.7
  - 2008: 5.2
  - 2009: 6.3
  - 2010: 6.2
  - 2011: 6.3
  - 2012: 6.8
  - 2013: 7.2
  - 2014: 7.3
- Contribution from real GDP growth (in percent of GDP):
  - 2004: -4.3
  - 2005: -2.4
  - 2006: -3.0
  - 2007: -0.9
  - 2008: -0.5
  - 2009: 4.4
  - 2010: 0.6
  - 2011: -3.0
  - 2012: -4.3
  - 2013: -4.8
  - 2014: -4.3
- Contribution from price and exchange rate changes (in percent of GDP):
  - 2004: -3.8
  - 2005: -2.1
  - 2006: 0.6
  - 2007: -8.1
  - 2008: -4.1
  - 2009: ... (ellipsis in source)
- Residual, including change in gross foreign assets (2-3) (in percent of GDP):
  - 2004: 17.7
  - 2005: 5.8
  - 2006: 6.1
  - 2007: 2.2
  - 2008: 9.5
  - 2009: 3.8
  - 2010: -9.9
  - 2011: -2.8
  - 2012: -2.3
  - 2013: -2.3
  - 2014: -4.0

### Ratios and financing needs
- External debt-to-exports ratio (in percent):
  - 2004: 103.1
  - 2005: 111.0
  - 2006: 118.0
  - 2007: 121.6
  - 2008: 142.0
  - 2009: 148.6
  - 2010: 143.1
  - 2011: 141.2
  - 2012: 137.5
  - 2013: 131.7
  - 2014: 130.9
- Gross external financing need (in billions of euros):
  - 2004: 23.6
  - 2005: 28.4
  - 2006: 32.4
  - 2007: 30.9
  - 2008: 40.8
  - 2009: 54.3
  - 2010: 44.8
  - 2011: 43.6
  - 2012: 48.3
  - 2013: 54.7
  - 2014: 55.1
- Gross external financing need (in percent of GDP):
  - 2004: 28.6
  - 2005: 32.0
  - 2006: 36.0
  - 2007: 30.5
  - 2008: 38.4
  - 2009: 59.0
  - 2010: 45.8
  - 2011: 41.8
  - 2012: 42.6
  - 2013: 44.5
  - 2014: 39.2

### Scenario with key variables at historical averages
- Selected scenario projections (values as presented):
  - 2009: 131.0
  - 2010: 125.9
  - 2011: 124.8
  - 2012: 124.8
  - 2013: 123.3
  - 2014: 125.3
  - Debt-stabilizing non-interest current account in scenario: -7.2

### Key macroeconomic assumptions underlying the baseline
- Real GDP growth (in percent):
  - 2004: 9.2
  - 2005: 3.9
  - 2006: 4.0
  - 2007: 1.1
  - 2008: 0.6
  - 2009: -3.3
  - 2010: -0.4
  - 2011: 2.5
  - 2012: 3.8
  - 2013: 4.5
  - 2014: 4.5
- GDP deflator in euros (change in percent):
  - 2004: 6.6
  - 2005: 3.7
  - 2006: -2.5
  - 2007: 11.2
  - 2008: 4.5
  - 2009: -10.6
  - 2010: 6.7
  - 2011: 4.1
  - 2012: 4.9
  - 2013: 3.7
  - 2014: 9.6
- Nominal external interest rate (in percent):
  - 2004: 5.6
  - 2005: 4.7
  - 2006: 4.3
  - 2007: 4.5
  - 2008: 5.6
  - 2009: 4.8
  - 2010: 5.1
  - 2011: 5.3
  - 2012: 6.0
  - 2013: 6.8
  - 2014: 7.7
- Growth of exports (euro terms, in percent):
  - 2004: 20.2
  - 2005: 12.2
  - 2006: 15.0
  - 2007: 17.1
  - 2008: 6.0
  - 2009: -5.4
  - 2010: 7.0
  - 2011: 4.7
  - 2012: 5.7
  - 2013: 5.6
  - 2014: 7.0
- Growth of imports (euro terms, in percent):
  - 2004: 20.8
  - 2005: 9.7
  - 2006: 14.2
  - 2007: 13.8
  - 2008: 5.9
  - 2009: -9.0
  - 2010: 6.4
  - 2011: 4.2
  - 2012: 4.4
  - 2013: 4.2
  - 2014: 5.5
- Current account balance, excluding interest payments (in percent of GDP):
  - 2004: -5.8
  - 2005: -4.6
  - 2006: -4.4
  - 2007: -2.8
  - 2008: -2.6
  - 2009: 2.3
  - 2010: 2.8
  - 2011: 3.1
  - 2012: 4.5
  - 2013: 5.7
  - 2014: 6.3
- Net non-debt creating capital inflows (in percent of GDP):
  - 2004: 5.4
  - 2005: 0.6
  - 2006: -4.1
  - 2007: -7.0
  - 2008: -4.5
  - 2009: -4.5
  - 2010: -2.0
  - 2011: 1.4
  - 2012: 2.5
  - 2013: 2.2
  - 2014: 0.5

### Methodological notes (as presented)
- Automatic debt dynamics formula components are defined with variables:
  - r = nominal effective interest rate on external debt
  - ρ = change in domestic GDP deflator in euro terms
  - g = real GDP growth rate
  - ε = nominal appreciation (increase in dollar value of domestic currency)
  - α = share of domestic-currency denominated debt in total external debt
- Contribution from price and exchange rate changes defined as the given expression involving ρ, ε, α, r, and g.
- Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
- Scenario sensitivities and bound tests summarized in accompanying appendices and figures (growth shocks, interest rate shocks, current account shocks, combined shocks, and real depreciation/contingent liability shocks) with permanent one-half standard deviation shocks and other scenario specifications referenced.

### Key findings from bound tests and stress scenarios (appendices and figures)
- Public and external debt vulnerability examined through bound tests with scenarios including:
  - Permanent one-half standard deviation shocks to real interest rate, growth rate, and primary balance.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance (or current account).
  - One-time real depreciation of 30 percent and a 10 percent of GDP shock to contingent liabilities in 2009 (public debt figure annotations include scenario box averages and ten-year historical averages).
- Figures indicate baseline and historical comparisons for public debt and external debt with labeled scenario averages and historical averages; gross financing need under baseline is plotted on right scale.

### Fiscal policy, structural reforms, and program implications (from Letter of Intent)
- Macroeconomic outlook and program requests:
  - Preliminary 2008 growth estimate: 0.6 percent
  - 2009 anticipated contraction: about 3.0-3.3 percent (range stated as "about 3.0-3.3 percent")
  - CPI inflation movement: from 6.7 percent in June 2008 to 3.1 percent by January 2009; average inflation in 2009 projected at 3.7-3.9 percent
  - Current account deficit for 2008 estimated at 7.9 percent of GDP; expected to narrow by 4 percentage points of GDP in 2009
- Fiscal outturns and targets:
  - Central government system deficit for 2008 estimated at 3.3 percent of GDP (accrual and cash basis)
  - Revenue shortfall anticipated in 2009: about HUF 300 billion relative to 2009 budget
  - Identified spending cuts net impact in 2009: HUF 190 billion
  - Revised target for general government deficit in 2009: 2.9 percent of GDP (original target: 2.6 percent)
  - Contingency reserve left intact at 0.3 percent of GDP
  - Appropriation to fund Fiscal Council by end-March 2009: HUF 1-2 billion from the general reserve
- Structural fiscal reform measures (summarized measures and timing):
  - Pension reforms:
    - As of 2010, modulation of the "Swiss" indexation formula by expected real GDP growth thresholds; CPI weight increases to 60 percent if growth expected 3-4 percent, to 80 percent if growth expected 2-3 percent; full CPI indexation if growth expected below 2 percent
    - Stricter enforcement of eligibility criteria for disability pensions and triennial reviews
    - Cancellation of certain disability pension increases planned for 2010 while increasing benefits for the poorest disabled
    - Abolition of the 13th month pension for new beneficiaries; existing recipients to have the 13th installment incorporated into 12-month payments (13th installment already capped at HUF 80,000 under the program)
    - Starting in 2016, statutory retirement age to increase by four months every year until reaching 65 in 2025
    - Legislative changes to be submitted to Parliament by end-March 2009; passage expected by June 2009 for implementation as of January 1, 2010 (structural performance criterion)
  - Targeting of social transfers:
    - As of September 2009, family allowances to be added to the income tax base (but remaining exempt from income taxation) to increase taxation on higher income earners
    - Starting in 2010, preserve nominal value of all social transfers for two years; mandate community work in exchange for social benefits under "pathway to work"
    - Reform cash support for first years of parenthood to account for length of employment when determining duration of salary-related child allowance
  - Reducing inefficient subsidies:
    - By end-March 2009, interest subsidy on forint-denominated mortgages to be cut in half; eligibility conditions for housing subsidy tightened; subsidy for housing savings plan eliminated if accumulated saving not used to purchase residential real estate
    - As of June 2009, reduce energy subsidies to offset predicted reduction in prices; freeze HUF 20 billion of corresponding budget appropriation; implement further subsidy reductions if necessary
    - Tighten eligibility criteria for free catering in public schools
    - In 2010, adjust energy subsidy rates and eligibility to cut budget appropriation to HUF 40 billion or less
  - Efficiency gains and public sector consolidation:
    - Steps to eliminate redundant transfers and subsidies across government levels
    - Encourage local governments to seek economies of scale by cutting central government transfers in the 2010 budget
    - Proposal to reduce the size of local councils (would require a supermajority; consultations ongoing)
- Program monitoring and requests to IMF:
  - Request completion of the First Review under the Stand-By arrangement
  - Request lowering of the inflation consultation bands for end-March 2009 and resetting consultation clause consistent with inflation-targeting framework
  - Request modification to the performance criteria on Net International Reserves (NIR) at end-March 2009 to preserve end-December 2008 overperformance
  - Commitment to consult with IMF before modifying program measures and to provide necessary information for program monitoring

*Italic: Source — Appendix Table 1 and accompanying text from the IMF document _cr09105 - Appendix Table 1. Hungary: Public Sector Debt Sustainability Framework, 2004-14*

### 16.      To further encourage job creation and strengthen potential growth, it is imperative to

### _cr09105 - 16.      To further encourage job creation and strengthen potential growth, it is imperative to

### Labor tax reform and fiscal neutrality
- Objective: reduce the tax wedge on labor while keeping reforms revenue-neutral until a broadly balanced budget position on a sustainable basis is reached.
- Labor tax cuts to be fully offset by higher consumption and wealth taxes.

Main tax cuts
- Employers’ social security contributions reduced by 5 percentage points for all workers:
  - effective July 1, 2009 for the part of income up to twice the minimum wage;
  - effective in 2010 for whole income.
- Personal income tax payments reduced through an increase in tax brackets.
- The individual solidarity tax of 4 percent and the corporate solidarity tax to be eliminated as of 2010.

Main offsetting measures
- Normal VAT rate raised by 3 percentage points (effective July 1, 2009).
- Excise duties on alcohol, tobacco and fuel increased by 5 percent on average.
- Starting in 2010:
  - corporate income tax base to be broadened and normal rate set at 19 percent;
  - personal income tax base to include all fringe benefits and universal social benefits;
  - deductions abolished except for the family allowance and the allowance for long term saving.
- Measures are being discussed with social partners and will be submitted to parliament thereafter.

### Financial sector policies and bank support framework
Liquidity and lending
- Western European parent banks increased funding of Hungarian subsidiaries during October–November 2008 turbulence and have since maintained exposure.
- Banks have attracted more deposits from households; additional funds used to acquire liquid assets (notably government bonds and central bank bills).
- Result: banking system withstood forint pressure starting January 2009 without noticeable liquidity strains so far.
- Counterpart: slowdown in lending to the private sector, especially corporations.
- Banking system capital position remains well above capital adequacy requirements, but profits fell in Q4 2008 and are under pressure in 2009 due to higher funding costs and provisions for non-performing loans.

Financial Stability Act and related measures
- Financial Stability Act (approved December 2008) includes:
  - Capital Enhancement Scheme available until end-March 2009;
  - Bank Borrowing Guarantee Scheme with guarantees to be issued until end-2009.
- European Commission ruled Act complies with EU competition rules.
- Government will review the Act and submit technical amendments to Parliament by March 31, 2009 (structural performance criterion). Amendments will include:
  - aligning expiration date of capital enhancement component with guarantee component;
  - specifying that option for shareholders of a troubled bank to sell to the state be exercised at a price reflecting current and prospective financial conditions as determined by an independent third party jointly selected by the MNB and the HFSA;
  - clarifying that a mandatory capital increase pursuant to Article 8(1)(b) is linked to any of the three thresholds concerning severe deterioration in the financial condition of the affected bank (Article 16).
- Government may lend in domestic or foreign currency directly to systemically-important banks to support the real economy.
- Establishment of a subcommittee of the Financial Stability Committee by end-March 2009 (structural performance criterion) to monitor financial soundness and stress-resilience of banks receiving government capital or funding support; subcommittee to be operational as long as support is outstanding and to consult with Fund staff on its work program (continuous structural benchmark).

Strengthening HFSA remedial and resolution powers
- December 2008: HFSA granted powers to impose extraordinary reporting requirements on banks if financial stability is threatened (structural benchmark).
- Proposal submitted to Parliament to amend Law on Credit Institutions and Financial Enterprises and other legislation:
  - higher threshold for capital adequacy ratio for extraordinary measures: 4.8 percent rather than 4.0 percent;
  - HFSA to have new powers to intervene in subsidiaries whose parent banks experience severe difficulties.
- Further amendments to be passed by end-June 2009 (structural benchmark) to:
  - strengthen provisions on appointment and role of supervisory commissioner (including mandatory thresholds);
  - ensure adequate legal protection for the supervisory commissioner;
  - refine and complement powers for specific bank resolution techniques (including purchase-and-assumption transactions and bridge banks) and affirm HFSA’s sole authority to initiate bank liquidation proceedings.
- Government will study feasibility of establishing a more comprehensive range of resolution tools to be applied once a supervisory commissioner is appointed, including mechanism for limiting shareholders’ governance rights to facilitate efficient and least-cost bank resolution.

HFSA operational capacity and supervision
- Develop an action plan by end-May 2009 (structural benchmark) to strengthen HFSA on-site bank examination capabilities, including training programs and possible technical assistance.
- HFSA’s 2009 supervisory plan includes expanded examinations of key banks and assessment of the impact of the worsening economic outlook.
- Explore movement toward more forward-looking, risk-based supervision and strengthen collaboration and information exchange with foreign supervisory authorities (including Memoranda of Understanding).

Private debt resolution and corporate insolvency
- Extend household debt restructuring agreement with banks (originally reached November 2008) until end-2009.
- Introduce legislation to provide temporary government guarantees for mortgage payments on primary residences for persons who become unemployed, with incentives and safeguards to facilitate orderly restructuring, support credit discipline, and minimize potential government costs.
- Strengthen corporate bankruptcy framework by establishing mechanisms for firm restructuring and rehabilitation in addition to existing liquidation procedures.

### Monetary and exchange rate policy
Inflation targeting and policy rate
- MNB committed to inflation target of 3 percent over the medium term.
- MNB key policy rate cut by 200 bps since November 2008.
- MNB projects inflation will remain within the 3±1 percent band specified by the inflation targeting framework.
- Quarterly CPI inflation targets under the program are consistent with this framework and will be monitored under the inflation consultation mechanism.

Net international reserves (NIR) objective
- Government objective: gradually build up an adequate level of international reserves.
- Target for NIR under program designed to meet this objective while allowing room for stabilizing market conditions in a fragile external environment.
- Government will refrain from issuing short-term debt for the purpose of meeting the NIR target.

MNB liquidity facilities and collateral policy
- Since October 2008, MNB established new facilities to inject foreign currency and forint liquidity, including a forint term lending facility and two overnight foreign exchange swap facilities backed by a repo facility with the ECB.
- MNB widened eligible collateral to include mortgage bonds of associated banks and municipal bonds.
- February 2 (year not restated in this excerpt): introduced a one-week Swiss franc liquidity providing fixed price euro/Swiss franc swap tender backed by a swap agreement with the Swiss National Bank.
- March 2, 2009: introduced euro-liquidity providing 6-month euro/forint swap tenders subject to conditions, including:
  - requirement to roll-over funding from non-residents with original maturity of more than one year and/or to reduce foreign assets;
  - maintaining the level of lending to Hungary’s corporate sector in nominal terms.
- Introduced a supplementary 3-months FX swap facility with unconditional access and a spread of at least 50 bps over the 6-month facility.
- MNB stands ready to extend its toolkit as needed to safeguard financial stability.

### Key program numbers and technical definitions (selected)
- Exchange rates for program purposes (as of September 30, 2008):
  - HUF 243.17 = €1
  - HUF 169.15 = $1
  - HUF 154.01 = CHF 1
- Net international reserves (NIR) outstanding stock:
  - End-December 2008: 18,493.8 (in millions of euros)
- External program disbursements (baseline projection, cumulative flows from end-December 2008, in millions of euros):
  - End-March 2009 (program projection): 2,000
  - End-June 2009 (program projection): 4,000
  - End-September 2009 (program projection): 4,000
  - End-December 2009 (program projection): 5,500
- Resources used for the Bank Guarantee Fund (baseline projection, cumulative flows from end-December 2008, in millions of euros):
  - End-March 2009 (program projection): 0
  - End-June 2009 (program projection): 2,069
  - End-September 2009 (program projection): 2,069
  - End-December 2009 (program projection): 2,069

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 8.      The quarterly consultation band for the 12-month rate of inflation in consumer

### _cr09105 - 8.      The quarterly consultation band for the 12-month rate of inflation in consumer

### CPI inflation consultation band: definition, targets, and procedures
- Headline measure: consumer price index (CPI) published by the Hungarian Central Statistical Office.
- Central point for end-quarter inflation: 3 percent.
- Consultation bands around central point: lower and upper bands of ±1 and ±2, respectively.
- Modification: Given the faster-than-expected decline in CPI inflation in recent months, the target for end-March 2009 will be modified to the above target.
- Target status by date:
  - End-March 2009: performance criterion.
  - End-June 2009: performance criterion.
  - End-September 2009: indicative target.
  - End-December 2009: indicative target.
- Accountability and consultation procedures:
  - The CPI inflation consultation band will be an important part of each review under the arrangement.
  - Authorities commit to report to the public the reasons for any breach of the inner band and their policy response.
  - If the observed year-on-year CPI inflation falls outside the inner band, the MNB will conduct discussions with Fund staff.
  - If the observed year-on-year CPI inflation falls outside the outer band, the authorities will complete a consultation with the Fund on their proposed policy response before requesting further purchases under the program.

### Floor on the cash primary balance of the Central Government System (CGS)
- Definition: The primary balance of a budgetary institution = total revenues − non-interest expenditures of that institution.
- Monitoring basis: above-the-line on a cash basis; transfers among CGS entities are mutually consistent; reconciliation required if discrepancies arise; Ministry of Finance will provide data to the IMF with a lag of no more than seven days past the test date.
- Exclusions from primary expenditure for program purposes:
  - Any cash payment related to bank recapitalization (to establish the Capital Enhancement Fund).
  - Transfers to the Bank Guarantee Fund.
- Net lending treatment:
  - Net lending of any CGS component = non-interest expenditure item.
  - Negative net lending of any CGS component = revenue item.
- Cumulative primary balance from January 1, 2009 (In billions of forints):
  - End-March 2009 (performance criterion) -280
  - End-June 2009 (performance criterion) -55
  - End-September 2009 (indicative target) 155
  - End-December 2009 (indicative target) 440

### Indicative ceiling on overall stock of debt of the Central Government System
- Coverage: HUF value of total stock of debt contracted by the central government system.
- Exclusions from indicative ceiling:
  - Credits from the IMF.
  - External program financing.
  - Normal trade-related credits.
  - Reserve and long-term liabilities of the MNB.
  - Absolute net value of mark-to-market deposits of the Hungarian Debt Management Agency (ÁKK).
  - Liabilities related to the bank support package are not included.
- ÁKK benchmarks: maintain stated public debt management benchmarks as much as possible, depending on market conditions and possible use of IMF credit.
- Outstanding stock (In billions of forints):
  - End-December 2008 (actual) 15,925
  - End-March 2009 (indicative ceiling) 15,872
  - End-June 2009 (indicative ceiling) 15,645
  - End-September 2009 (indicative ceiling) 15,526
  - End-December 2009 (indicative ceiling) 15,487
- Reporting: Data on total stock of debt of the central government system will be provided to the IMF by ÁKK on a quarterly basis within 10 days of the end of each quarter.
- Exchange rate: The program exchange rate will apply to all non-HUF denominated debt.
- Adjustments to the indicative ceiling:
  - Upward (downward) adjustment for shortfall (surplus) in net EU transfers relative to the baseline projection underlying government budget and financing plans. “Net EU transfers” refers to the net effect of pre- and post-financing of certain EU transfers, which are excluded from the public deficit but included in public debt.
  - Upward (downward) adjustment for an increase (decrease) of ÁKK’s cash reserves in the Single Treasury Account at the MNB relative to the baseline projection.

### Net EU transfers — baseline projections (In billions of forints)
- End-March 2009 (program projection) 207.65
- End-June 2009 (program projection) 12.62
- End-September 2009 (program projection) -103.40
- End-December 2009 (program projection) -167.59

### Cash reserves at the Single Treasury Account — baseline projections (In billions of forints)
- End-March 2009 (program projection) 295.93
- End-June 2009 (program projection) 452.11
- End-September 2009 (program projection) 120.53
- End-December 2009 (program projection) 118.97

### Continuous performance criterion on non-accumulation of external debt payment arrears
- Commitment: The central government system will accumulate no new external debt arrears during the program period.
- Definition: An external debt payment arrear = a payment by the central government system not made within seven days after falling due.
- Calculation and reporting:
  - Stock of external arrears will be calculated based on the schedule of external payment obligations reported by ÁKK.
  - Data on external arrears will be reconciled with relevant creditors; necessary adjustments will be incorporated in targets as they occur.
  - The performance criterion applies on a continuous basis.
  - ÁKK will provide final data on central government system external arrears to the Fund with a lag of not more than seven days after the test date.
- Exclusion: This performance criterion does not cover trade credits.

*Source: IMF staff report excerpt and informational annex contained in the document._cr09105 - 8.      The quarterly consultation band for the 12-month rate of inflation in consumer_*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09105.pdf_