## _cr09330 ## Source details **Canonical URL:** [_cr09330](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09330.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09330.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09330.pdf.json) --- ### Introduction and Summary - Important progress since the SBA approval in November 2008: government spending reduced durably while allowing the fiscal deficit to increase in 2009 to avoid exacerbating the economic contraction. - Financial sector: bank supervision and remedial action framework enhanced; measures have better anchored market expectations and created room for a cautious reduction in the policy interest rate. - Compliance: All September 2009 quantitative performance criteria, the continuous performance criterion on non-accumulation of external arrears, the indicative target on central government debt, and the continuous structural benchmark related to government lending to banks were met. - Prior actions and structural measures: - Government committed to preparing a business plan for MAV (state-owned railway) consistent with planned savings in the 2010 budget by December 7, 2009 (prior action). - Finish technical work on draft legislation to strengthen the bank resolution framework by December 11, 2009 (prior action). - Financing decisions: - Authorities do not intend to draw SDR 725 million (about €780 million) available upon completion of this review; will not request release of EU balance of payments assistance upon completion of this review. Outstanding undrawn amount (of up to €1 billion) remains available. - World Bank approved a €1 billion Financial Sector and Macro Stability Loan on September 22, 2009 (loan documents not yet signed). - Program key objectives: - Put government debt as a share of GDP firmly on a declining path over the medium term via strict expenditure control and cautious use of contingency reserves in 2010 and further measures in 2011. - Preserve financial stability via reform of institutional arrangements for bank supervision and strengthening the bank resolution framework. - Improved global financial conditions and increased confidence in fiscal sustainability should create room for cautious interest rate cuts. - Political context: Parliamentary elections expected in April 2010; pre-election parliamentary session expected to be very short. ### Recent Developments (2009Q3–Q4) - Real activity and labor market: - Real GDP fell by 7.2 percent year-on-year in 2009Q3. - Unemployment rate increased from 9.6 percent in 2009Q2 to 10.3 percent in 2009Q3. - Retail sales dampened by weak labor market and increase in VAT rate in July 2009. - Credit and banking sector: - Credit stagnated; outstanding loans to corporations fell by 4 percent since the beginning of the year. - Loans to households stable, with a shift in new lending from foreign currency to domestic currency. - Inflation and wages: - CPI inflation moderated to 4.7 percent in October 2009, due mostly to lower food price inflation. - Private sector wage growth excluding bonuses declined to 4.1 percent y-o-y in September 2009. - External sector and current account: - Preliminary trade data suggest current account could register a surplus of about 2 percent of GDP in 2009Q3. - Exports benefited from rebound in the euro area; imports contracted further. - Outflows of investment income fell in line with declining corporate profits. - Financial market developments: - Exchange rate roughly stable at about 265-275 forint per euro. - CPI-based REER about 8 percent below its July 2008 peak; appreciated by 20 percent since March 2009; exchange rate roughly in line with CGER fundamentals. - Yields on five-year government bonds dropped by about 1 percentage point since September to around 7 percent. - Net international reserves increased by €2.8 billion in 2009Q3. - Government net financing included euro bond issuance €1 billion and EU balance of payments support €1.5 billion; non-residents purchased domestic-currency government securities on a net basis €0.6 billion. ### Macroeconomic Outlook and Projections - Short-term outlook: - Pace of contraction expected to ease from -6.7 percent in 2009 to -0.6 percent in 2010. - Real GDP growth for 2010 revised up by 1/4 percentage point versus Third Review due to stronger export growth and lower domestic interest rates. - Credit to the economy expected to bottom out in Q1 2010. - CPI inflation projected to rise above 5 percent by end-2009 and then fall below 3 percent by mid-2010. - Current account deficit expected to narrow sharply to 0.5 percent of GDP in 2009 and then widen to 1.5 percent of GDP in 2010. - Note: 2009 adjustment in the current account was almost 7 percentage points of GDP compared to Third Review projections. - External vulnerabilities and financing: - Improvement in external financing conditions expected to persist, but vulnerabilities remain due to high level and short maturity of external debt. - Gross external financing requirement in 2010 remains elevated because of external debt structure. - Increase in reserves and available financing from the Fund, EU, and World Bank provide a buffer. - Medium-term projections: - External debt-to-GDP ratio expected to peak at 137 percent in 2009 and fall gradually to 112 percent in 2014. - Peak about 4 percentage points of GDP higher than at Third Review due to methodological changes, debt data revisions, and more optimistic rollover assumptions. - Projection highly sensitive to exchange rate path. ### Fiscal Policy: Performance, Targets, and Risks - Consolidation framework and targets: - Structural general government balance expected to improve by about 3 percentage points of GDP in 2009, a further 1 percentage point in 2010, and a further 0.1 percentage point in 2011. - Aim to bring headline general government deficit below 3 percent of GDP by 2011. - Government debt-to-GDP ratio expected to peak at about 80 percent at end-2010 and decline to about 70 percent by 2014. - Beyond 2011, no further adjustment assumed over the medium term; a roughly constant structural overall balance after 2011 is essential to reduce public debt-to-GDP under adverse shocks. - 2009 outturns and adjustments: - End-September 2009 target on primary cash balance of central government met. - Authorities and staff agreed on limiting general government deficit to 3.9 percent of GDP in 2009. - Authorities propose to adjust down end-December 2009 performance criterion on central government cumulative cash primary balance to account for macro-related revenue shortfalls and higher spending on unemployment benefits; general government deficit target unchanged as deterioration in primary balance offset by lower interest expenditure. - 2010 budget and execution risks: - 2010 budget adopted by parliament consistent with agreed target and reflects full implementation of previously agreed structural reforms. - Modest reduction of general government deficit to 3.8 percent of GDP in 2010 needed to preserve credible commitment to debt sustainability while avoiding excessively negative impulse to activity. - Overall budgetary reserves at 0.8 percent of GDP; remaining specific reserves contingent on Constitutional Court ruling on farm support. - Meeting 2010 fiscal objectives requires strict expenditure control; appointment of treasurers in line ministries and clarity on appropriations support discipline. - Staff baseline scenario includes risks: (i) lower-than-projected revenue due to stock building of excise stamps in 2009 and weakness in gambling tax and corporate tax; (ii) higher-than-projected subsidies to public transport if reforms are insufficient. - Taking these into account, remaining budgetary reserves would amount to about 0.5 percent of GDP. - Additional adjustment needs: - To bring deficit below 3 percent of GDP in 2011, authorities must offset: - fiscal impact of increase in the threshold for the top PIT bracket projected to be 0.6 percent of GDP, - budgetary effect of the central bank’s loss expected in 2010 projected to be 0.3 percent of GDP, - projected weak growth of some tax bases relative to GDP. - Additional expenditure measures that could amount to about 1¼ percent of GDP should be envisaged. ### Public Transport and MAV - Prior action: business plan for MAV consistent with planned savings in the 2010 budget to be prepared by December 7, 2009. - Government to announce decisions on fares and subsidies for entire public transport system by December 15, 2009. - Short-term savings expected from envisaged reforms, but structural inefficiencies must be addressed to avoid a continued significant drain on government finances. ### Financial Sector: Soundness, Risks, and Policy - Key indicators and recent outcomes: - Return-on-equity for banking system (first nine months of 2009): 14.8 percent (down from 15.3 percent mid-year and 24.9 percent same period 2008 noted elsewhere). - Non-performing loans (NPLs) as share of total loans: 3.5 percent end-March, 5.1 percent end-June, 5.9 percent end-September. - Banking system capital adequacy ratio (CAR): 12.3 percent at end-June; increased to 13.1 percent at end-September. - Liquid assets as share of total assets: 14.6 percent at end-2008; increased to 21.5 percent at end-September 2009. - Central bank projects NPLs will peak at 9-10 percent during course of 2010. - Profitability and stress tests: - Bank profitability projected to weaken as loan-loss provisions increase and interest margins narrow. - Updated stress tests: no significant recapitalization needs under macroeconomic baseline; recapitalization needs of €400–600 million under a downside scenario. - Liquidity and parent bank support: - Corporate deposits fell somewhat in Q3 after strong H1 increase; household deposits continued to increase. - Parent bank funding to Hungarian subsidiaries stabilized in September and October after earlier withdrawals. - Commitments from parent banks (six largest subsidiaries) under EBCI: minimum parents’ exposure set at 95 percent of that prevailing at end-September 2008; follow-up letters expected by end-December 2009. - Subcommittee of Financial Stability Committee monitoring three credit institutions that received FX loans from government; capital enhancement fund under December 2008 Financial Stability Act extended from end-2009 to end-2010; size of fund about 1 percent of GDP. - Supervision, inspections, and institutional reforms: - HFSA Action Plan on track with priority on on-site inspections of large banks: six of eight large-bank inspections finalized by end-October deadline; one completed in November; final inspection projected early 2010. - Legislation submitted Oct 22 to upgrade HFSA to an autonomous organization and establish a Financial Stability Council (FSC); HFSA expected to be upgraded but will not obtain right to issue binding regulations due to insufficient political support; FSC and MNB expected to obtain right to propose regulations to government on a “comply or explain” basis. - HFSA—rather than MNB—expected to be granted right to issue binding temporary resolutions in case of imminent systemic risk. Legislation expected to be enacted by December 15, 2009. - Bank resolution regime: - Amendments to Law on Credit Institutions and Financial Enterprises submitted Oct 22 expected to be passed by December 15, 2009 (structural benchmark for end-December 2009): stronger removal regime for executives, additional mandatory threshold for supervisory commissioner appointment when CAR falls below 4 percent, clear statement that only HFSA can initiate bank liquidation proceedings. - Remaining technical work on broadening powers for specific bank resolution techniques to be completed by December 11, 2009 (prior action); submit proposed legislation to parliament by February 12, 2010 (structural benchmark). - FX household lending regulations: - Regulations to prescribe lower loan-to-value ratios for FX loans than for forint loans and changes to banks’ scoring systems so monthly installments for FX loans reflect exchange rate volatility while avoiding large dampening of credit growth. - Significant impact on outstanding FX household loans expected to take several years. ### Monetary Policy, Inflation, and Exchange Rate - Policy rate and room for easing: - Since July, MNB cut key policy rate by total of 300 bps to 6.5 percent. - Excluding temporary impact of July VAT and excise increases, implies a real policy rate slightly below 4.5 percent. - Markets expect policy rate to drop to around 6 percent in early 2010. - Given still-large interest rate differential to the euro, immediate impact of further cuts on credit demand expected to be limited. - Inflation consultation mechanism (ICM) and adjustors: - Central point for end-quarter inflation: 3 percent; bands: lower ±1, upper ±2. - CPI inflation adjustments for VAT/excise: CPI inflation will be adjusted by 2.5 percentage points in 2009 in December 2009; by 3.0 percentage points in March and June 2010. - Consumer price inflation stood at 4.9 percent at end-September; adjusted for estimated technical impact of July indirect tax increases (3.7 percent) yields 1.2 percent—far lower than central bank midpoint target of 3.0 percent. - Adjustor under the ICM modified in line with estimated actual pass-through. - FX swap facilities and reserves: - Demand for central bank medium-term FX swap facilities picked up; total amounts drawn €1.2 billion in early December remain far below available about €4.5 billion. - Amounts available under medium-term swap facilities will peak at end-year and then gradually fall over 2010. - If exchange rate faces strong and sustained upward pressure, policy responses include appropriate policy mix within inflation targeting framework, possible interest rate cuts, communication policy; FX intervention could be used in event of excessive volatility. - Gross official reserves: - Gross official reserves increased from €17.4 billion at end-September 2008 to €30.6 billion at end-September 2009 (other table entries show 2008: 24,040 and 2009 Sept: 30,603 as related reservoir figures). ### Program Modalities, Conditionality, and Financing - Stand-By Arrangement (Box 3): - Access: SDR 10.5 billion (1,015 percent of quota). - Length: 23 months from November 6, 2008 (extended from 17 months at Third Review). - Phasing of disbursements: - SDR 4.2 billion disbursed on November 6, 2008. - SDR 2.1 billion disbursed March 25, 2009. - SDR 1.3 billion disbursed June 23, 2009. - SDR 50 million disbursed at completion of Third Review September 25, 2009. - Availability of fifth tranche SDR 725.1 million subject to completion of Fourth Review; authorities indicated intention not to draw this amount. - Remaining amounts (SDR 2,175 million) contingent on completion of further quarterly reviews. - Total: 10,537.5 million SDRs — 1,014.8 percent of quota. - Performance criteria and adjustments: - LOI sets out performance criteria and structural conditionality through March 2010. - Net international reserves performance criterion adjusted upward to lock in higher-than-anticipated reserves at end-September 2009 and expected improved external financing conditions. - Central government cumulative cash primary balance adjusted down to account for part of macro-related revenue shortfalls and higher spending on unemployment benefits. - Prior action introduced to support credibility of 2010 budget regarding planned reduction in MAV subsidy. - Prior action and structural benchmark for Feb 12, 2010 introduced to address delays in preparing legislation to broaden bank resolution techniques. - Key program monitoring figures (selected exact values): - Return on equity (first three quarters of 2009): 14.8 percent. - Capital adequacy ratio: 13.1 percent at end-September; 12.3 percent at end-June. - Non-performing loans ratio: 5.9 percent at end-September; 5.1 percent at end-June. - MNB policy rate cut total: 300 bps to 6.5 percent (since July 28). - Inflation adjustor technical effect: 3.7 percent (indirect tax increases in July 2009). - NIR outstanding stock: End-December 2008 = 18,493.8 (In millions Of Euros). - Floor on cumulative change in NIR from end-December 2008 (actuals and targets): - End-March 2009 (actual) = 1,464 - End-June 2009 (actual) = -1,195 - End-September 2009 (actual) = 1,574 - End-December 2009 (performance criterion) = -2,378 - End-March 2010 (performance criterion) = -2,962 - End-June 2010 (indicative target) = -2,942 - External program disbursements (technical assumption) — cumulative flows from end-December 2008 (In millions of Euros): - End-March 2009 = 2,000 - End-June 2009 = 2,000 - End-September 2009 = 3,500 - End-December 2009 (technical assumption) = 3,500 - End-March 2010 (technical assumption) = 3,500 - End-June 2010 (technical assumption) = 3,500 ### Staff Appraisal, Recommendations, and Risks - Staff appraisal highlights: - Important progress since SBA approval in November 2008 in strengthening policies underpinning fiscal sustainability and financial stability. - Government spending reduced durably while allowing fiscal deficit to increase in 2009 to avoid exacerbating the contraction. - Bank supervision and remedial action framework enhanced, helping anchor market expectations and create room for cautious policy rate reductions. - All end-September 2009 quantitative performance criteria and relevant structural benchmarks met. - Policy recommendations and conditionality priorities: - Strict expenditure control in 2010 to place government debt on declining path; further measures required in 2011 to bring fiscal deficit below 3 percent of GDP. - Preserve financial stability: complete reform of institutional arrangements for bank supervision, strengthen bank resolution framework, grant HFSA authority to issue regulations (staff to pursue with next government if needed). - Intensify efforts to restructure public transport and MAV to secure savings and avoid fiscal drains. - Continue stepped-up HFSA on-site inspections and follow-up on capital adequacy and credit quality; monitor credit institutions that received FX loans from government. - Introduce regulation to reduce risks related to household FX lending (loan-to-value limits, installment treatment). - Key downside risks: - Implementation uncertainty in non-central institutions (local governments and public transport) could rapidly exhaust planned buffers if combined. - Revenue risks from personal income tax and social security contributions in Q4 and corporate tax receipts in December. - Financial-sector risk from deterioration in asset quality and the high stock of external debt with short maturity. ### Selected Quantitative Tables and Indicators (high-fidelity excerpts) - Real GDP (change in percent): 2006: 4.0; 2007: 1.0; 2008: 0.6; 2009: -6.7; 2010: -0.6. - CPI (end year): 2006: 6.5; 2007: 7.4; 2008: 3.5; 2009: 6.1; 2010: 2.5. - Unemployment rate (average, percent): 2006: 7.5; 2007: 7.4; 2008: 7.8; 2009: 9.9; 2010: 10.9. - Overall balance (percent of GDP, ESA-95): 2006: -9.3; 2007: -4.9; 2008: -3.7; 2009: -3.9; 2010: -3.8. - Debt (percent of GDP, ESA-95): 2006: 65.6; 2007: 65.7; 2008: 72.9; 2009: 78.8; 2010: 80.2. - Current account (percent of GDP): 2006: -7.5; 2007: -6.8; 2008: -7.2; 2009: -0.5; 2010: -1.5. - Gross external debt (percent of GDP, excluding SPEs): 2006: 91.0; 2007: 98.1; 2008: 115.3; 2009: 136.6; 2010: 131.7. - Gross official reserves (billions of euros, selected): 2006: 16.4; 2007: 16.4; 2008: 24.0; 2009: 27.5; 2010: 32.5. - Banking sector indicators (selected): - Regulatory capital to risk-weighted assets: 2009 Q3: 13.1. - NPLs to gross loans: 2009 Q3: 5.9. - Provisions to NPLs: 2009 Q3: 51.2. - Foreign currency loans to total loans: 2008: 64.7; 2009 (various): 63.1; 63.8; 64.4; 63.3. - Appendix Table 1 selected public sector debt (baseline, percent of GDP): 2004: 59.4; 2006: 65.6; 2008: 72.9; 2009: 78.7; 2010: 80.2; 2014: 68.9. - Appendix Table 1 growth and interest assumptions (selected exact values): - Real GDP growth (baseline, percent): 2006: 4.0; 2007: 1.2; 2008: 0.6; 2009: -6.7; 2010: -0.6; 2011: 3.2; 2014: 3.5. - Average nominal interest rate on public debt (percent): 2004: 8.3; 2008: 6.6; 2009: 5.8; 2010: 5.8. *Source: IMF staff report excerpts (Main Economic Indicators, 2006–10; Stand-By Arrangement; Appendix Table 1) as provided in content unit _cr09330.* ### 1. Main Economic Indicators, 2006–10 ...........................................................................21 ### 1. Main Economic Indicators, 2006–10 ### Introduction and Summary - Important progress since the SBA approval in November 2008: government spending reduced in a durable way while allowing the fiscal deficit to increase in 2009 to avoid exacerbating the economic contraction. - Financial sector: bank supervision and remedial action framework enhanced; measures have better anchored market expectations and created room for a cautious reduction in the policy interest rate. - Compliance: All September 2009 quantitative performance criteria, the continuous performance criterion on non-accumulation of external arrears, the indicative target on central government debt, and the continuous structural benchmark related to government lending to banks were met. - Prior actions and structural measures: - Government committed to preparing a business plan for the state-owned railway company (MAV) consistent with planned savings in the 2010 budget by December 7, 2009 (prior action). - Finish technical work on draft legislation to strengthen the bank resolution framework by December 11, 2009 (prior action). - Financing decisions: Authorities do not intend to draw SDR 725 million (about €780 million) available upon completion of this review; will not request release of EU balance of payments assistance upon completion of this review. Outstanding undrawn amount (of up to €1 billion) remains available. - World Bank: approved a €1 billion Financial Sector and Macro Stability Loan on September 22, 2009 (loan documents not yet signed). - Program key objectives: - Put government debt as a share of GDP firmly on a declining path over the medium term via strict expenditure control and cautious use of contingency reserves in 2010 and further measures in 2011. - Preserve financial stability via reform of institutional arrangements for bank supervision and strengthening the bank resolution framework. - Improved global financial conditions and increased confidence in fiscal sustainability should create room for cautious interest rate cuts. - Political context: Parliamentary elections expected in April 2010; pre-election parliamentary session expected to be very short. ### Recent Developments (2009Q3–Q4) - Real activity and labor market: - Real GDP fell by 7.2 percent year-on-year in 2009Q3. - Unemployment rate increased from 9.6 percent in 2009Q2 to 10.3 percent in 2009Q3. - Retail sales dampened by weak labor market and increase in VAT rate in July 2009. - Credit and banking sector: - Credit stagnated; outstanding loans to corporations fell by 4 percent since the beginning of the year. - Loans to households have been stable, with a shift in new lending from foreign currency to domestic currency. - Inflation and wages: - CPI inflation moderated to 4.7 percent in October 2009, due mostly to lower food price inflation. - Private sector wage growth excluding bonuses declined to 4.1 percent y-o-y in September 2009. - External sector and current account: - Preliminary trade data suggest current account could register a surplus of about 2 percent of GDP in 2009Q3. - Exports benefited from growth rebound in the euro area; imports contracted further. - Outflows of investment income fell in line with declining corporate profits. - Financial market developments: - Exchange rate roughly stable at about 265-275 forint per euro. - FX swap market: non-residents taking long positions; liquidity in FX spot market improved (lower bid-ask spreads); exchange rate volatility fallen to about pre-crisis levels. - CPI-based REER about 8 percent below its July 2008 peak; appreciated by 20 percent since March 2009; exchange rate roughly in line with fundamentals as estimated by CGER. - Government bond market: yields on five-year bonds dropped since September by another percentage point to around 7 percent. - Net international reserves increased by €2.8 billion in 2009Q3, more than expected. - Use of central bank FX swap facility less than programmed; banks’ net external financing improved in 2009Q3 but estimated still negative. - Government net financing: euro bond issuance €1 billion and EU balance of payments support €1.5 billion; non-residents purchased domestic-currency government securities on a net basis €0.6 billion. ### Policy Discussions — Macroeconomic Framework - Outlook and projections: - Pace of economic contraction expected to ease from 6.7 percent in 2009 to 0.6 percent in 2010. - Real GDP growth for 2010 revised up by ¼ percentage point versus Third Review, reflecting stronger export growth and reduction in domestic interest rates. - Credit to the economy expected to bottom out in the first quarter of 2010; remainder of 2009 credit projected to contract mildly. - CPI inflation projected to rise above 5 percent by end-2009 and then fall to below 3 percent by mid-2010. - Current account deficit expected to narrow sharply to 0.5 percent of GDP in 2009 and then widen to 1.5 percent of GDP in 2010. - Note: the 2009 adjustment in the current account was almost 7 percentage points of GDP compared to Third Review projections. - External financing and vulnerabilities: - Improvement in external financing conditions expected to persist, but vulnerabilities remain due to high level and short maturity of external debt. - Current account deficit is fully offset by EU capital transfers, implying a lower external financing need than anticipated at the Third Review. - Non-residents expected to maintain share of HUF-denominated government bonds and provide much of financing for FX bond redemptions. - Rollover rates for parent banks of Hungarian subsidiaries revised upward per European Bank Coordination Initiative (EBCI) commitments. - Gross external financing requirement in 2010 remains elevated because of external debt structure. - Increase in reserves, and available financing from the Fund, EU, and World Bank provide a buffer. - Medium-term projections: - External debt-to-GDP ratio expected to peak at 137 percent in 2009 and fall gradually to 112 percent in 2014. - Peak about 4 percentage points of GDP higher than at Third Review due to methodological changes, debt data revisions, and more optimistic rollover assumptions. - Projection highly sensitive to exchange rate path. ### Policy Discussions — Fiscal Policy - Fiscal consolidation and targets: - Strengthening fiscal sustainability remains core of the program. - Structural general government balance expected to improve by about 3 percentage points of GDP in 2009, a further 1 percentage point of GDP in 2010, and a further 0.1 percentage point of GDP in 2011. - Aim to bring headline general government deficit below 3 percent of GDP by 2011. - Beyond 2011, no further adjustment assumed over the medium term. - Government debt-to-GDP ratio expected to peak at about 80 percent at end-2010 and decline to about 70 percent by 2014. - A roughly constant structural overall balance after 2011 is essential to reduce public debt-to-GDP under adverse shocks. - 2009 performance and adjustments: - End-September 2009 target on primary cash balance of central government met. - In 2009Q3, higher-than-projected spending by line ministries and on housing subsidies offset by lower-than-expected spending in other areas and higher-than-projected revenue (VAT and personal income tax). - Local governments registered a small surplus in first nine months of 2009. - Authorities and staff agreed on limiting general government deficit to 3.9 percent of GDP in 2009. - Compared to Third Review: projected spending by line ministries and on unemployment benefits and health care higher; corporate tax revenue lower; offset by higher-than-projected excise revenue, dividend receipts from state-owned enterprises, saving of the pension contingency reserve, and interest payments. - Tax compliance does not appear to have deteriorated significantly over past year. - Downside revenue risks: personal income tax and social security contributions in Q4; corporate tax receipts in December. - Authorities propose to adjust down end-December 2009 performance criterion on central government cumulative cash primary balance to account for macro-related revenue shortfalls and higher spending on unemployment benefits; general government deficit target unchanged as deterioration in primary balance offset by lower interest expenditure. - 2010 budget and execution risks: - 2010 budget adopted by parliament consistent with agreed target and reflects full implementation of previously agreed structural reforms. - Modest reduction of general government deficit to 3.8 percent of GDP in 2010 needed to preserve credible commitment to debt sustainability while avoiding excessively negative impulse to activity. - Specific reserves allocated to higher spending on healthcare, local governments on school meals and education, and reduction in VAT on district heating. - Overall budgetary reserves at 0.8 percent of GDP; remaining specific reserves contingent on Constitutional Court ruling on farm support. - Meeting 2010 fiscal objectives requires strict expenditure control. - Two factors underpinning spending discipline: appointment of treasurers in line ministries; clarity on appropriations from the beginning of the year. - Staff baseline scenario reflects two significant risks: - (i) Lower-than-projected revenue due to stock building of excise stamps in 2009 and continuation of weakness in gambling tax and corporate tax. - (ii) Higher-than-projected subsidies to public transport system if envisaged reforms are insufficient. - Taking these into account, remaining budgetary reserves would amount to about 0.5 percent of GDP. *Source: IMF staff report excerpt (Main Economic Indicators, 2006–10).* ### 17. The authorities said they would intensify their efforts aimed at restructuring the ### _cr09330 - 17. The authorities said they would intensify their efforts aimed at restructuring the ### Public transport and MAV (state-owned railway) - The government will prepare a business plan for the state-owned railway company (MAV) consistent with the planned savings in the 2010 budget by December 7, 2009 (prior action). - The government will announce decisions on fares and subsidies for the entire public transport system by December 15, 2009. - Short-term savings are expected from envisaged reforms; however, the authorities need to tackle structural inefficiencies affecting the sector’s profitability to avoid a continued significant drain on government finances that would complicate fiscal consolidation. ### Fiscal policy, adjustment needs, and contingency saving - If economic and financial conditions turn out to be better than anticipated, any extra revenues should be saved to help limit spending adjustment needed to bring the overall deficit of the general government below 3 percent of GDP in 2011. - To bring the deficit below 3 percent of GDP in 2011, authorities must offset: - the fiscal impact of the increase in the threshold for the top PIT bracket projected to be 0.6 percent of GDP, - the budgetary effect of the central bank’s loss expected in 2010 projected to be 0.3 percent of GDP, - projected weak growth of some tax bases (such as private consumption) relative to GDP. - Additional expenditure measures that could amount to about 1¼ percent of GDP should be envisaged to preserve the medium-term adjustment path and secure a trend decline in the debt to GDP ratio. - Authorities will review possible expenditure rationalization reforms aimed at improving the efficiency of public service delivery. ### Fiscal Responsibility Law and budget procedures - The Fiscal Council has begun advocating for fiscal responsibility and transparency, including a thorough review of the 2010 budget submitted to parliament. - The government has taken on board most Fiscal Council recommendations and intends to work closely with the Council to implement others. - The Ministry of Finance, in consultation with the Fiscal Council and the parliament budgetary committee, completed a review of inconsistencies between the Fiscal Responsibility Law and existing budget procedures and has started addressing identified inconsistencies. - The Ministry intends to take steps to improve budgetary procedures with a focus on medium-term budget planning and management. ### Financial sector: profitability, asset quality, and capital - Return-on-equity for the banking system as a whole in the first nine months of the year was 14.8 percent, down slightly from the mid-year result (15.3 percent). - Non-performing loans (NPLs) as a share of total loans: - 5.9 percent at end-September, - 5.1 percent at end-June, - 3.5 percent at end-March. - Deterioration concentrated in unsecured consumer lending and commercial real estate. - Banking system capital adequacy ratio (CAR) increased to 13.1 percent at end-September from 12.3 percent at end-June, owing mostly to retained earnings; particularly high capital buffer for the largest domestic bank. ### Projections and stress testing - Bank profitability is projected to weaken as loan-loss provisions increase further and interest margins narrow. - Central bank projects NPLs will peak at 9-10 percent during the course of 2010. - For most banks, loan loss provisions are expected to reduce profits but not capital levels. - Updated stress tests suggest: - no significant recapitalization needs under the macroeconomic baseline scenario, - recapitalization needs of €400–600 million under a downside scenario. ### Liquidity and parent bank support - Corporate deposits fell somewhat in Q3 after a strong H1 increase; household deposits continued to increase. - Parent bank funding to Hungarian subsidiaries stabilized in September and October after earlier withdrawals. - Liquid assets as a share of total assets increased to 21.5 percent at end-September, up from 14.6 percent at end-2008. - Largest domestic bank repaid in early November half of the FX-denominated government loan (€0.7 billion) received in Q2. ### Commitments from parent banks and monitoring - Authorities secured specific commitments from parent banks of Hungary’s six largest subsidiaries in the context of the EBCI; follow-up meeting held in Brussels on November 19 to add specificity. - Minimum level of parents’ exposure set at 95 percent of that prevailing at end-September 2008. - A specific reporting format to monitor groups’ global exposure to Hungary was discussed and approved. - Authorities expect to receive individual letters confirming banks’ commitments by end-December 2009. - Subcommittee of the Financial Stability Committee monitoring the three credit institutions that received FX loans from the government meets regularly; capital enhancement fund under the December 2008 Financial Stability Act was extended from end-2009 to end-2010. The size of the fund is about 1 percent of GDP. ### Supervision, inspections, and institutional reforms - HFSA Action Plan implementation is on track with priority on on-site inspections of large banks: - Six of eight large-bank inspections finalized by the originally envisaged end-October deadline, - One completed in November, - Final inspection projected to be finalized in early 2010. - Some inspections extended, leading in a few cases to requests for sizeable additional provisions that do not threaten capital adequacy. - Reviews of foreign subsidiaries of Hungarian banks progressing as scheduled. - Preparations for next cycle of on-site controls, including credit quality inspections for selected banks in early 2010, are progressing; objective to complete reports for three banks in the first quarter (structural benchmark for end-March 2010) is within reach. - Legislation submitted to parliament on October 22 to upgrade HFSA to an autonomous organization and establish a Financial Stability Council (FSC); some modifications occurred during consultation with parliament. - HFSA expected to be upgraded to an autonomous institution accountable to parliament and controlling its budget and human resources, but will not obtain the right to issue binding regulations due to insufficient political support. - FSC and MNB expected to obtain the right to propose regulations to the government on a “comply or explain” basis (government must adopt the proposal within 15 days or publicly explain disagreement). - HFSA—rather than the MNB—expected to be granted the right to issue binding temporary resolutions in case of imminent risks to the financial system. - Legislation expected to be enacted by December 15, 2009; staff will pursue granting HFSA the power to issue binding regulations with the next government. ### Bank resolution regime: progress, gaps, and commitments - Amendments to the Law on Credit Institutions and Financial Enterprises submitted October 22, expected to be passed by December 15, 2009 (structural benchmark for end-December 2009): - stronger regime for removal of executives who no longer meet “fit and proper” criteria, - additional mandatory threshold for appointment of a supervisory commissioner when capital adequacy falls below 4 percent, - clear statement that only the HFSA can initiate bank liquidation proceedings. - Progress on broadening powers for specific bank resolution techniques has been slower than expected due to technical complexity and an overcrowded legislative agenda. - Authorities will complete by December 11, 2009 the remaining technical work—including a full legislative proposal and a presentation note—on broadening available bank resolution techniques (prior action). - Authorities will finish consultations and submit the proposed legislation to parliament by February 12, 2010 (structural benchmark); completion of the comprehensive proposal is a major step even if parliament likely will not vote before elections. Staff will press the issue with the new government after elections. ### FX household lending regulations - Government developing regulations to reduce risks related to lending to households in foreign currency (FX loans). - Regulations expected to prescribe lower loan-to-value ratios for FX loans than for forint loans and changes to banks’ scoring systems for household loans, implying lower monthly installments for FX loans than for forint loans to reflect exchange rate volatility while avoiding unnecessarily large dampening of credit growth during recovery. - These regulations aim to prevent further build-up of balance sheet vulnerabilities and protect households with limited stress-absorbing capacity, though significant impact on the outstanding stock of household FX loans will take several years. ### Monetary policy and inflation - Since July, the MNB cut the key policy rate by a total of 300 bps to 6.5 percent. - Excluding the temporary impact of the July increases in VAT and excise duties on inflation, this implies a real policy rate of slightly below 4.5 percent. - Low underlying inflation, large output gap, and flat yield curve point to substantial room to cut policy rates further if financial strains continue to relax. - Markets expect the policy rate to drop to around 6 percent in early 2010. - Given the still-large interest rate differential to the euro, immediate impact of further policy rate cuts on demand for credit is expected to be limited. ### Inflation consultation mechanism and FX swap facilities - Consumer price inflation stood at 4.9 percent at end-September, equivalent to 1.2 percent once adjusted for the estimated technical impact of VAT and excise increases in July (3.7 percent)—far lower than the central bank’s midpoint inflation target (3.0 percent). - Under-shooting related to lower-than-estimated pass-through of indirect tax increases; the adjustor under the ICM has been modified accordingly. - Demand for the central bank’s medium-term FX swap facilities picked up recently, but total amounts drawn (€1.2 billion in early December) remain far below amounts available (about €4.5 billion), reflecting normalization of spreads and maturities. - Amounts available under medium-term swap facilities will peak at end-year and then gradually fall over 2010. - Demand for forint-denominated liquidity instruments has remained low. - If the exchange rate comes under strong and sustained upward pressure, agreed policy responses include an appropriate policy mix within the inflation targeting framework, including, if needed, interest rate cuts and consistent communication policy; FX intervention could be used in the event of excessive exchange rate volatility. ### Program modalities, performance criteria, and financing - LOI sets out performance criteria and structural conditionality through March 2010. - Performance criteria adjustments: - Net international reserves adjusted upward to lock in higher-than-anticipated reserves at end-September 2009 and expected improved external financing conditions. - Central government’s cumulative cash primary balance adjusted down to account for part of macro-related revenue shortfalls and higher spending on unemployment benefits. - Adjustors modified: - Performance criterion for net international reserves adjusted upward for program disbursements in 2010 from the EU and the World Bank. - Adjustor under the inflation consultation mechanism modified in line with estimated actual pass-through. - A prior action introduced to support credibility of the 2010 budget regarding planned reduction in MAV subsidy. - Prior action and structural benchmark for February 12, 2010 introduced to address delays in preparing legislation to broaden available bank resolution techniques; end-December 2009 structural benchmark on remedial action and bank resolution regime modified to exclude broadening of available techniques. - Authorities indicated intention not to draw the amount made available upon completion of this review and will not request release of EU balance of payments assistance upon completion of this review. - Gross official reserves increased from €17.4 billion at end-September 2008 to €30.6 billion at end-September 2009. - Available official financing from the Fund, the EU and the World Bank intended to help insulate Hungary from potential external shocks throughout the program period. ### Staff appraisal and performance outcomes - Important progress since SBA approval in November 2008 in strengthening policies underpinning fiscal sustainability and financial stability. - Government spending reduced durably while allowing fiscal deficit to increase in 2009 to avoid exacerbating the economic contraction. - Bank supervision and remedial action framework enhanced, helping anchor market expectations and creating room for cautious policy rate reductions. - All end-September 2009 quantitative performance criteria, the continuous performance criterion on non-accumulation of external arrears, the indicative target on central government debt, and the continuous structural benchmark related to government lending to banks were met. - Inflation in September breached the lower inner band of the inflation consultation mechanism and the central bank had discussions with Fund staff. - Structural benchmark on submission of legislation to parliament on strengthening institutional framework for bank supervision was met with only a minor delay. *IMF staff report content (pages excerpted).* ### 39. Hungary’s economic outlook has improved modestly since the last review, ### _cr09330 - 39. Hungary’s economic outlook has improved modestly since the last review, ### Macroeconomic outlook - Real GDP is contracting sharply this year and is expected to fall a little further in 2010. - The current account deficit is narrowing quickly this year. - Inflation is expected to rise temporarily through early 2010 due to the increases in the VAT rate and excise duties, and then fall to below the central bank’s inflation target by mid-2010. - Key program objectives: improve fiscal sustainability and preserve financial stability. ### Fiscal policy and budgetary risks - The government should be prepared to take additional measures, if necessary, to underline its commitment to fiscal sustainability. - The 2010 budget credibly reflects structural spending cuts decided in June, but strict expenditure control and a cautious use of contingency buffers will be essential to manage risks. - Concrete measures backing planned savings in local governments and in public transportation have been identified and incorporated into the budget. - Risks: - Implementation of adjustment measures in non-central institutions (local governments and public transportation) is subject to large uncertainty. - If combined, risks could rapidly exhaust planned buffers. - Recommended safeguards: - Continue initiatives to strengthen expenditure controls. - Use reserves only when offsets cannot be found within existing appropriations. - Strengthen efforts to restructure the public transport system. ### Financial stability and banking sector - Funding levels in the banking system have remained stable and capital levels are well above regulatory requirements, but pressures on capital will rise due to the impact of the economic downturn on credit quality. - Authorities should: - Carefully monitor the financial soundness of credit institutions that have received FX loans from the government to safeguard financial stability and minimize risks to public finances. - Have the HFSA continue stepped-up on-site inspections and conduct follow-up inspections on capital adequacy and credit quality. - Introduce regulation to reduce risks related to lending to households in foreign currency. - Implement the proposed reform of the institutional arrangements for bank supervision. - Develop a concrete proposal for strengthening the bank resolution framework. - Institutional actions pending: - Need for the HFSA to have the authority to issue regulations. - Parliamentary adoption of the proposal to strengthen the bank resolution framework will have to be taken up with the new government after the elections. - Assessment: These actions would imply material but not yet sufficient progress in financial sector reforms. ### Monetary and exchange rate policy - Policy will continue to target inflation over the medium term, while taking into account risks to financial stability. - Improved global financial conditions and increased confidence in fiscal sustainability created room for interest rate cuts in recent months. - Going forward, continued fiscal consolidation and stable external financing conditions would allow for further cautious interest rate cuts. ### Program implementation and staff position - Implementation of policies consistent with the program remains essential to strengthen macroeconomic stability and provide the basis for strong, sustainable growth over the medium term. - Staff support the authorities’ requests for completion of the fourth review and the modification of the central government primary cash balance and NIR performance criteria. ### Box 1 — Hungary’s Fiscal Adjustment in Perspective (key figures and implications) - Structural primary balance: - Improved from a deficit of 6.0 of GDP in 2006 to a surplus of 0.5 percent of GDP in 2008. - Expected to improve further to 4.7 percent of GDP in 2011. - Assumes as-yet unidentified spending measures of about 1½ percent of GDP in 2011 to offset: - planned reduction in personal income taxes, - projected loss of the central bank in 2010, - and a tax base that is expected to be less dynamic than GDP. - Consolidation magnitude: - Hungary’s fiscal consolidation effort between 2006–11, by delivering an increase in the structural primary balance of close to 11 percent of GDP, would fall among the largest observed in emerging Europe in recent decades. - Composition and focus: - Consolidation is focused on spending reforms. - Bulk of adjustment expected to come from a reduction of the structural primary spending-to-potential GDP ratio from 49 percent in 2006 to 40 percent in 2011. - Debt outlook: - Envisaged fiscal path should allow a significant reduction in the government debt-to-GDP ratio starting in 2011. - Assuming continued fiscal discipline, Hungary’s government debt is projected to be brought back below 60 percent of GDP within 10 years. ### Box 2 — Foreign Currency Lending in Hungary (vulnerabilities and recent developments) - A key macro-financial vulnerability is FX lending to unhedged borrowers. - Drivers of FX lending: - Cross-border financial integration. - Large interest differential between the forint and funding currencies such as the euro and the Swiss Franc. - Increase after 2003 reflected in part the abolition of a subsidy on forint-denominated household loans. - At end-2008, the share of FX loans in Hungary was the highest among the EU New Member States outside the Baltics. - Exchange rate episode and policy response: - Sharp depreciation of the forint between October 2008 and March 2009 raised concerns about borrowers’ ability to service FX loans and banks’ loan portfolio quality. - To prevent an excessive and possibly destabilizing depreciation, the central bank kept the policy interest rate higher than it otherwise would have been, easing only in July 2009 after financial market strains had lessened markedly. - Debt-service assessment: - Preliminary analysis shows that debt service on FX loans has remained manageable for most borrowers. - Example: monthly payment burden on a variable rate 10-year Swiss Franc mortgage loan contracted in 2005 remained below or roughly equal to the payment on a comparable forint denominated mortgage, even at the height of exchange rate pressures in March 2009. - Low euro and Swiss franc interest rates helped keep debt service manageable. - Trade-offs and policy implications: - The successful interest rate defense needs to be weighed against economic costs of tighter-than-otherwise monetary policy and possible future costs from encouraging risky behavior (moral hazard). - Recent relative shift to forint lending—amid very weak overall demand for credit—reflects banks’ efforts to reduce currency mismatch and rely more on domestic currency funding. - The attractiveness of forint lending will depend on a continued narrowing of the interest differential between the forint and foreign currencies, which will require the steadfast implementation of fiscal consolidation. *Source: _cr09330 - 39. Hungary’s economic outlook has improved modestly since the last review,* ### Box 3. Hungary: Stand-By Arrangement ### Box 3. Hungary: Stand-By Arrangement ### Arrangement terms and access - Access: SDR 10.5 billion (1,015 percent of quota). - Length: 23 months from November 6, 2008 (extended from 17 months at the Third Review). - Phasing of disbursements: - SDR 4.2 billion disbursed on November 6, 2008 (Board approval). - SDR 2.1 billion disbursed after First Review on March 25, 2009. - SDR 1.3 billion disbursed after Second Review on June 23, 2009. - SDR 50 million disbursed at completion of Third Review (rephased access). - Availability of fifth tranche SDR 725.1 million subject to completion of Fourth Review; authorities indicated intention not to draw this amount. - Remaining amounts (SDR 2,175 million) contingent on completion of further quarterly reviews. - Table (Schedule of Reviews and Purchases) entries (dates, amounts, percent of quota): - November 6, 2008 — 4,215.0 million SDRs — 405.9 percent of quota — Approval of arrangement. - March 25, 2009 — 2,107.5 million SDRs — 203.0 percent of quota — First review and end-December 2008 performance criteria. - June 23, 2009 — 1,264.5 million SDRs — 121.8 percent of quota — Second review and end-March 2009 performance criteria. - September 25, 2009 — 50.0 million SDRs — 4.8 percent of quota — Third review and end-June 2009 performance criteria. - December 18, 2009 — 725.1 million SDRs — 69.8 percent of quota — Fourth review and end-September 2009 performance criteria. - March 15, 2010 — 725.1 million SDRs — 69.8 percent of quota — Fifth review and end-December 2009 performance criteria. - June 15, 2010 — 725.1 million SDRs — 69.8 percent of quota — Sixth review and end-March 2010 performance criteria. - September 15, 2010 — 725.2 million SDRs — 69.8 percent of quota — Seventh review and end-June 2010 performance criteria. - Total: 10,537.5 million SDRs — 1,014.8 percent of quota. ### Conditionality: quantitative and prior actions - Quantitative Performance Criteria: - A floor on the central government system primary cash balance. - A band around the 12-month rate of inflation of consumer prices. - A floor on the change in net international reserves. - Non-accumulation of external debt arrears. - Quantitative Indicative Target: - Ceiling on the total debt stock of the central government system. - Prior Actions (deadlines preserved): - Prepare a business plan for the state-owned railway company (MAV) consistent with the planned savings in the 2010 budget. By December 7, 2009. - Complete the remaining technical work―including a full legislative proposal and a presentation note―on broadening the available bank resolution techniques, consistent with paragraph 20 (iii) in the March 2009 LOI. By December 11, 2009. - Structural Benchmarks: - Operation of the subcommittee described in the March 2009 LOI ¶18 as long as there is any government capital or funding support outstanding to banks, and consultation of the subcommittee with Fund staff on its work program. Continuous. - Passage by parliament of the amendments strengthening the remedial powers of the HFSA as listed in paragraph 20 (i), (ii), and (iv) of the March 2009 LOI. By end-December 2009. - Submission to parliament of the amendments strengthening the bank resolution regime as listed in paragraph 20 (iii) of the March 2009 LOI. By February 12, 2010. - Completion of reports on thematic inspections focusing on credit risk and the quality of the loan portfolio for at least 3 banks, selected using a systemic risk-based approach. By end-March 2010. ### Key macroeconomic outcomes and projections (selected indicators) - Real economy (change in percent): - Real GDP: 2006: 4.0; 2007: 1.0; 2008: 0.6; 2009: -6.7; 2010: -0.6 (columns reflect multiple revision points in source). - Private consumption: 2006: 1.9; 2007: -1.6; 2008: -0.6; 2009: -6.8; 2010: -2.3. - Gross fixed investment: 2006: -3.6; 2007: 1.6; 2008: 0.4; 2009: -9.3; 2010: 1.0. - Inflation: - CPI (end year): 2006: 6.5; 2007: 7.4; 2008: 3.5; 2009: 6.1; 2010: 2.5. - CPI (average): 2006: 3.9; 2007: 7.9; 2008: 6.1; 2009: 4.5; 2010: 3.9. - Labor and saving: - Unemployment rate (average, percent): 2006: 7.5; 2007: 7.4; 2008: 7.8; 2009: 9.9; 2010: 10.9. - Gross domestic investment (percent of GDP): 2006: 24.0; 2007: 23.5; 2008: 23.4; 2009: 20.9; 2010: 20.0. - Gross national saving (percent of GDP, from BOP): 2006: 16.5; 2007: 16.7; 2008: 16.2; 2009: 18.0; 2010: 18.5. - Government finances (percent of GDP, ESA-95): - Overall balance: 2006: -9.3; 2007: -4.9; 2008: -3.7; 2009: -3.9; 2010: -3.8. - Primary balance: 2006: -5.4; 2007: -0.9; 2008: 0.4; 2009: 0.5; 2010: 0.7. - Debt: 2006: 65.6; 2007: 65.7; 2008: 72.9; 2009: 78.8; 2010: 80.2. - External sector: - Current account (percent of GDP): 2006: -7.5; 2007: -6.8; 2008: -7.2; 2009: -0.5; 2010: -1.5. - Gross external debt (percent of GDP, excluding SPEs): 2006: 91.0; 2007: 98.1; 2008: 115.3; 2009: 136.6; 2010: 131.7. - Reserves (in billions of euros): 2006: 16.4; 2007: 16.4; 2008: 24.0; 2009: 27.5; 2010: 32.5. - Monetary aggregates (end-of-period, percent change): - Broad money: 2006: 13.6; 2007: 11.0; 2008: 9.2; 2009: 3.4; 2010: 4.3. - Credit to the economy, flow-based: 2006: 17.3; 2007: 15.9; 2008: 10.6; 2009: -1.2; 2010: 1.4. ### Balance of payments and program financing (selected figures) - Balance of payments (millions of euros, selected flows and projections): - Current Account (2008-2011 series): 2008: -7,591; 2009 (Dec est.): -562; 2010 (projections): -3,167 (2010 annual projection in table context). - Exports (selected quarters/years): e.g., 2008 total exports: 86,390; 2009 (various quarter entries include 69,080; 70,561; 71,245). - Imports (selected): e.g., 2008 total imports: -85,610; 2009 quarterly/import series include -64,813; -65,376. - Program financing and gross reserves dynamics: - Fund disbursements shown in program financing (Table 4) and net international reserves impacts detailed (e.g., Net International Reserves (increase -): entries such as -2,479; -1,464; 2,658; -2,769; 953; 2,592 across periods shown). - Program financing summary (Table 4): Program financing lines include European Union and World Bank amounts and Fund credits; sample entries include Program financing 2008 Q4 to 2010 Q3: e.g., Fund credits in line with disbursements. ### Financial sector and vulnerability indicators - Banking sector soundness (selected indicators, end of period unless noted): - Regulatory capital to risk-weighted assets: 2005: 11.6; 2006: 11.0; 2007: 10.4; 2008: 11.2; 2009 Q3: 13.1. - NPLs to gross loans: 2005: 2.3; 2006: 2.6; 2007: 2.3; 2008: 3.0; 2009 Q3: 5.9. - Provisions to NPLs: 2005: 65.1; 2006: 57.1; 2007: 64.8; 2008: 58.9; 2009 Q3: 51.2. - Foreign currency exposure: foreign currency loans to total loans ranged (examples) 2005: 47.9; 2006: 56.4; 2007: 58.7; 2008: 64.7; 2009 (various): 63.1; 63.8; 64.4; 63.3. - Indicators of external vulnerability (selected): - Short-term debt at remaining maturity: 2005: 14,012; 2006: 13,270; 2007: 18,428; 2008: 33,244; 2009: 35,441 (units implied: millions). - Gross official reserves (millions of euros): 2008: 24,040; 2009 Sept: 30,603. - External debt indicators and debt-stabilizing scenario: gross external debt series and debt-stabilizing non-interest current account and projections are presented, e.g., baseline external debt percentages: 2004–2014 table entries include 2008: 136.6; 2009: 131.7; 2014: 111.6 (percent of GDP, as provided in the staff's illustrative medium-term scenario). ### Staff illustrative medium-term fiscal scenario (selected lines) - Real GDP growth (percent): entries across 2006–14 show 2006: 3.9; 2007: 1.2; 2008: 0.6; 2009: -6.7; 2010: -0.6; 2011: 3.2; 2012: 4.5; 2013: 4.0; 2014: 3.5. - General government (ESA-95, percent of GDP) summary (selected): - Total revenues: 2006: 42.6; 2007: 44.8; 2008: 45.5; 2009: 46.2; 2010: 45.6. - Total expenditures: 2006: 51.9; 2007: 49.7; 2008: 49.2; 2009: 50.1; 2010: 49.4. - Structural general government balance (percent of potential GDP): 2006: -10.3; 2007: -5.3; 2008: -4.1; 2009: -0.7; 2010: -0.9. - Gross public debt (percent of GDP): 2006: 65.6; 2007: 65.7; 2008: 72.9; 2009: 78.8; 2010: 79.0. *Source: IMF staff estimates and Hungarian authorities as presented in the Box 3. Hungary: Stand-By Arrangement content unit.* ### Appendix Table 1. Hungary: External Debt Sustainability Framework, 2004-14 ### Appendix Table 1. Hungary: External Debt Sustainability Framework, 2004-14 ### Projections and key statistics (public sector debt, percent of GDP unless noted) - Public sector debt (baseline): 59.4 (2004), 61.8 (2005), 65.6 (2006), 65.7 (2007), 72.9 (2008), 78.7 (2009), 80.2 (2010), 79.0 (2011), 75.9 (2012), 72.4 (2013), 68.9 (2014). - Foreign-currency denominated (o/w): 15.3 (2004), 17.4 (2005), 18.5 (2006), 18.5 (2007), 26.2 (2008), 33.8 (2009), 34.2 (2010), 28.3 (2011), 26.3 (2012), 24.3 (2013), 22.5 (2014). - Change in public sector debt: 1.4 (2004), 2.4 (2005), 3.8 (2006), 0.0 (2007), 7.2 (2008), 5.9 (2009), 1.4 (2010), -1.1 (2011), -3.1 (2012), -3.4 (2013), -3.5 (2014). - Identified debt-creating flows (4+7+12): -1.2 (2004), 5.2 (2005), 1.7 (2006), -1.2 (2007), 3.4 (2008), 6.3 (2009), 2.3 (2010), -1.1 (2011), -3.1 (2012), -3.4 (2013), -3.5 (2014). - Primary deficit: 2.0 (2004), 3.7 (2005), 5.4 (2006), 0.9 (2007), -0.4 (2008), -0.4 (2009), -0.7 (2010), -1.8 (2011), -2.6 (2012), -3.2 (2013), -3.6 (2014). - Revenue and grants: 42.6 (2004), 42.3 (2005), 42.6 (2006), 44.8 (2007), 45.5 (2008), 46.2 (2009), 45.5 (2010), 44.6 (2011), 44.4 (2012), 44.3 (2013), 44.4 (2014). - Primary (noninterest) expenditure: 44.6 (2004), 46.0 (2005), 48.0 (2006), 45.7 (2007), 45.1 (2008), 45.8 (2009), 44.8 (2010), 42.9 (2011), 41.9 (2012), 41.2 (2013), 40.8 (2014). - Automatic debt dynamics: -2.4 (2004), 3.4 (2005), -2.4 (2006), -2.1 (2007), 3.8 (2008), 6.8 (2009), 3.0 (2010), 0.6 (2011), -0.6 (2012), -0.3 (2013), 0.1 (2014). - Contribution from interest rate/growth differential: -0.6 (2004), 0.6 (2005), -0.7 (2006), -0.3 (2007), 1.5 (2008), 6.8 (2009), 3.0 (2010), 0.6 (2011), -0.6 (2012), -0.3 (2013), 0.1 (2014). - Of which contribution from real interest rate: 2.0 (2004), 2.9 (2005), 1.6 (2006), 0.3 (2007), 1.9 (2008), 1.7 (2009), 2.5 (2010), 3.0 (2011), 2.8 (2012), 2.6 (2013), 2.5 (2014). - Of which contribution from real GDP growth: -2.6 (2004), -2.3 (2005), -2.3 (2006), -0.7 (2007), -0.4 (2008), 5.0 (2009), 0.5 (2010), -2.4 (2011), -3.4 (2012), -2.9 (2013), -2.4 (2014). - Contribution from exchange rate depreciation: -1.8 (2004), 2.8 (2005), -1.7 (2006), -1.8 (2007), 2.3 (2008), ... (2009 onward truncated in table). - Other identified debt-creating flows: -0.8 (2004), -2.0 (2005), -1.2 (2006), 0.0 (2007), 0.0 (2008), 0.0 (2009), 0.0 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014). - Privatization receipts (negative): -0.8 (2004), -2.0 (2005), -1.2 (2006), 0.0 (2007), 0.0 (2008), 0.0 (2009), 0.0 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014). - Recognition of implicit or contingent liabilities: 0.0 for all years 2004–2014. - Residual, including asset changes (2-3): 2.6 (2004), -2.8 (2005), 2.1 (2006), 1.3 (2007), 3.8 (2008), -0.5 (2009), -0.9 (2010), 0.0 (2011), 0.0 (2012), 0.0 (2013), 0.0 (2014). - Public sector debt-to-revenue ratio: 139.5 (2004), 146.3 (2005), 154.1 (2006), 146.6 (2007), 160.2 (2008), 170.4 (2009), 176.1 (2010), 177.1 (2011), 170.8 (2012), 163.4 (2013), 155.4 (2014). - Gross financing need (percent of GDP): 23.2 (2004), 24.6 (2005), 24.3 (2006), 18.6 (2007), 16.7 (2008), 19.2 (2009), 13.4 (2010), 25.2 (2011), 22.3 (2012), 18.0 (2013), 18.5 (2014). - Gross financing need (in billions of U.S. dollars): 23.7 (2004), 27.2 (2005), 27.5 (2006), 25.9 (2007), 26.0 (2008), 24.2 (2009), 18.4 (2010), 36.2 (2011), 33.9 (2012), 28.7 (2013), 30.9 (2014). ### Scenario results and sensitivities - Scenario with key variables at their historical averages 7/: 78.7 (2004), 78.1 (2005), 78.3 (2006), 78.5 (2007), 78.8 (2008), 79.0 (2009), -0.7 (note: table shows "-0.7" following 79.0; context indicates deviation metric). - Scenario with no policy change (constant primary balance) in 2009-2014: 78.7 (2004), 84.2 (2005), 84.4 (2006), 83.3 (2007), 82.6 (2008), 82.2 (2009), 0.4 (note: appended "0.4" in table context). - Debt-stabilizing primary balance 10/: 0.3 (reported alongside baseline projections). - Bound tests and shocks (figure notes): - Individual shocks are permanent one-half standard deviation shocks. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance (combined shock). - One-time real depreciation of 30 percent occurs in 2010 (real depreciation shock). - Shaded areas in figures represent actual data; figures in boxes represent average projections for the respective variables in the baseline and scenario being presented; ten-year historical average for the variable is also shown. ### Baseline assumptions and key macro-fiscal drivers (exact values underlying baseline) - Real GDP growth (in percent): 4.8 (2004), 4.0 (2005), 4.0 (2006), 1.1 (2007), 0.6 (2008), -6.7 (2009), -0.6 (2010), 3.2 (2011), 4.5 (2012), 4.0 (2013), 3.5 (2014). - Average nominal interest rate on public debt (in percent) 9/: 8.3 (2004), 7.4 (2005), 6.9 (2006), 6.6 (2007), 6.6 (2008), 5.8 (2009), 5.8 (2010), 6.0 (2011), 5.8 (2012), 5.7 (2013), 5.7 (2014). - Average real interest rate (nominal rate minus change in GDP deflator, in percent): reported series concatenated in table as "3.9 5.2 3.0 0.6 3.0 2.1 3.2 4.0 3.8 3.8 3.7" corresponding to years 2004–2014 as presented. - Nominal appreciation (increase in US dollar value of local currency, in percent): 15.3 (2004), -15.6 (2005), 11.5 (2006), 11.0 (2007), -11.2 (2008), ... (table truncated for later years). - Inflation rate (GDP deflator, in percent): 4.4 (2004), 2.2 (2005), 3.9 (2006), 6.0 (2007), 3.6 (2008), 3.7 (2009), 2.6 (2010), 1.9 (2011), 2.0 (2012), 2.0 (2013), 2.0 (2014). - Growth of real primary spending (deflated by GDP deflator, in percent): 3.7 (2004), 7.2 (2005), 8.6 (2006), -3.8 (2007), -0.7 (2008), -5.3 (2009), -2.6 (2010), -1.4 (2011), 2.1 (2012), 2.4 (2013), 2.5 (2014). - Primary deficit (repeat of flow): 2.0 (2004), 3.7 (2005), 5.4 (2006), 0.9 (2007), -0.4 (2008), -0.4 (2009), -0.7 (2010), -1.8 (2011), -2.6 (2012), -3.2 (2013), -3.6 (2014). - Memorandum item — Growth of real public debt: 6.2 (2004), 7.0 (2005), 7.8 (2006), -0.2 (2007), 11.7 (2008), -1.1 (2009), 0.0 (2010), 1.3 (2011), -0.9 (2012), -1.7 (2013), -2.5 (2014). ### Footnotes and definitions relevant for interpretation - 1/ General government gross debt. - 2/ Automatic debt dynamics derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). - 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π(1+g) and the real growth contribution as -g. - 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r). - 5/ For projections, the residual line includes exchange rate changes. - 6/ Gross financing need defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. - 7/ The key variables in the historical-average scenario include real GDP growth; real interest rate; and primary balance in percent of GDP. - 8/ The scenario assumes structural balances of -2.5 percent of GDP in 2009, -1.5 in 2010, and -0.5 over 2011-13. - 9/ Average nominal interest rate derived as nominal interest expenditure divided by previous period debt stock. - 10/ Debt-stabilizing primary balance assumes key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. *Source: Appendix Table 1. Hungary: External Debt Sustainability Framework, 2004-14 (as provided).* ### 16. Looking ahead, we remain committed to reducing the general government deficit to ### 16. Looking ahead, we remain committed to reducing the general government deficit to ### Fiscal outlook and consolidation - Committed objective: reduce the general government deficit to below 3 percent of GDP in 2011. - To offset: - revenue loss from the planned increase in the top personal income tax bracket in 2011; - assumed loss of the MNB expected in 2010; - consideration of permanent expenditure cuts. - Policy action: review of expenditure rationalization aimed at improving the efficiency of the delivery of public services, possibly with Fund technical assistance. ### Fiscal governance and budget procedures - Completed a review of possible inconsistencies between the Fiscal Responsibility Law and budget procedures; to be published by December 15, 2009. - Review findings: areas for further improvement, including medium-term budgeting procedures, which the authorities intend to address. - Action taken: most recommendations of the Fiscal Council related to consistency of the 2010 budget law with the Public Finance Act have been taken on board. - Outstanding issue: consolidation in the general government budget of the profits and losses of the state-owned enterprises—intended to work with the Fiscal Council to determine the best implementation approach. - Commitment: strengthen ongoing dialogue and information sharing with the Fiscal Council. ### Banking system performance (recent outcomes) - Return on equity: 14.8 percent in the first three quarters of 2009, compared to 24.9 percent in the same period of 2008. - Capital adequacy ratio: increased to 13.1 percent at end-September from 12.3 percent at end-June. - Deposits: - Corporate deposits: fell somewhat in the third quarter after a significant increase in the first half of the year. - Household deposits: continued to increase. - External bank funding: stabilized. - Credit to the economy: continued to contract at a modest pace due in part to lack of demand and tight credit conditions. - Non-performing loans ratio: increased to 5.9 percent at end-September from 5.1 percent at end-June. - Definition: Non-performing loans are corporate, household, interbank, foreign and other loans that are past due for more than 90 days. ### Banking system outlook and projections - Profitability: expected to fall further in Q4 2009 and H1 2010 and may turn negative for individual banks as interest margins narrow and provisioning increases. - Central bank projections: non-performing loans expected to peak around 9-10 percent during the course of 2010. - Capital buffer: expected to suffice to absorb projected loan losses under the macroeconomic baseline scenario in both 2009 and 2010 for systemically important banks. ### Parent bank commitments and EBCI - Secured specific commitments from parent banks of Hungary’s six largest subsidiaries under the European Bank Coordination Initiative (EBCI). - Individual letters confirming commitments are being received. - Brussels meeting held on November 19 to add specificity to May 2009 commitments. - Minimum stability of parents’ exposures: 95 percent of that prevailing at end-September 2008; all banks in compliance. - Parent banks committed to sound risk, capital and liquidity management practices, including proper asset and liability maturity structure. - Capital levels of subsidiaries: appear adequate taking into account stress-test results and consolidated group capital position. ### Supervision capacity and HFSA action plan - HFSA on-site inspections: seven of the eight largest banks finalized by end-November; last postponed to early 2010. - Reviews of foreign subsidiaries of Hungarian banks: progressing as scheduled. - Preparation for next inspection cycle: including inspections of credit quality for selected banks in early 2010. - Structural benchmark: complete reports on inspections for three banks during Q1 2010 (end-March 2010). ### Legal and institutional reforms for supervision and resolution - Submitted to parliament legal amendments to overhaul banking supervision organizational framework (structural benchmark for October 15, 2009). - Proposed legislative changes would: - upgrade the HFSA to an autonomous organization with the right to issue regulations; - give the central bank authority to issue temporary regulations on macro-prudential issues; - establish a Financial Stability Council consisting of members of the HFSA, the Central Bank (MNB) and the Ministry of Finance; - give HFSA and MNB the right to propose legislation or regulation to the government on a “comply or explain” basis. - Remedial action and resolution regime: ongoing work to strengthen the regime with the following actions and timelines: - Prior submission (October 22) to parliament of amendments to the Law on Credit Institutions and Financial Enterprises expected to be passed by December 15, 2009. These amendments will: - establish a stronger regime for removal of bank executives that no longer meet “fit and proper” criteria; - stipulate an additional mandatory threshold for appointment of a supervisory commissioner; - clearly state that only the HFSA has power to initiate bank liquidation proceedings. - Remaining technical work on broadening available bank resolution techniques: complete by December 11, 2009 (including a full legislative proposal and a presentation note) consistent with paragraph 20 (iii) in the March 2009 Letter of Intent (prior action). - Complete consultations and approvals and submit proposed legislation to parliament by February 12, 2010. - Request to modify the corresponding structural benchmark accordingly. ### Household credit vulnerability regulation - Planned regulations to prevent further buildup of household balance sheet vulnerabilities: - establish maximum loan-to-value ratios for all new mortgage and long-term mortgage-backed consumer loans in line with best international practice, with lower limits for foreign currency loans; - require that the monthly installment for a loan denominated in foreign currency be lower than the installment for a comparable forint loan. - Short-term effect: expected to have only a small impact on lending activity. - Medium-term effect: should yield a less risky composition of outstanding household loans. - Related legislation in parliament aims at: - implementing EU directive on consumer lending to strengthen lenders’ obligations and facilitate early repayment; - regulating non-bank financial intermediaries, including licensing and skill requirements; - implementing a code of conduct for banks to ensure responsible lending behavior, limit lenders’ options to make unilateral contract changes, and introduce set procedures in case of payment arrears or foreclosures. ### Monetary and exchange rate policy - MNB commitment: inflation target of 3 percent over the medium term while mitigating financial stability risks. - Policy rate: since July 28, the MNB has cut the key policy rate by a total of 300 bps to 6.5 percent. - Further easing: room for further policy rate cuts if market sentiment improvements prove sustainable. - Inflation outlook: consumer price inflation projected to fall below the MNB’s central target of 3 percent once the transitory impact of recent VAT and excise tax increases evaporates. - CPI inflation in September 2009, adjusted for the technical effect of indirect tax increases in July 2009 (3.7 percent), was below the lower inner band of the inflation consultation mechanism (ICM). - Request: modify the adjustor under the ICM in line with estimated actual pass-through (Table 2, and TMU). - ICM parameters: central point remains at 3 percent; both bands remain unchanged. ### International reserves and program stance - Key objective: maintain an adequate level of international reserves. - Program target: net international reserves (NIR) target designed to meet adequacy objective while allowing room for stabilizing market conditions. - Policy: government will refrain from issuing short-term debt to meet the NIR target. ### Program monitoring: key quantitative figures and targets (selected exact values) - Return on equity (first three quarters of 2009): 14.8 percent. - Return on equity (same period 2008): 24.9 percent. - Capital adequacy ratio: 13.1 percent at end-September; 12.3 percent at end-June. - Non-performing loans ratio: 5.9 percent at end-September; 5.1 percent at end-June. - MNB policy rate cut total: 300 bps to 6.5 percent (since July 28). - Inflation adjustor technical effect: 3.7 percent (indirect tax increases in July 2009). - TMU program exchange rates (as of September 30, 2008): - HUF 243.17 = €1 - HUF 169.15 = $1 - HUF 154.01 = CHF 1 - NIR outstanding stock: End-December 2008 = 18,493.8 (In millions Of Euros). - Floor on cumulative change in NIR from end-December 2008 (actuals and targets): - End-March 2009 (actual) = 1,464 - End-June 2009 (actual) = -1,195 - End-September 2009 (actual) = 1,574 - End-December 2009 (performance criterion) = -2,378 - End-March 2010 (performance criterion ) = -2,962 - End-June 2010 (indicative target) = -2,942 - External program disbursements (technical assumption) — cumulative flows from end-December 2008 (In millions of Euros): - End-March 2009 = 2,000 - End-June 2009 = 2,000 - End-September 2009 = 3,500 - End-December 2009 (technical assumption) = 3,500 - End-March 2010 (technical assumption) = 3,500 - End-June 2010 (technical assumption) = 3,500 ### Structural conditionality and timelines (selected) - Prior actions: - Prepare a business plan for state-owned railway company (MAV) consistent with planned savings in the 2010 budget — By December 7, 2009. - Complete remaining technical work—including a full legislative proposal and a presentation note—on broadening bank resolution techniques consistent with March 2009 LOI para 20 (iii) — By December 11, 2009. - Structural benchmarks: - Operation of the sub-committee described in the March LOI para 18 — Continuous while any government capital or funding support outstanding to banks. - Passage by parliament of amendments strengthening remedial powers of the HFSA as listed in paragraph 20 (i), (ii), and (iv) of the March 2009 LOI — By end-December 2009. - Submission to parliament of amendments strengthening the bank resolution regime as listed in paragraph 20 (iii) of the March 2009 LOI — By February 12, 2010. - Completion of reports on thematic inspections focusing on credit risk and loan portfolio quality for at least 3 banks selected with a systemic risk-based approach — By end-March 2010. *Source: _cr09330 - 16. Looking ahead, we remain committed to reducing the general government deficit to* ### 8. The quarterly consultation band for the 12-month rate of inflation in consumer ### _cr09330 - 8. The quarterly consultation band for the 12-month rate of inflation in consumer ### Inflation consultation band and monitoring framework - Headline measure: consumer price index (CPI) published by the Hungarian Central Statistical Office. - Central point for end-quarter inflation: 3 percent. - Bands around each target: lower band ±1 and upper band ±2. - Target status: - End-December 2009: performance criterion. - End-March 2010: performance criterion. - End-June 2010: indicative target. - VAT and excise tax adjustment to CPI for monitoring: - CPI inflation will be adjusted by 2.5 percentage points in 2009 in December 2009. - CPI inflation will be adjusted by 3.0 percentage points in March and June 2010. - These adjustments equal the estimated impact of increases in VAT (2.2 percentage points) and excise taxes (0.3 percentage points in the final quarter of 2009 and 0.8 percentage points in the first half of 2010) on the consumer price index. - Accountability and consultation procedures: - MNB will conduct discussions with Fund staff should observed year-on-year CPI inflation fall outside the inner band. - If 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. - Note: estimates of the VAT/excise impact were revised down from 3.7 percentage points in 2009 and 4.1 percentage points in 2010 in the TMU of September 16, 2009. ### Floor on the cash primary balance of the Central Government System (CGS) - Measurement basis: cumulative primary balance on a cash (above-the-line) basis. - Definition: primary balance of a budgetary institution = total revenues − non-interest expenditures. - Exclusions: primary expenditure of the CGS excludes any cash payment related to bank recapitalization and transfers to the Bank Guarantee Fund. - Net lending treatment: - Net lending of any CGS component is a non-interest expenditure item. - Negative net lending of any CGS component is considered a revenue item. - Reporting and reconciliation: - Transfers among CGS entities are mutually consistent; consolidated CGS balance derived from simple sums requires reconciliation if discrepancies arise. - Data to be provided by the Ministry of Finance to the IMF with a lag of no more than seven days past the test date. - Specified floors (In billions of forints): - Cumulative primary balance from January 1, 2009: - End-December 2009 (performance criterion) 190 - Cumulative primary balance from January 1, 2010: - End-March 2010 (performance criterion) -280 - End-June 2010 (indicative target) -185 ### Indicative ceiling on overall stock of debt of the Central Government System - Scope: 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: foreign currency debt should be kept wholly in Euro denomination; interest rate composition fixed; non-Euro issuances managed via cross-currency and interest rate swaps; mark-to-market deposits used as collateral are excluded from the ceiling. - Reporting: ÁKK will provide total stock of debt data to the IMF quarterly within 10 days of the end of each quarter. - Program exchange rate applies to all non-HUF denominated debt. - Adjustments to the indicative ceiling: - Upward (downward) by shortfall (surplus) in net EU transfers relative to baseline projection. - Upward (downward) for an increase (decrease) of ÁKK’s cash reserves in the Single Treasury Account held at the MNB relative to baseline projection. - Outstanding stock (In billions of forints): - End-December 2008 (actual) 15,925 - End-March 2009 (actual) 15,936 - End-June 2009 (actual) 15,162 - End-September 2009 (actual) 15,057 - End-December 2009 (indicative ceiling) 15,050 - End-March 2010 (indicative ceiling) 15,400 - End-June 2010 (program projection) 15,900 - Net EU Transfers (Baseline Projection) (In billions of forints): - End-December 2009 (program projection) -185 - End-March 2010 (program projection) 217 - End-June 2010 (program projection) 37 - Cash reserves at the Single Treasury Account (Baseline Projection) (In billions of forints): - End-December 2009 (program projection) 137 - End-March 2010 (program projection) 144 - End-June 2010 (program projection) 532 ### Continuous performance criteria on non-accumulation of external debt payment arrears - Criterion: 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 calculated based on ÁKK’s reported schedule of external payment obligations. - Data on external arrears will be reconciled with relevant creditors; necessary adjustments incorporated into targets as they occur. - ÁKK will provide final data on the stock of central government system external arrears to the Fund with a lag of not more than seven days after the test date. - Scope exclusion: this performance criterion does not cover trade credits. ### Staff findings, recent developments, and policy context (from staff statement excerpts) - Real economy and prices: - Second estimate of real GDP growth in 2009Q3: -7.1 percent (0.1 percentage point less negative than first estimate). - CPI inflation increased to 5.2 percent in November (reflecting higher food and energy prices). - External financing and financial sector: - Largest domestic bank contracted in mid-December a 12-month syndicated loan of €220 million at an interest rate of 125 bps over Euribor. - Legislation to upgrade the Hungarian Financial Supervisory Authority (HFSA) to an autonomous agency was approved by parliament on December 14, 2009. - Authorities completed technical work and a full legislative proposal on broadening bank resolution techniques (purchase-and-assumption transactions and bridge banks); aim to finish consultations and submit legislation to parliament by February 12, 2010 (structural benchmark). - Fiscal policy: - 2009 general government deficit target of 3.9 percent of GDP remains achievable, though risks skewed to the downside. - Government announced non-urban public transport fare increases of 10-15 percent effective February 1, 2010 (no changes to discount fares). - 2010 budget relies heavily on temporarily lower investment spending and one-off sales of real estate assets; risk that savings may not fully materialize is covered by budget reserves and incorporated into staff baseline. - Structural spending reforms noted: pension system, social transfers, and subsidies; tax reform shifting burden from labor to consumption and wealth. - IMF Executive Board action: - Completion of fourth review made available SDR 725 million (about €788 million or US$1.15 billion), though authorities do not intend to draw the amount. - Total amount disbursed under the program remains SDR 7.64 billion (about €8.27 billion or US$12.11 billion). - The SBA approved on November 6, 2008 for SDR 10.54 billion; arrangement entails exceptional access amounting to 1,015 percent of Hungary’s quota. - Policy guidance highlighted by IMF: - Strict expenditure control needed in 2010 to place government debt on a declining path; further measures required in 2011 to bring fiscal deficit below 3 percent of GDP. - Continued emphasis on preserving financial stability while targeting inflation over the medium term; HFSA needs authority to issue regulations; reform of remedial action framework and bank resolution regime remains important. *Prepared by the European Department; December 4, 2009 (content as provided in the supplied document).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09330.pdf_