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---

### Program status, disbursement, and institutional participation
- Arrangement extended by six months to October 6, 2010; undisbursed amounts were re-phased over the remainder of the arrangement.
- Fourth purchase of SDR 50 million made at the Third Review (September 25, 2009).
- Authorities chose not to draw the SDR 725 million made available upon completion of the Fourth Review (December 17, 2009).
- Authorities do not intend to draw the amount that would be made available upon completion of this review (SDR 725 million).
- Cumulative resources from both reviews available as insurance: SDR 1,450 million (70 percent of quota for the SDR 725 million tranche).
- European Union (EU) disbursed €5½ billion of the €6½ billion that were approved.
- World Bank has made funds available to cover the financing need under the program, but loan documents have not yet been signed.
- Fund staff and teams from the EC, ECB, and the World Bank participated in mission meetings; staff team included experts across EUR, MCM, SPR, LEG, FAD; Resident Representative and other attendees assisted and observed.
- Authorities consented to publication of the staff report.

### Key quantitative and structural performance outcomes (end-December 2009)
- All end-December 2009 quantitative performance criteria were met.
- Continuous performance criterion on non-accumulation of external arrears was met.
- Indicative target on central government debt was met.
- Structural benchmarks met:
  - government lending to banks benchmark;
  - passage by parliament of amendments strengthening the remedial powers of the HFSA;
  - submission of amendments strengthening the bank resolution framework.

### Macroeconomic developments and outlook
- 2009 real GDP: declined by 6.3 percent.
- 2009Q4 real GDP: fell by 4.0 percent (y-o-y), from 7.1 percent in 2009Q3.
- Loans to households: remained stable in 2009; new lending to households shifted from foreign to domestic currency.
- Credit to corporations: fell by 5 percent in 2009.
- CPI inflation: headline rate accelerated to 6.4 percent in January (boosted since mid-2009 by increases in the VAT rate and excise taxes).
- Private sector wage growth excluding bonuses: decreased to 3.5 percent y-o-y in December.
- Current account 2009: estimated surplus of about ½ percent of GDP; current account estimated to have adjusted by over 7½ percentage points of GDP.
- Forint exchange rate range vs euro (period referenced): HUF 265-275.
- Real effective forint: 11½ percent below its July 2008 peak.
- Gross international reserves: increased from €17.4 billion in September 2008 to €32.5 billion in January 2010; net international reserves fell slightly in 2009Q4 (by about €0.5 billion).
- Government bond issuance: a 10-year $2 billion bond issued at 265 bps over U.S. Treasuries in late January.
- Program stance on drawing resources: government did not draw on IMF or EU resources available at completion of the last review.

### Macroeconomic framework and projections
- 2010 real GDP: expected to decline by 0.2 percent (an improvement of ½ percentage point since the last review).
- Credit to the economy: expected to contract further in early 2010, then pick up in second half of 2010.
- CPI inflation: projected to fall to about 3 percent y-o-y in the second half of 2010; projected to moderate to 2½ percent in 2011.
- External current account 2010: expected to deteriorate to a deficit of 0.4 percent of GDP; EU capital transfers expected to more than offset the deficit.
- Gross external financing requirement (staff projection) for 2010: about €36 billion (36 percent of GDP).
- Reserves coverage of short-term external debt at remaining maturity: projected to rise from 85 percent in 2009 to about 90 percent at end-2010 under the baseline.
- External debt: projected to have peaked at 137 percent of GDP in 2009 and decline to 113 percent of GDP by 2015 (sensitivity to exchange rate noted).

### Fiscal policy assessment and requirements
- Structural general government balance: estimated improvement of 3 percentage points of GDP in 2009.
- 2010 adjustment: further ½ percentage point of GDP adjustment expected based on prudent 2010 budget implementation.
- 2011 requirement: further measures of about 1¼ percent of GDP will be needed to bring the headline deficit below 3 percent of GDP in 2011 (authorities’ announced objective in line with EU commitments).
- Medium-term assumption: beyond measures for 2011, no further adjustment assumed; implies government debt-to-GDP ratio expected to peak at about 79 percent at end-2010 and decline to about 64 percent by 2015.
- End-December 2009 central government primary cash balance target: met.
- Revenue outcomes: tax revenue broadly in line with projections; lower-than-projected PIT revenues, social security contributions, and fees/duties offset by higher VAT and other revenues.
- Nontax revenue: higher than expected due to higher interest revenue, one-off revenues related to voluntary switch from the second pillar to the first pillar of the pension system, and dividends from state-owned companies.
- Spending outcomes: slightly lower than projected overall; lower transfers to local governments and social security fund spending; line ministry spending slightly higher; carry-over balances and payment arrears somewhat higher than expected.

### Fiscal outturn and 2010 assessment (general government balance)
- General government deficit target for 2009 of 3.9 percent of GDP (Maastricht definition) appears to have been met.
- In ESA terms, central government deficit expected to have been 3.6 percent of GDP, in line with projections.
- General government deficit target for 2010 of 3.8 percent of GDP remains appropriate to preserve credible commitment to debt sustainability while avoiding an excessively negative impulse to economic activity.
- Compared to the Fourth Review:
  - Tax revenue expected to be lower due to Constitutional Court rulings related to the property tax and taxation of family allowances.
  - Primary spending expected higher owing to higher healthcare spending and higher capital transfers reflecting government support to BKV and outlays related to take-over and restructuring of Malev.
  - These are broadly offset by lower projected interest payments and additional one-off revenue related to the pension-shift.
- Changes to the 2010 fiscal projections (general government, accrual basis; percent of GDP) — IMF staff estimates:
  - Change to the underlying primary balance: -0.01 (Macro-related), -0.47 (Non Macro-related), -0.48 (Total)
  - Primary revenue: 0.04 (Macro-related), -0.24 (Non Macro-related), -0.21 (Total)
  - Interest revenue: -0.05 (Macro-related), 0.00 (Non Macro-related), -0.05 (Total)
  - Additional spending: 0.00 (Macro-related), 0.22 (Non Macro-related), 0.22 (Total)
  - Malev: 0.11 (Non Macro-related)
  - BKV: 0.06 (Non Macro-related)
  - Healthcare spending: 0.05 (Non Macro-related)
  - One-off items: 0.00 (Macro-related), 0.24 (Non Macro-related), 0.24 (Total)
  - Revenue related to the shift in the pension system: 0.24 (Non Macro-related)
  - Change to primary balance: -0.24 (Macro-related), -0.24 (Total)
  - Decline in interest payments: -0.18 (Total)
  - Change to overall balance: -0.06 (Total)

### Expenditure control, contingency planning, and transparency
- Importance of strict expenditure control to meet 2010 fiscal targets emphasized; treasurers assigned to line ministries and clarity on appropriations early in year.
- Contingency plan to supplement budgetary reserves:
  - Baseline leaves budgetary reserves at about 0.5 percent of GDP.
  - Identified remaining risks: uncertainties related to local governments, state-owned enterprises, Malev, macro uncertainty, and possible Eurostat treatment assigning pension-shift revenue to 2009 only.
  - Authorities identified savings amounting to 0.2 percent of GDP to be implemented if fiscal outlook deteriorates significantly.
  - Agreement to save extra revenues from better-than-anticipated macro performance; revenue from sale of emission credits to be spent exclusively on new environmental projects.
  - Political risk: future government could assume some or all loans contracted by MAV (1 percent of GDP at end-2009) or other state-owned enterprises.
- Authorities committed to modernizing the budgetary framework in consultation with the Fiscal Council and to publish annually a report on contingent liabilities of financial and nonfinancial state-owned enterprises.

### Financial sector and market conditions
- Financial conditions: continued stabilization despite global market strains.
- Foreign currency swap market: operated normally since May 2009.
- Government bond market: broadly stable; long-term yields and CDS spreads increased slightly since November 2009.
- Corporate and mortgage bond markets: spreads remain significantly above pre-crisis levels and liquidity has not fully returned.
- Parent banks: maintained exposures to subsidiaries consistent with EBCI commitments; rollover rates of bank liabilities falling due in 2009Q4 expected near 100 percent.
- Policy recommendations (staff appraisal):
  - Strengthen banking supervision and the resolution framework for banks.
  - Maintain strict expenditure control and cautious use of budgetary reserves; be ready to take additional action if necessary.
  - Further gradual and cautious cuts in the policy interest rate, to the extent allowed by financial market conditions.
  - In 2011, implement additional measures to reduce the general government deficit to below 3 percent of GDP and put government debt on a declining path.

### Risks and uncertainties
- Risks to GDP forecast: tilted to the downside.
- External vulnerabilities: remain significant because of high integration into global financial markets, large rollover needs, and a fragile global environment.
- Uncertainties highlighted: political risks, external risks including the ECB’s speed of exit from its monetary stance, and potential contagion from Greece.

### LOI priorities, performance-criterion modifications, and external financing decisions
- Performance criterion on net international reserves for end-March 2010 to be modified upward to reflect higher-than-programmed increase in reserves at end-December 2009 and expected improvement in external financing conditions in Q1 2010.
- Adjustor for performance criterion on the primary cash balance of the central government system added to reflect revenue/expenditure from sale of emission credits (TMU ¶11).
- Structural benchmarks adjusted:
  - End-March 2010 benchmark on targeted bank inspections modified to two large credit institutions without a foreign parent bank.
  - New benchmark for end-June 2010: HFSA to conduct similar inspections for two large subsidiaries of foreign parent banks.
- With continued stability of external financing conditions, authorities take drawing decisions on a review-by-review basis; they do not intend to draw the SDR 725 million tranche that would be made available upon completion of this review and do not intend to request release of EU balance of payments assistance.
- Authorities treat cumulative resources of SDR 1,450 million from the Fourth and Fifth Reviews, and remaining EU and World Bank funds, as insurance against unanticipated shocks.

### Staff appraisal: program progress, near-term outlook, and policy guidance
- Overall assessment: program has put Hungary on a path to stability and growth; underlying fiscal position improved; timely liquidity support provided to the financial sector; bank supervision enhanced.
- Program implementation: all end-December 2009 quantitative performance criteria and structural benchmarks for the Fifth Review were met.
- Near-term outlook: economy expected to start recovering during 2010; small current account surplus recorded in 2009, small deficit expected in 2010; inflation elevated in H1 2010 then falling to target in H2 2010.
- Fiscal recommendations:
  - Strict expenditure control, cautious use of contingency buffers, and saving of revenue windfalls in 2010.
  - Structural measures required to bring general government deficit below 3 percent of GDP in 2011 and reduce government debt over the medium term.
  - Restructuring of the public transport system to reduce its budgetary drain.
- Financial sector recommendations:
  - Continued implementation of measures to preserve financial stability; stepped-up HFSA on-site inspections; implementation of institutional reform of bank supervision.
  - Continue careful monitoring of credit institutions receiving FX loans from the government.
  - HFSA’s regulatory power and a stronger bank resolution framework to be addressed with the new government after elections.
- Monetary policy guidance:
  - Monetary policy should continue to ease gradually and cautiously, to the extent allowed by financial market conditions.
  - Maintain an adequate level of international reserves, taking into account access to official external financing.
- Staff supports completion of the Fifth Review and modification of the net international reserves performance criterion and the primary cash balance adjustor.

### Box 1 — Corporate Funding: key findings
- Corporate sector largely foreign-owned; non-residents hold about 60 percent of equity.
- Debt financing almost exclusively loans: about 40 percent from non-residents (including parent companies) and another 40 percent from domestic financial institutions.
- Net corporate funding declined sharply since 2008Q4 and was negative in first three quarters of 2009; initial fall driven by collapse in trade credit; 2009Q2 fall driven by drop in net bank lending; net funding less negative in 2009Q3 due to higher net bank lending.
- Foreign parent funding was a stabilizing factor during acute financial strains.

### Box 2 — Government Spending: key findings and reform priorities
- General government spending fell from 54 percent of potential GDP in 2006 to 50 percent of potential GDP in 2008, but remained about 9 percentage points of GDP higher than the average in other Visegrad countries.
- In 2008, primary current spending was 7½ percent of GDP higher than the regional average; government wage bill 3½ percent of GDP higher; social benefits 2 percent of GDP higher; intermediate consumption 1¼ percent of GDP higher.
- Expected spending adjustment: reforms adopted in 2009-10 expected to further reduce spending; spending projected to decline by 4½ percentage points of potential GDP between 2008 and 2010.
- Further reforms recommended: reduce government wage bill, eliminate redundancies between government levels, improve budget processes, publish contingent liabilities, accelerate improvements in state-owned enterprises’ operating and financial performance.
- Selected 2008 central eastern European comparisons (percent of GDP):
  - Total expenditure: Hungary 49.2; Average of comparable neighboring countries 40.3; Difference 8.9
  - Central government: 32.8; 24.8; 8.0
  - Local governments: 11.4; 10.3; 1.1
  - Social security funds: 5.0; 5.2; -0.2
  - Current Spending: 45.0; 34.8; 10.2
  - Primary current spending: 40.9; 33.3; 7.6
  - Compensation of employees: 11.5; 8.1; 3.5
  - Intermediate consumption: 7.1; 5.8; 1.3
  - Social benefits: 18.7; 16.7; 2.0
  - Property income: 4.1; 1.5; 2.6
  - Gross fixed capital formation: 2.7; 3.8; -1.2
  - Functional classification (2007): Social protection 17.4; 13.0; 4.3; General public services 9.4; 4.5; 4.8

### Box 3 — Hungary: Stand-By Arrangement (access, phasing, conditionality, and key projections)
- Access: Exceptional. 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 and disbursements:
  - SDR 4.2 billion disbursed on November 6, 2008.
  - 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 Third Review on September 25, 2009.
  - Authorities did not draw SDR 725 million tranche from Fourth Review and indicated not to draw the SDR 725 million tranche for this (Fifth) Review; remaining amount (SDR 1,450 million) contingent upon completion of further quarterly reviews.
- Conditionality highlights:
  - Quantitative performance criteria: floor on central government system primary cash balance; floor on change in net international reserves; band around 12-month rate of inflation of consumer prices; non-accumulation of external debt arrears.
  - Indicative target: ceiling on total debt stock of central government system.
  - Structural benchmarks: operation of subcommittee monitoring supported banks; completion of thematic inspection reports for specified banks by end-March 2010 and end-June 2010.
- Selected key macro indicators (series as presented, 2006–10):
  - Real GDP (change in percent): 4.0, 1.0, 0.6, -6.7, -6.3, -0.6, -0.2
  - CPI (end year): 6.5, 7.4, 3.5, 5.2, 5.6, 2.5, 3.0
  - Unemployment rate (average, percent): 7.5, 7.4, 7.8, 10.0, 10.0, 10.9, 10.6
  - General government overall balance (percent of GDP, ESA-95): -9.3, -4.9, -3.7, -3.9, -3.9, -3.8, -3.8
  - Debt (percent of GDP): 65.6, 65.8, 72.9, 78.7, 77.7, 80.2, 78.9
  - Reserves (in billions of euros): 16.4, 16.4, 24.0, 29.7, 30.7, 32.5, 33.9
  - Gross external debt (percent of GDP)4/: 91.1, 98.4, 115.3, 136.6, 137.3, 131.7, 132.3
  - Present exchange rates (March 3, 2010): Ft 195.65 = US$1; Ft. 266.79 = €1.
- Monetary and banking highlights (selected series and indicators, 2006–10 as presented):
  - Banking capital adequacy ratio rose to 12.9 percent at end-2009 from 11.2 percent a year earlier.
  - NPLs increased to 6.7 percent at end-2009 (from 3.0 percent at end-2008).
  - Lending to private sector flow-based series include -3.7, -4.7, etc., reflecting contraction.
- Program financing schedule (SDRs and percent of quota, selected dates):
  - November 6, 2008: 4,215.0 SDRs; 405.9 percent of Quota
  - March 25, 2009: 2,107.5; 203.0
  - June 23, 2009: 1,264.5; 121.8
  - September 25, 2009: 50.0; 4.8
  - December 18, 2009: 725.1; 69.8
  - March 15, 2010: 725.1; 69.8
  - Total: 10,537.5 millions of SDRs; 1,014.8 percent of Quota
- Indicators of Fund credit (selected):
  - Disbursement (existing): 4,215; 3,422; 1,450; 0; 0; 0; 0; 0; 0 (series as presented)
  - Stock of existing and prospective Fund credit (millions of SDR): 4,215; 7,637; 10,538; 10,538; 7,317; 2,683; 635; 0; 0

### Balance of Payments and financing requirements (selected)
- Gross external financing need (staff series, selected): gross external financing requirement for 2010 about €36 billion (36 percent of GDP); other series show gross external financing need in percent of GDP in various projections (e.g., 31.0, 36.3, 36.1).
- Program financing (total) from June 2010 to program expiration in October (series as presented) totals shown: 2,000; 2,000; 0; 1,500; 0; 3,500; 3,500; 0; 800; 900; 0; 2,000; 1,700; 0.
- Reserves and reserve liabilities (selected series and projections):
  - Gross official reserves (levels): 24,040; 27,890; 26,950; 30,603; 30,676; 29,650; 30,676; 31,572; 32,504; 33,687; 33,940; 32,521; 33,940; 35,206.
  - In percent of short-term debt at remaining maturity: 72.2; 79.2; 76.5; 86.0; 84.9; 85.1; 84.9; 83.8; 85.1; 89.3; 88.8; 81.5; 88.8; 97.6.

### Banking system performance, risks, and supervisory reforms
- Banking system profitability and capital:
  - After-tax return on equity: 9.8 percent in 2009, compared to 11.6 percent in 2008.
  - Interest margins remained stable in 2009.
  - Pre-provisioning profits sizeable due to cost compression and investment gains.
  - Capital adequacy ratio: 12.9 percent at end-December 2009, compared to 11.2 percent a year earlier.
- Asset quality and provisioning:
  - NPLs: 6.7 percent at end-2009 (5.9 percent at end-September; 3.0 percent at end-2008).
  - NPLs expected to peak around 9-10 percent during 2010.
  - Banks increased loan-loss provisions; profits expected to shrink substantially in 2010 and may be negative for some banks.
- Supervision and institutional reforms:
  - HFSA upgraded to an autonomous organization reporting to Parliament; given right to issue binding administrative acts to temporarily suspend financial products in case of threats to financial stability.
  - Tri-partite Financial Stability Council (FSC) operational (Minister of Finance, Governor of MNB, Chairman of HFSA); meets monthly; minutes published.
  - MNB and FSC have right to propose legislation/regulation on a “comply or explain” basis.
  - On-site inspections: seven of eight largest banks inspected in 2009; remaining inspection scheduled for April 2010; thematic inspections for two large credit institutions without foreign parent to be completed by end-March 2010 (structural benchmark) and for two large subsidiaries of foreign parents by end-June 2010 (new benchmark).
- Remedial action and resolution framework:
  - Amendments to the Law on Credit Institutions and Financial Enterprises (December 14, 2009) established additional mandatory threshold for appointment of a supervisory commissioner and vested HFSA with sole power to initiate bank liquidation proceedings.
  - Draft legislation submitted on February 12 to allow purchase-and-assumption transactions and bridge banks for systemically-important institutions; will not be adopted before elections.
  - Government seeking European Commission approval to extend capital enhancement fund under financial stability act until end-2010.
- Mortgage and household credit measures:
  - From March 1, 2010: loan-to-value (LTV) ratios for forint mortgage and long-term consumer loans limited to 75 percent, lower limits for foreign currency loans.
  - From June 1, 2010: banks’ scoring systems to reflect lower monthly installment for comparable forint loan than for foreign currency loan.
  - MNB mortgage bond facility: central bank to purchase mortgage bonds up to HUF 100 billion (about 1 percent of central bank assets) with maximum 20 percent share of any individual issue; HUF100 billion noted elsewhere as 0.4 percent of GDP in specific program description.
- Monetary policy and liquidity:
  - MNB cut key policy rate by cumulative 375 bps to 5.75 percent since July; markets expect policy rate around 5½ percent in Q2 2010.
  - Ex ante real policy rate stands at about 3¼ percent excluding temporary VAT/excise impacts.
  - Demand for extraordinary liquidity facilities subdued; 3-month FX swap facility outstanding €1.25 billion in mid-February (far below originally envisaged up to €5 billion at end-2009).
  - Authorities and staff agreed on importance of maintaining adequate international reserves; reserves broadly adequate by metric of 100 percent coverage of short-term debt at remaining maturity once all remaining IMF, EU, and World Bank resources are considered.

### Program monitoring, TMU, and consultation mechanisms
- Net international reserves (NIR) monitoring (floor on cumulative change from end-December 2008, millions of euros):
  - End-March 2009 (actual) 1,464
  - End-June 2009 (actual) -1,195
  - End-September 2009 (actual) 1,574
  - End-December 2009 (actual) 1,028
  - End-March 2010 (performance criterion) -1,075
  - End-June 2010 (performance criterion) -937
- External program disbursements (technical assumption), cumulative flows from end-December 2008 (millions of euros):
  - End-March 2009 2,000
  - End-June 2009 2,000
  - End-September 2009 3,500
  - End-December 2009 3,500
  - End-March 2010 (technical assumption) 3,500
  - End-June 2010 (technical assumption) 4,300
  - End-September 2010 (technical assumption) 5,200
- CPI inflation consultation band:
  - Central point for end-quarter inflation: 3 percent.
  - Bands: lower and upper bands around each target of ±1 and ±2, respectively.
  - Targets for end-March and end-June 2010 are performance criteria.
  - For monitoring, CPI inflation will be adjusted by 3.0 percentage points (estimated impact of VAT increases 2.2 percentage points and excise taxes 0.8 percentage points).
  - Consultation mechanics: staff and authorities will consult if CPI falls outside inner band; if outside outer band, authorities will consult Fund on proposed policy response before requesting further purchases.

### Program fiscal monitoring details (selected numeric targets and reporting)
- Floor on cumulative primary balance from January 1, 2009:
  - End-December 2009 (actual) 273 (billions of forints).
- Floor on cumulative primary balance from January 1, 2010 (performance criterion):
  - End-March 2010 -280 (billions of forints).
  - End-June 2010 -280 (billions of forints).
- Indicative ceiling on overall stock of debt of the central government system (HUF billions):
  - 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 (actual) 14,992
  - End-March 2010 (indicative ceiling) 15,800
  - End-June 2010 (indicative ceiling) 15,800
- Net EU transfers (baseline projection, HUF billions):
  - End-March 2010 (program projection) 73
  - End-June 2010 (program projection) 160
- Cash reserves at Single Treasury Account (HUF billions):
  - End-March 2010 (program projection) 466
  - End-June 2010 (program projection) 220
- Continuous performance criterion: central government system will accumulate no new external debt arrears (external debt payment arrear defined as payment not made within seven days after falling due). ÁKK to provide final data within seven days after test date.

### Appendix Table 1 — External Debt Sustainability Framework (selected public debt and projections, percent of GDP)
- General government gross debt:
  - 2005: 61.8
  - 2006: 65.6
  - 2007: 65.7
  - 2008: 72.9
  - 2009: 77.7
  - 2010: 78.9
  - 2011: 77.3
  - 2012: 74.5
  - 2013: 71.2
  - 2014: 67.6
  - 2015: 64.0
- Foreign-currency denominated share of public debt (percent of GDP):
  - 2005: 17.4
  - 2006: 18.5
  - 2007: 18.5
  - 2008: 26.3
  - 2009: 33.2
  - 2010: 32.5
  - 2011: 30.6
  - 2012: 27.9
  - 2013: 25.2
  - 2014: 22.7
  - 2015: 20.9
- Identified debt-creating flows (percent of GDP) and change in public sector debt:
  - Identified debt-creating flows (4+7+12): 2005 5.2; 2006 1.7; 2007 -1.2; 2008 3.4; 2009 5.3; 2010 2.1; 2011 -1.6; 2012 -2.8; 2013 -3.3; 2014 -3.6; 2015 -3.6
  - Change in public sector debt (percent of GDP): 2005 2.4; 2006 3.8; 2007 0.0; 2008 7.2; 2009 4.8; 2010 1.2; 2011 -1.6; 2012 -2.8; 2013 -3.3; 2014 -3.6; 2015 -3.6
- Automatic debt dynamics (percent of GDP): 2005 3.4; 2006 -2.4; 2007 -2.1; 2008 3.8; 2009 5.8; 2010 2.5; 2011 -0.2; 2012 -0.6; 2013 -0.5; 2014 -0.3; 2015 0.0
- Debt-stabilizing primary balance presented as 0.2 (table header).

*Prepared by the European Department — March 5, 2010. Authorities consented to publication of the staff report.*

### 1.3 billion (Second Review, June 23, 2009). The arrangement was extended by six months to

### _cr1080 - 1.3 billion (Second Review, June 23, 2009). The arrangement was extended by six months to

### Program status, disbursement, and institutional participation
- The arrangement was extended by six months to October 6, 2010; undisbursed amounts were re-phased over the remainder of the arrangement.
- The fourth purchase of SDR 50 million was made at the Third Review (September 25, 2009).
- The authorities chose not to draw the SDR 725 million made available upon the completion of the Fourth Review (December 17, 2009).
- As of the report: the authorities do not intend to draw the amount that would be made available upon completion of this review (SDR 725 million).
- Cumulative resources from both reviews available as insurance: SDR 1,450 million (70 percent of quota for the SDR 725 million tranche).
- The European Union (EU) disbursed €5½ billion of the €6½ billion that were approved.
- The World Bank has made funds available to cover the financing need under the program, but the loan documents have not yet been signed.
- Fund staff and teams from the EC, ECB, and the World Bank participated in mission meetings. The staff team included named experts across EUR, MCM, SPR, LEG, FAD; Resident Representative and other attendees assisted and observed.
- Publication: the authorities consented to publication of the staff report.

### Key quantitative and structural performance outcomes (end-December 2009)
- All end-December 2009 quantitative performance criteria were met.
- The continuous performance criterion on non-accumulation of external arrears was met.
- The indicative target on central government debt was met.
- Structural benchmarks met:
  - government lending to banks benchmark;
  - passage by parliament of amendments strengthening the remedial powers of the HFSA;
  - submission of amendments strengthening the bank resolution framework.

### Macroeconomic developments and outlook
- 2009 real GDP: declined by 6.3 percent.
- 2009Q4 real GDP: fell by 4.0 percent (y-o-y), from 7.1 percent in 2009Q3.
- Loans to households: remained stable in 2009; new lending to households shifted from foreign to domestic currency.
- Credit to corporations: fell by 5 percent in 2009.
- CPI inflation: headline rate accelerated to 6.4 percent in January (boosted since mid-2009 by increases in the VAT rate and excise taxes).
- Private sector wage growth excluding bonuses: decreased to 3.5 percent y-o-y in December.
- Current account 2009: estimated surplus of about ½ percent of GDP; current account estimated to have adjusted by over 7½ percentage points of GDP.
- Forint exchange rate range vs euro: HUF 265-275 (period referenced).
- Real effective forint: 11½ percent below its July 2008 peak.
- Gross international reserves: increased from €17.4 billion in September 2008 to €32.5 billion in January 2010; net international reserves fell slightly in 2009Q4 (by about €0.5 billion).
- Government bond issuance: a 10-year $2 billion bond issued at 265 bps over U.S. Treasuries in late January.
- Program stance on drawing resources: government did not draw on IMF or EU resources available at completion of the last review.

### Macroeconomic framework and projections
- 2010 real GDP: expected to decline by 0.2 percent (an improvement of ½ percentage point since the last review).
- Credit to the economy: expected to contract further in early 2010, then pick up in second half of 2010.
- CPI inflation: projected to fall to about 3 percent y-o-y in the second half of 2010; projected to moderate to 2½ percent in 2011.
- External current account 2010: expected to deteriorate to a deficit of 0.4 percent of GDP; EU capital transfers expected to more than offset the deficit.
- Gross external financing requirement (staff projection) for 2010: about €36 billion (36 percent of GDP).
- Reserves coverage of short-term external debt at remaining maturity: projected to rise from 85 percent in 2009 to about 90 percent at end-2010 under the baseline.
- External debt: projected to have peaked at 137 percent of GDP in 2009 and decline to 113 percent of GDP by 2015 (sensitivity to exchange rate noted).

### Fiscal policy assessment and requirements
- Structural general government balance: estimated improvement of 3 percentage points of GDP in 2009.
- 2010 adjustment: further ½ percentage point of GDP adjustment expected based on prudent 2010 budget implementation.
- 2011 requirement: further measures of about 1¼ percent of GDP will be needed to bring the headline deficit below 3 percent of GDP in 2011 (authorities’ announced objective in line with EU commitments).
- Medium-term assumption: beyond measures for 2011, no further adjustment assumed; this implies the government debt-to-GDP ratio is expected to peak at about 79 percent at end-2010 and decline to about 64 percent by 2015.
- End-December 2009 central government primary cash balance target: met.
- Revenue outcomes: tax revenue broadly in line with projections; lower-than-projected PIT revenues, social security contributions, and fees/duties offset by higher VAT and other revenues.
- Nontax revenue: higher than expected, reflecting higher interest revenue, one-off revenues related to voluntary switch from the second pillar to the first pillar of the pension system, and dividends from state-owned companies.
- Spending outcomes: slightly lower than projected overall, reflecting mainly lower transfers to local governments and social security fund spending; line ministry spending slightly higher than expected; carry-over balances and payment arrears somewhat higher than expected.

### Financial sector and market conditions
- Financial conditions: continued stabilization despite global market strains.
- Foreign currency swap market: operated normally since May 2009.
- Government bond market: broadly stable; long-term yields and CDS spreads increased slightly since November 2009.
- Corporate and mortgage bond markets: spreads remain significantly above pre-crisis levels and liquidity has not fully returned.
- Parent banks: maintained exposures to subsidiaries consistent with European Bank Coordination Initiative (EBCI) commitments; rollover rates of bank liabilities falling due in 2009Q4 expected near 100 percent.
- Policy recommendation (from staff appraisal themes):
  - Strengthen banking supervision and the resolution framework for banks.
  - Maintain strict expenditure control and cautious use of budgetary reserves; be ready to take additional action if necessary.
  - Further gradual and cautious cuts in the policy interest rate, to the extent allowed by financial market conditions.
  - In 2011, implement additional measures to reduce the general government deficit to below 3 percent of GDP and put government debt on a declining path.

### Risks and uncertainties
- Risks to GDP forecast: tilted to the downside.
- External vulnerabilities: remain significant because of high integration into global financial markets, large rollover needs, and a fragile global environment.
- Uncertainties highlighted: political risks, external risks including the ECB’s speed of exit from its monetary stance, and potential contagion from Greece.

*IMF staff report (Second Review, June 23, 2009) — authorities consented to publication.*

### 15. The general government deficit target for 2009 of 3.9 percent of GDP

### 15. The general government deficit target for 2009 of 3.9 percent of GDP

### Fiscal outturn and 2009 assessment
- The general government deficit target for 2009 of 3.9 percent of GDP (Maastricht definition) appears to have been met (Tables 7-8 and LOI ¶12).
- In ESA terms (i.e. after accrual/cash adjustments for early payments of dividends, late payments of tax refunds, and other factors), the central government deficit is expected to have been 3.6 percent of GDP, in line with projections.
- The fiscal performance of the local government is expected to have broadly conformed to expectations.

### 2010 target, revisions, and composition of changes
- The general government deficit target for 2010 of 3.8 percent of GDP remains appropriate to preserve a credible commitment to debt sustainability, while avoiding an excessively negative impulse to economic activity (LOI ¶13).
- Compared to the Fourth Review:
  - Tax revenue is expected to be lower due to the Constitutional Court’s rulings related to the property tax and the taxation of family allowances, only partly offset by additional revenue from the improved macroeconomic outlook.
  - Primary spending is expected to be higher owing to higher healthcare spending and higher capital transfers reflecting government support to BKV and outlays related to the government take-over and restructuring of Malev.
  - These lower tax revenue and higher primary spending are expected to be broadly offset by lower projected interest payments (reflecting lower yields) and additional one-off revenue related to the shift from the second pillar to the first pillar of the pension system.
- Although the structural fiscal balance in 2010 is now weaker than envisaged at the last review, the fiscal effort needed in 2011 to bring the headline deficit below 3 percent of GDP and put the government debt-to-GDP ratio firmly on a downward path is unchanged, due to an improved short-term macroeconomic outlook and a declined projected central bank loss.

- Hungary: Changes to the 2010 Fiscal Projections (General government, accrual basis; percent of GDP) — IMF staff estimates (text table reproduced in source):
  - Change to the underlying primary balance: -0.01 (Macro-related), -0.47 (Non Macro-related), -0.48 (Total)
  - Primary revenue: 0.04 (Macro-related), -0.24 (Non Macro-related), -0.21 (Total)
  - Interest revenue: -0.05 (Macro-related), 0.00 (Non Macro-related), -0.05 (Total)
  - Additional spending: 0.00 (Macro-related), 0.22 (Non Macro-related), 0.22 (Total)
  - Malev: 0.11 (Non Macro-related)
  - BKV: 0.06 (Non Macro-related)
  - Healthcare spending: 0.05 (Non Macro-related)
  - One-off items: 0.00 (Macro-related), 0.24 (Non Macro-related), 0.24 (Total)
  - Revenue related to the shift in the pension system: 0.24 (Non Macro-related)
  - Change to primary balance: -0.24 (Macro-related), -0.24 (Total)
  - Decline in interest payments: -0.18 (Total)
  - Change to overall balance: -0.06 (Total)

### Expenditure control, structural measures, and contingency planning
- Staff and authorities agreed on the importance of strict expenditure control to meet the 2010 fiscal targets (LOI ¶14).
  - Authorities indicated spending discipline would be underpinned by assignment of treasurers to line ministries and clarity on appropriations from the beginning of the year.
  - On structural measures, the authorities and staff agreed Constitutional Court decisions reduce the expected structural adjustment in 2010; re-submitting the property tax law to address Court reservations would be the best remedy, but authorities noted that proximity of elections makes passage unlikely.
- To manage substantial risks in 2010, the authorities prepared a contingency plan to supplement budgetary reserves (LOI ¶15):
  - Baseline scenario reflects likelihood of higher local government spending in an election year and higher-than-budgeted subsidies to public transport, leaving budgetary reserves at about 0.5 percent of GDP.
  - Identified remaining risks: residual uncertainties related to local governments, state-owned enterprises, Malev, macroeconomic uncertainty, and possible Eurostat treatment that could assign pension-shift revenue to 2009 only.
  - Authorities identified savings amounting to 0.2 percent of GDP to be implemented if the fiscal outlook deteriorates significantly.
  - Agreement that extra revenues from better-than-anticipated macro performance should be saved, and revenue from sale of emission credits should be spent exclusively on new environmental projects.
  - Additional political risk: a future government could assume some or all loans contracted by MAV (1 percent of GDP at end-2009) or other state-owned enterprises.

### Measures needed for 2011 and medium-term fiscal sustainability
- To bring the general government deficit below 3 percent of GDP in 2011, additional measures will be required (LOI ¶16):
  - Fiscal effort amounting to about 1¼ percent of GDP is needed to offset:
    - Impact of increase in the threshold for the top PIT bracket effective in 2011 (projected to be 0.5 percent of GDP).
    - Projected weak growth of some tax bases (including the wage bill) relative to GDP (projected to be about 0.5 percent of GDP).
    - Budgetary effect of the central bank’s loss in 2010 related to sterilization of the government’s use of external financing (projected to be about 0.1 percent of GDP).
    - Yield an improvement in the structural balance of 0.1 percent of GDP.
  - Staff observed government spending relative to GDP in Hungary is high compared to neighboring countries (Box 2).
  - Authorities requested technical assistance on expenditure rationalization, expected to be delivered soon after the elections.
- To reduce medium-term risks, staff emphasized addressing the fiscal drain related to the public transport system:
  - Government finalizing a public service agreement with MAV consistent with the 2010 budget.
  - Government discussed the 2010 business plan for MAV prepared in December 2009; final adoption expected by end-March 2010.
  - Staff urged speedy adoption and development/implementation of an ambitious medium-term restructuring plan to tackle structural inefficiencies in the sector.

### Budgetary framework modernization and transparency
- Authorities committed to modernizing the budgetary framework in consultation with the Fiscal Council (LOI ¶17):
  - Better alignment of budgetary procedures with the Public Finance and Fiscal Rule Acts.
  - To improve fiscal transparency, authorities will publish annually a report on contingent liabilities of financial and nonfinancial state-owned enterprises—first step toward publishing statistics on the nonfinancial public sector balance.
  - Continued modernization of tax administration, including reviewing selection criteria for assigning taxpayers to the large taxpayer unit to increase its share of the tax base.

### Financial sector policies — banking system performance and outlook
- Banking system developments and outlook (LOI ¶18, Table 9):
  - Despite a tripling of loan-loss provisions, banks remained profitable by preserving interest margins, reducing operating costs, and benefiting from one-off factors (favorable revaluation of government bond portfolios).
  - Average return on equity was almost 10 percent in 2009, close to the result in 2008.
  - Profits were mostly added to capital, contributing to an increase in the banking system’s capital adequacy ratio to 12.9 percent, almost 2½ percentage points higher than at end-September 2008.
  - Bank funding and liquidity improved in 2009 after sharp liquidity strains in late 2008; deposits and parent bank funding increased significantly in H1 2009 and stabilized at high levels.
  - Banks invested much of the additional funds in liquid assets; private sector credit contracted by almost 5 percent in 2009.
- Expected further deterioration in credit quality appears manageable (LOI ¶19):
  - NPLs increased from 3.0 percent at end-2008 to 6.7 percent at end-2009, projected to peak just below 10 percent around mid-2010.
  - Problem loans concentrated in unsecured consumer lending and project financing.
  - Most banks appear well prepared due to high capital buffers and provisioning made in 2009, though profits are expected to decline sharply as one-off factors dissipate and interest margins narrow.

### European Bank Coordination Initiative (EBCI)
- The EBCI provides assurances about funding stability of the six largest foreign subsidiaries (accounting for 60 percent of banking system loans) (LOI ¶20):
  - All six parent banks confirmed in writing pledges given at the Brussels meeting on November 19, 2009; parent banks’ commitment to maintain total net exposure to Hungary was set at 95 percent of the level prevailing at end-September 2008.
  - Banks’ commitment to bring additional capital if needed remains unchanged, and parent banks are expected to meet commitments even under pressures on their own balance sheets.
  - Authorities support a wider EBCI role; a Hungary-specific workshop on fostering bank lending (including wider use of existing guarantee schemes) scheduled for March 5; EBCI Full Forum scheduled for March 19 in Athens, Greece, with participation by authorities and parent banks. The largest Hungarian domestic bank (no parent) will attend both events.

### Regulation, supervision, and remedial frameworks
- Institutional reforms to financial regulation and supervision (LOI ¶21):
  - HFSA upgraded to an autonomous organization reporting to Parliament; internal reorganization strengthened operational effectiveness.
  - HFSA was not given authority to issue binding regulations (would require constitutional change/two-thirds majority). Within current bounds, HFSA can issue binding administrative acts to temporarily suspend financial products in case of risks to financial stability.
  - Newly created tri-partite Financial Stability Council (FSC) — Minister of Finance, Governor of MNB, and Chairman of HFSA — is operational and meets monthly; minutes of FSC meetings are published.
  - MNB and FSC have the right to propose legislation or regulation on financial sector issues on a “comply or explain” basis (government must indicate agreement within 15 days or explain disagreement).
  - Staff will review effectiveness of the new regulatory framework, including the “comply or explain” mechanism, and discuss remaining concerns (notably HFSA’s power to issue regulations) with authorities if necessary.
- Banking supervision capacity (LOI ¶22):
  - On-site inspections of seven of the eight largest banks were finalized in 2009; inspection of the remaining bank scheduled to be completed in April 2010.
  - HFSA completed targeted inspections of credit quality for two large credit institutions without a foreign parent (structural benchmark for end-March); similar inspections planned for all other systematically important banks with completion of two inspections by end-June set as a new structural benchmark.
  - Progress slower on reviews of foreign subsidiaries of Hungarian banks outside the EU due to an inconclusive public tender; a new tender launched. Cooperation between HFSA and key foreign supervisors has improved.
  - A sub-committee of the FSC monitors credit institutions that received government loans in 2009 (LOI ¶23), consulting regularly with IMF staff; any government loan/stand-by facility would be granted only under unusually unfavorable funding conditions, documented public interest, and after in-depth verification of the institution’s financial standing and stress-resilience.
- Remedial action and resolution framework:
  - Remedial action regime improved (LOI ¶24a): March 2009 enhancements provide stronger legal protection for the supervisory commissioner; December 2009 amendments to the Law on Credit Institutions and Financial Enterprises establish an additional mandatory threshold for appointment of a supervisory commissioner and state HFSA has sole power to initiate bank liquidation proceedings (structural benchmark).
  - Legislative proposal to broaden bank resolution tools developed but will not be adopted before elections (LOI ¶24b): submitted to parliament on February 12, 2010 (structural benchmark). Once adopted, changes would allow purchase-and-assumption transactions and creation of a bridge bank when a systemically-important bank’s capital adequacy ratio falls below 2 percent or when experiencing severe liquidity strains. Delay allows additional technical work on funding sources for purchase-and-assumption transactions and temporary status of bridge banks.

### Household credit regulation and mortgage market initiatives
- Regulation to safeguard household credit quality will come into effect in the first half of 2010:
  - From March 1, loan-to-value (LTV) ratios for all mortgage and long-term consumer loans denominated in forint will be limited to 75 percent, with lower limits for foreign currency loans.
  - From June 1, banks’ scoring systems will be modified so monthly installment for a foreign currency loan will be lower than for a comparable forint loan.
  - These changes will tighten access to credit for some households, but overall impact on lending activity is expected to be small (LOI ¶22).
- MNB mortgage bond facility (LOI ¶26):
  - Mortgage bond yields remained about 200 bps higher than government bond yields (compared to about 30 bps pre-crisis).
  - To boost liquidity, the central bank will purchase modest amounts of mortgage bonds in primary and secondary markets with a maximum share of 20 percent of any individual issue and an overall ceiling of HUF 100 billion (about 1 percent of central bank assets).
  - Longer-term objective: provide additional domestic currency funding sources for banks to spur domestic currency lending to households.
  - Staff welcomed intention to complement the facility with regulatory initiatives to standardize mortgage bond characteristics and broaden issuers beyond mortgage banks.

### Monetary policy, liquidity, and reserves
- Monetary policy easing and outlook (Figure 6 and LOI ¶25):
  - Since July, MNB cut the key policy rate by a total of 375 bps to 5.75 percent, slowing the pace of cuts from 50 bps to 25 bps from December 2009.
  - Excluding temporary impact of recent increases in VAT and excise duties on inflation, the ex ante real policy rate stands at about 3¼ percent.
  - Markets expect the policy rate to drop to around 5½ percent in the second quarter of 2010.
  - As interest rate differential with the euro area narrows and forint borrowing becomes relatively more attractive, policy rate changes may have stronger impact on credit going forward.
- Demand for extraordinary liquidity facilities:
  - Demand remained subdued as banks’ liquidity improved.
  - Of various HUF and FX facilities introduced in late 2008/early 2009, the only facility with significant outstanding amount is the 3-month FX swap facility (€1.25 billion in mid-February), far below originally envisaged up to €5 billion at end-2009.
- Reserves and external financing (LOI ¶27):
  - Authorities and staff agreed on importance of maintaining adequate international reserves, considering access to official external financing.
  - At this juncture, reserves are broadly adequate using the metric of 100 percent coverage of short-term debt at remaining maturity, including inter-company loans, once all remaining resources under IMF, EU, and World Bank facilities are considered.

*Source: IMF staff estimates.*

### 34. The attached Letter of Intent (LOI) sets out the authorities’ priorities and

### _cr1080 - 34. The attached Letter of Intent (LOI) sets out the authorities’ priorities and

### LOI priorities and performance-criterion modifications
- The performance criterion on net international reserves for end-March 2010 would be modified: it would be adjusted upward to reflect the higher-than-programmed increase in reserves at end-December 2009 and the expected improvement in external financing conditions in the first quarter of 2010.
- An adjustor for the performance criterion on the primary cash balance of the central government system would be added:
  - To reflect additional revenue that could result from the sale of emission credits accrued under the Kyoto protocol and that would either be spent on new environmental projects or saved for such projects in later years, the floor on the primary cash balance will be adjusted upward for any revenue received from such sales and downward for expenditures on new environmental projects financed from this revenue (Technical Memorandum of Understanding ¶ 11).
- Structural benchmarks adjusted:
  - The end-March 2010 structural benchmark on targeted bank inspections would be modified: the end-March benchmark—on the completion of reports on thematic inspections focusing on credit risk and loan portfolio quality for at least three banks selected with a systemic risk-based approach—would be modified to two large credit institutions without a foreign parent bank, since higher than expected demands on supervisory resources limited the scope for an additional priority inspection.
  - A new benchmark introduced for end-June 2010: the HFSA is planning to conduct similar inspections in the second quarter for two large subsidiaries of foreign parent banks (new benchmark, end-June).

### External financing and drawing decisions
- With continued stability of external financing conditions, the authorities are taking decisions about drawing on a review-by-review basis.
- As at the Fourth Review:
  - They do not intend to draw the SDR 725 million (70 percent of quota) that would be made available upon the completion of this review.
  - They also do not intend to request the release of EU balance of payments assistance.
- The authorities are treating the cumulative resources of SDR 1,450 million from the Fourth and Fifth Reviews, as well as the remaining EU and World Bank funds, as insurance against unanticipated shocks.

### Staff appraisal: macroeconomic assessment and program progress
- Overall assessment:
  - The authorities’ economic program, supported by the Stand-By Arrangement, has put Hungary on a path to stability and growth.
  - Under the Fund-supported program, the underlying fiscal position has improved, timely liquidity support was provided to the financial sector, and bank supervision has been significantly enhanced.
  - As a result, macro-financial vulnerabilities are being lowered, investor confidence is returning, and the economy is on the road to recovery.
- Program implementation:
  - All end-December 2009 quantitative performance criteria, the continuous performance criterion on the non-accumulation of external arrears, and the indicative target on central government debt were met.
  - The three structural benchmarks for the Fifth Review—related to monitoring the financial soundness of banks receiving government support, the passage by parliament of amendments to strengthen the remedial powers of the Hungarian Financial Supervisory Authority (HFSA), and the submission to parliament of amendments to improve the bank resolution framework—were also met.
- Near-term outlook and risks:
  - The economy is expected to start recovering during the course of 2010, reflecting the strengthening of policy credibility and higher global demand.
  - A small current account surplus was recorded in 2009, and a small deficit is expected in 2010.
  - Inflation is expected to remain elevated in the first half of 2010, due mostly to the increases in the VAT rate and excise duties, and then fall to the central bank’s inflation target in the second half of the year.
- Fiscal policy recommendations:
  - The underlying fiscal position has been strengthened, but more needs to be done to put debt firmly on a declining path.
  - In 2010, strict expenditure control, cautious use of contingency buffers, and saving of revenue windfalls are essential to manage risks and meet fiscal targets. If existing buffers prove to be insufficient, the authorities would need to take further action.
  - Structural measures will be required to meet the objectives of bringing the general government deficit below 3 percent of GDP in 2011 and of reducing significantly government debt over the medium term.
  - The restructuring of the public transport system will need to be tackled more forcefully so as to reduce its drain on the budget in a durable way.
- Financial sector recommendations:
  - Continued implementation of measures to preserve financial stability remains essential.
  - HFSA actions: stepped up on-site inspections; planning additional follow-up inspections on capital adequacy and credit quality.
  - Sustained vigorous implementation of the reform of the institutional arrangements for bank supervision is essential.
  - Authorities need to continue to carefully monitor the financial soundness of credit institutions that receive FX loans from the government, to safeguard financial stability and minimize risks to public finances.
  - The issue of the HFSA’s regulatory power and the enactment of a stronger bank resolution framework will need to be taken up with the new government after the elections.
- Monetary policy guidance:
  - Monetary policy should continue to ease gradually and cautiously, to the extent allowed by financial market conditions.
  - Reduced external financial strains since mid-2009 and increased confidence in fiscal sustainability have created room for substantial interest rate cuts since then; going forward, continued fiscal consolidation and stable external financing conditions would allow for further cautious interest rate cuts.
  - It is important to maintain an adequate level of international reserves, taking into account access to official external financing.
- Staff support:
  - Staff supports the authorities’ requests for completion of the Fifth Review and modification of the performance criterion for net international reserves and of the adjustor for the performance criterion on the primary cash balance of the central government system.

### Box 1 — Corporate Funding: key findings
- Structure of corporate funding:
  - The non-financial corporate sector is largely foreign-owned and relies heavily on loans.
  - Non-residents hold about 60 percent of equity.
  - Debt financing is almost exclusively in the form of loans, of which about 40 percent are from non-residents (including parent companies) and another 40 percent from domestic financial institutions.
- Recent funding dynamics:
  - Net corporate funding has declined sharply since 2008Q4 and was negative in the first three quarters of 2009.
  - The initial reduction in net funding in 2008Q4 was driven mainly by a collapse in trade credit.
  - The sharp fall in net funding in 2009Q2 was mostly due to a significant drop in net bank lending, which in turn reflected mainly an increase in corporate deposits.
  - Net corporate funding became less negative in 2009Q3, mostly due to higher net bank lending, as corporate deposit drawdown more than offset the continued weakness in new bank credit.
  - External funding has been surprisingly resilient, though it turned slightly negative recently.
- Role of foreign parent funding:
  - Overall, foreign parent funding of the non-financial corporate sector was a stabilizing factor during the period of acute financial strains.
  - This mirrors parent bank support to Hungarian banking subsidiaries, which increased greatly during 2008Q4 and 2009Q1, before falling back later in 2009.

### Box 2 — Government Spending: key findings and reform priorities
- Spending levels and composition:
  - General government spending fell from 54 percent of potential GDP in 2006 to 50 percent of potential GDP in 2008, but remained about 9 percentage points of GDP higher than the average in the other Visegrad countries.
  - Higher general government spending in Hungary reflects higher primary current spending and higher interest payments, which more than offset lower capital spending.
  - In 2008, primary current spending was 7½ percent of GDP higher than the average of the other Visegrad countries, reflecting mainly a higher government wage bill (3½ percent of GDP), higher social benefits (2 percent of GDP), and higher intermediate consumption (1¼ percent of GDP).
  - Interest payments were about 2½ percent of GDP above the average of the other countries.
  - Capital spending was significantly lower than in these countries.
  - Functionally, the higher level of spending mostly related to social protection and general public services.
- Expected spending adjustment:
  - The reforms adopted in 2009-10 are expected to further reduce spending, though it would remain above the regional average.
  - Based on current projections, spending would decline by 4½ percentage points of potential GDP between 2008 and 2010.
  - The bulk of this adjustment would come from a broad-based reduction in primary current spending, though the government wage bill and social transfers would remain at relatively high levels.
- Further reform opportunities:
  - Further reforms could enhance the credibility of fiscal consolidation, improve the efficiency of public services delivery, and create the fiscal space necessary for higher capital spending and lower taxes.
  - Possible measures include reducing the government wage bill and eliminating redundancies between government levels.
- Public finance management recommendations:
  - Spending reforms should be accompanied by measures to further improve budget processes and reduce fiscal risks.
  - Public finance management measures should notably aim at:
    - (i) setting fiscal reforms in a medium-term perspective, including through the implementation of a medium-term fiscal framework and program budgeting;
    - (ii) better managing carry-overs; and
    - (iii) strengthening budgetary controls, to make sure commitments are in line with allocations.
  - With regard to risks, measures aim at improving the operating and financial performance of state-owned enterprises should be accelerated.
- Table excerpt: Selected Central Eastern European Countries: General Government Spending, 2008 (in percent of GDP)
  - Total expenditure: Hungary 49.2; Average of comparable neighboring countries 40.3; Difference 8.9
  - Central government: 32.8; 24.8; 8.0
  - Local governments: 11.4; 10.3; 1.1
  - Social security funds: 5.0; 5.2; -0.2
  - Current Spending: 45.0; 34.8; 10.2
  - Primary current spending: 40.9; 33.3; 7.6
  - Compensation of employees: 11.5; 8.1; 3.5
    - o.w. Central government: 5.8; 4.0; 1.8
    - Local governments: 5.6; 3.9; 1.7
  - Intermediate consumption: 7.1; 5.8; 1.3
  - Social benefits: 18.7; 16.7; 2.0
  - Subsidies: 1.1; 1.3; -0.2
  - Other: 2.5; 1.5; 1.0
  - Property income: 4.1; 1.5; 2.6
  - Gross fixed capital formation: 2.7; 3.8; -1.2
  - Capital transfers: 1.5; 1.7; -0.1
  - Functional classification (2007):
    - Social protection: 17.4; 13.0; 4.3
    - General public services: 9.4; 4.5; 4.8
    - Education: 5.3; 4.8; 0.5
    - Others: 17.8; 17.4; 0.4

*Source: _cr1080 - 34. The attached Letter of Intent (LOI) sets out the authorities’ priorities and*

### Box 3. Hungary: Stand-By Arrangement

### Box 3. Hungary: Stand-By Arrangement

### Access and program length
- Access: Exceptional. 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 and disbursements
- Front loaded:
  - SDR 4.2 billion disbursed after the Board’s approval of the arrangement on November 6, 2008.
  - SDR 2.1 billion disbursed after the completion of the First Review on March 25, 2009.
  - SDR 1.3 billion disbursed after the completion of the Second Review on June 23, 2009.
- Re-phasing:
  - SDR 50 million disbursed at the completion of the Third Review on September 25, 2009.
- Insurance / contingent tranches:
  - Authorities did not draw the tranche (SDR 725 million) made available at the completion of the Fourth Review on December 17, 2009, and indicated their intention not to draw the tranche (SDR 725 million) that would be made available at the completion of this (Fifth) Review.
  - Subject to satisfactory policy performance, these amounts would remain available through the end of the program period.
  - The remaining amount (SDR 1,450 million) is contingent upon completion of further quarterly reviews.

### Conditionality
- Quantitative Performance Criteria:
  - Floor on the central government system primary cash balance.
  - Floor on the change in net international reserves.
  - Band around the 12-month rate of inflation of consumer prices.
  - Non-accumulation of external debt arrears.
- Quantitative Indicative Target:
  - Ceiling on the total debt stock of the central government system.
- 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:
    - Completion of reports on thematic inspections focusing on credit risk and the quality of the loan portfolio for the two large credit institutions without a foreign parent bank. By end-March 2010.
    - Completion of reports on thematic inspections focusing on credit risk and the quality of the loan portfolio for two large subsidiaries of foreign parent banks. By end-June 2010.

### Key macroeconomic indicators and projections (selected, 2006–10)
- Real economy (change in percent):
  - Real GDP: 4.0, 1.0, 0.6, -6.7, -6.3, -0.6, -0.2 (series as presented).
  - Total domestic demand (contribution to growth): 1/ 0.9, -2.1, 0.6, -11.2, -13.0, -1.8, -1.4.
  - Private consumption: 1.9, -1.6, -0.6, -6.8, -7.2, -2.3, -3.0.
  - Gross fixed investment: -3.6, 1.6, 0.4, -8.3, -6.8, 1.0, 1.5.
  - Exports: 18.6, 16.2, 5.6, -12.3, -9.5, 3.6, 6.0.
  - Imports: 14.8, 13.3, 5.7, -16.5, -15.3, 2.7, 5.4.
- Inflation and labor:
  - CPI (end year): 6.5, 7.4, 3.5, 5.2, 5.6, 2.5, 3.0.
  - CPI (average): 3.9, 7.9, 6.1, 4.2, 4.2, 3.9, 4.3.
  - Unemployment rate (average, in percent): 7.5, 7.4, 7.8, 10.0, 10.0, 10.9, 10.6.
- Fiscal (general government, percent of GDP, ESA-95 basis):
  - Overall balance: -9.3, -4.9, -3.7, -3.9, -3.9, -3.8, -3.8.
  - Primary balance: -5.4, -0.9, 0.4, 0.4, 0.5, 0.7, 0.4.
  - Debt: 65.6, 65.8, 72.9, 78.7, 77.7, 80.2, 78.9.
- Money and credit (end-of-period, percent change):
  - Broad money: 13.6, 11.0, 9.2, 3.6, 3.4, 4.3, 4.0.
  - Lending to the private sector, flow-based: 19.6, 18.4, 11.4, -3.7, -4.7, 1.4, -0.6.
- Balance of payments and reserves:
  - Goods and services trade balance (percent of GDP): -0.9, 1.2, 0.7, 5.6, 6.6, 5.6, 6.3.
  - Current account (percent of GDP): -7.5, -6.8, -7.2, -0.5, 0.4, -1.5, -0.4.
  - Reserves (in billions of euros): 16.4, 16.4, 24.0, 29.7, 30.7, 32.5, 33.9.
  - Gross external debt (percent of GDP)4/: 91.1, 98.4, 115.3, 136.6, 137.3, 131.7, 132.3.
- Exchange rate and quota:
  - Exchange regime: Floating.
  - Present rate (March 3, 2010): Ft 195.65 = US$1; Ft. 266.79 = €1.
  - Nominal effective rate (2005=100): 94.1, 100.2, 101.4, ..., 91.2, ...... 
  - Real effective rate, CPI basis (2005=100): 95.8, 108.1, 112.8, ..., 105.3, ...... 
  - Quota at the Fund: SDR 1,038.4 million.

### Monetary accounts highlights (selected series, 2006–10; in billions of forint unless indicated)
- Monetary Survey:
  - Net foreign assets: -83, -952, -1,487, 564, 567, 995, 1,197, 1,311, 735, 1,387.
  - Net domestic assets: 12,809, 15,078, 16,908, 15,414, 15,376, 15,108, 14,877, 14,867, 15,924, 15,196.
  - Domestic credit: 16,190, 18,907, 21,481, 20,722, 20,846, 20,536, 20,330, 20,287, 21,292, 20,554.
  - Broad money: 12,727, 14,126, 15,422, 15,978, 15,943, 16,103, 16,075, 16,178, 16,658, 16,583.
  - Total deposits: 10,075, 10,869, 12,114, 12,504, 12,328, 12,509, 12,457, 12,531, 13,006, 12,807.
- Accounts of the Magyar Nemzeti Bank (MNB):
  - Net foreign assets 1/: 3,838, 3,941, 5,988, 6,680, 7,261, 7,445, 7,520, 7,625, 6,845, 7,693.
  - Base money: 2,434, 2,791, 2,605, 2,566, 2,506, 2,568, 2,558, 2,541, 2,643, 2,592.
  - Currency in circulation: 1,838, 2,068, 2,137, 2,046, 2,039, 2,052, 2,047, 2,045, 2,109, 2,127.
- Other Monetary and Financial Institutions:
  - Net foreign assets: -3,920, -4,892, -7,475, -6,116, -6,694, -6,450, -6,323, -6,315, -5,573, -6,307.
  - Domestic credit: 17,554, 20,045, 24,674, 24,444, 24,938, 24,855, 24,737, 24,839, 24,565, 25,139.
  - Total deposits: 10,075, 10,869, 12,114, 12,504, 12,328, 12,509, 12,457, 12,531, 13,006, 12,807.
- Memoranda (percentage changes, y-o-y):
  - Base money: 10.7, 14.7, -6.7, -1.5, -3.8, -1.9, 2.2, -0.1, 3.0, 3.4.
  - Broad money: 13.6, 11.0, 9.2, 3.6, 3.4, 1.2, 1.6, 3.0, 4.3, 4.0.
  - Credit to the economy: 16.7, 18.8, 18.5, -3.5, -3.9, -12.5, -3.6, -1.9, 1.4, -0.6.
  - Foreign currency loans to total loans: 47.9, 56.4, 64.7, 63.0, 63.3, 63.3, 63.0, 63.0, 63.3, 63.1.
  - Foreign currency deposits to total deposits: 22.3, 19.9, 19.6, 21.8, 21.8, 21.1, 21.4, 21.4, 21.3, 21.3.
- Net international reserves (memorandum): 4,000, 4,051, 4,908, 5,106, 5,284, 5,479, 5,517, 5,623, 5,235, 5,691.
  - plus IMF disbursement to the government 4/: 0, 0, 1,215, 1,864, 1,879, 1,869, 1,869, 1,869, 1,864, 1,869.
  - = net foreign assets of the central bank: 3,838, 3,941, 5,988, 6,680, 7,261, 7,445, 7,520, 7,625, 6,845, 7,693.

### Balance of payments and financial flows (selected quarterly and projected items)
- Current Account (quarterly, in millions): -7,591; -587; 475; 698; -210; -430; 376; 73; -143; -138; -216; -1,500; -424; -1,056 (series as presented).
- Goods and services, net (annual cumulative / quarterly contributions): 780; 843; 1,815; 1,986; 1,489; 5,184; 6,132; 1,529; 1,627; 1,527; 1,587; 5,468; 6,270; 5,934.
  - Exports (levels): 86,390; 16,575; 17,513; 18,520; 19,440; 70,561; 72,049; 18,122; 18,906; 19,331; 19,805; 73,633; 76,164; 81,835.
  - Imports (levels): -85,610; -15,732; -15,699; -16,534; -17,952; -65,376; -65,917; -16,592; -17,280; -17,804; -18,218; -68,165; -69,894; -75,900.
- Income, net (annual cumulative / quarterly contributions): -7,697; -1,278; -1,470; -1,418; -1,459; -5,368; -5,625; -1,362; -1,675; -1,570; -1,708; -6,371; -6,315; -7,058.
- Capital Account and EU transfers:
  - Capital Account: 1,034; 300; 415; 354; 168; 1,526; 1,238; 484; 478; 490; 492; 1,853; 1,943; 1,864.
  - Net capital transfers from the EU: 937; 295; 417; 354; 578; 1,543; 1,645; 484; 478; 490; 492; 1,853; 1,943; 2,071.
- Financial Account (quarterly): 9,629; -643; -3,462; 1,248; -692; -3,942; -3,549; 474; -862; -727; 110; -1,386; -1,004; 726.
  - Direct investment, net (annual cumulative / quarterly): 2,499; 109; -1,063; -174; 536; -942; -591; 49; 203; -66; -17; -194; 169; 584.
  - Portfolio investment, net (annual cumulative / quarterly): -3,174; -2,940; -542; 2,907; -2,246; -671; -2,821; 1,375; -313; -483; 304; 912; 882; 119.
  - Other investment (annual cumulative / quarterly): 10,304; 2,188; -1,858; -1,485; 1,018; -2,329; -137; -950; -751; -178; -176; -2,104; -2,056; 24.
- Net errors and omissions (quarterly): -2,593; 394; -86; -1,031; 187; -434; -536; -134; -134; -134; -134; -434; -536; -268.
- Overall Balance (quarterly): 479; -536; -2,659; 1,269; -546; -3,280; -2,471; 896; -661; -509; 252; -1,468; -22; 1,267.
- Program financing (available official financing from June 2010 to program expiration in October):
  - Program financing totals shown in series: 2,000; 2,000; 0; 1,500; 0; 3,500; 3,500; 0; 800; 900; 0; 2,000; 1,700; 0.
  - European Union shown as the source of 2,000; 2,000; 0; 1,500; 0; 3,500; 3,500; 0; 300; 400; 0; 1,000; 700; 0.
  - World Bank shown with later program disbursements: 0; 0; 0; 0; 0; 0; 0; 0; 500; 500; 0; 1,000; 1,000; 0.
- Reserves and reserve liabilities (quarterly and projections):
  - Net International Reserves (increase -): -2,479; -1,464; 2,659; -2,769; 546; -620; -1,029; -896; -139; -391; -252; -532; -1,678; -1,267.
  - Gross Reserves (quarterly): -7,402; -3,831; 1,270; -3,907; 546; -5,496; -5,923; -896; -932; -1,183; -252; -2,871; -3,263; -1,267.
  - Reserve Liabilities (quarterly): 4,923; 2,368; 1,389; 1,138; 0; 4,876; 4,894; 0; 793; 793; 0; 2,339; 1,585; 0.
  - Fund disbursements (as part of reserve liabilities): 4,923; 2,368; 1,389; 54; 0; 3,811; 3,811; 0; 793; 793; 0; 2,339; 1,585; 0.
  - Current account (in percent of GDP) series: -7.2, -2.8, 2.1, 3.0, -0.8, -0.5, 0.4, 0.3, -0.6, -0.6, -0.7, -1.5, -0.4, -1.0.
  - Gross external debt (in percent of GDP) series: 115.3, 136.9, 138.5, 139.2, 137.3, 136.6, 137.3, 138.2, 138.8, 139.7, 132.3, 131.7, 132.3, 124.3.
  - Gross official reserves (levels): 24,040; 27,890; 26,950; 30,603; 30,676; 29,650; 30,676; 31,572; 32,504; 33,687; 33,940; 32,521; 33,940; 35,206.
  - In percent of short-term debt at remaining maturity: 72.2, 79.2, 76.5, 86.0, 84.9, 85.1, 84.9, 83.8, 85.1, 89.3, 88.8, 81.5, 88.8, 97.6.

*Source: Box 3. Hungary: Stand-By Arrangement, IMF staff presentation in the provided content.*

### 2010. Undrawn balances of € 1,600 million

### 2010. Undrawn balances of € 1,600 million

### Balance of Payments and Financing Requirements
- Total financing requirements (selected points, in millions of euros):
  - Total (Dec 2008–Dec 2010 series): -1,341; -836; -3,074; 915; -714; 412; -1,139; -999; -6,776
  - Current account deficit (same series): -2,268; -587; 475; 698; -210; 73; -143; -138; -2,101
  - Financial account outflows: 992; -643; -3,462; 1,248; -692; 474; -862; -727; -3,671
  - Net errors and omissions: -66; 394; -86; -1,031; 187; -134; -134; -134; -1,004
- Financial account components (selected):
  - Direct investment, net: 1,310; 109; -1,063; -174; 536; 492; 03; -669; 05
  - Portfolio investment, government net 1/: -4,407; -2,483; -255; 2,259; -2,016; 1,751; -127; -740; -6,017
  - Portfolio investment, private net 2/: -1,256; -457; -287; 648; -230; -376; -186; 256; -1,888
  - Other investment: 5,346; 2,188; -1,858; -1,485; 1,018; -950; -751; -178; 3,329
- Total financing sources and uses:
  - Total financing sources: -3,582; -1,531; 1,685; -2,053; 714; -412; 346; 206; -4,627
  - Capital account inflows: 739; 300; 415; 354; 168; 484; 478; 490; 3,428
  - Net capital transfers from the EU: 660; 295; 417; 354; 578; 484; 478; 490; 3,756
  - Program Financing (total): 2,000; 2,000; 0; 1,500; 0; 0; 800; 900; 7,200
    - European Union: 2,000; 2,000; 0; 1,500; 0; 0; 300; 400; 6,200
    - World Bank: 0; 0; 0; 0; 0; 0; 500; 500; 1,000
  - Change in gross reserves: -6,321; -3,831; 1,270; -3,907; 546; -896; -932; -1,183; -15,255
  - Financing need: -4,923; -2,368; -1,389; -1,138; 0; 0; -793; -793; -11,403
  - Fund credits: 4,923; 2,368; 1,389; 540; 0; 79; 379; 310; 10,319
  - SDR allocation: 0; 0; 0; 1,083; 0; 0; 0; 1,083
- Notes:
  - 1/ Includes government FX bond issuance of US$ 2,000 million in 2010Q1.
  - 2/ During the fourth quarter of 2009, banks with foreign parent banks are expected to have rolled 95 percent of short-term debt, and others 70 percent, recovering gradually to 100 percent in the second half of 2010.
  - 3/ Assumes no net gains from financial derivatives.
  - 3/ The short-term debt at remaining maturity includes an estimate of intercompany loans falling due in the short term.

### External Indicators and Vulnerability
- Key external statistics (selected, levels and percent changes):
  - Exports of goods and services, annual percentage change: 12.9; 15.4; 16.6; 7.0; -16.6
  - Imports of goods and services, annual percentage change: 10.0; 14.7; 13.5; 7.7; -23.0
  - Real effective exchange rate, percentage change, + = appreciation: 2.4; -4.2; 12.8; 4.4; -6.7
  - Current account balance, in percent of GDP: -7.2; -7.5; -6.8; -7.2; 0.4
  - Financial account, in percent of GDP: 12.9; 10.1; 7.9; 9.1; -3.8
  - Net foreign direct investment, in percent of GDP: 5.0; 3.1; 1.6; 2.4; -0.6
- Reserves and external debt measures:
  - Gross official reserves (millions of euros): 15,721; 16,397; 16,385; 24,040; 30,676
  - Reserves in months of imports: 2.7; 2.5; 2.3; 4.4; 5.3
  - Reserves in percent of short-term debt at remaining maturity: 112.2; 123.6; 88.9; 72.2; 84.9
  - Total external debt, excluding SPEs, in percent of GDP: 75.7; 91.1; 98.4; 115.3; 137.3
  - Of which: Direct investment intercompany loans (percent of GDP): 11.9; 16.4; 18.9; 22.0; 28.9
  - Short-term debt at remaining maturity (levels): 14,012; 13,270; 18,428; 33,314; 36,141
- Indicators of external vulnerability (debt dynamics and financing needs):
  - External debt-to-exports ratio (in percent): 111.7; 118.3; 123.2; 141.0; 176.8; 171.7; 159.1; 152.4; 146.6; 141.4; 135.6
  - Gross external financing need (in billions of euros): 20.8; 21.8; 20.7; 32.7; 33.7; 35.7; 38.6; 38.4; 43.6; 48.6; 47.6
  - Gross external financing need (in percent of GDP): 23.4; 24.3; 20.5; 31.0; 36.3; 36.1; 36.8; 34.4; 36.7; 38.6; 35.8
- Key assumptions underlying baseline (selected):
  - Real GDP growth (in percent): 2.4; 4.0; 1.0; 0.6; -6.3; -0.2; 3.2; 4.5; 4.0; 3.5; 3.0
  - GDP deflator in euros (change in percent): 5.2; -2.5; 11.4; 3.8; -6.2; 6.7; 2.7; 2.1; 2.3; 2.4; 2.4
  - Nominal external interest rate (in percent): 4.7; 4.3; 4.5; 5.7; 3.9; 3.7; 4.2; 4.3; 4.3; 4.4; 4.4
  - Growth of exports (euro terms, in percent): 12.2; 15.4; 16.6; 7.0; -16.6; 5.7; 7.4; 7.6; 7.7; 8.1; 8.3
  - Growth of imports (euro terms, in percent): 9.7; 14.7; 13.5; 7.7; -23.0; 6.0; 8.6; 9.1; 9.1; 8.9; 8.4
- Debt dynamics contributions (selected):
  - Automatic debt dynamics 3/: -1.6; 0.9; -5.4; 1.2; 18.0; 5.0; 1.2; -0.2; 0.4; 0.9; 1.5
  - Contribution from nominal interest rate: 2.9; 3.2; 3.7; 5.4; 5.1; 4.8; 5.2; 5.0; 4.9; 4.8; 4.8
  - Contribution from real GDP growth: -1.5; -3.0; -0.8; -0.6; 8.3; 0.2; -4.0; -5.2; -4.5; -3.9; -3.3
  - Contribution from price and exchange rate changes 4/: -3.1; 0.6; -8.3; -3.6; 4.5; ...
- Scenario with key variables at their historical averages: external debt path shows 132.3; 129.0; 127.9; 126.4; 124.8; 122.4; -7.1 (table entries as presented).

### Fiscal Balances and Medium-Term Scenario
- Key fiscal aggregates (percent of GDP, selected years and projections):
  - Total revenues: 42.7; 44.9; 45.5; 46.2; 45.8; 45.5; 44.7; 43.5
  - Current revenues and current transfers (incl. grants): 41.8; 40.0; 44.9; 44.9; 44.4; 44.2; 43.4; 42.0
  - Tax revenues: 37.0; 39.5; 40.1; 39.8; 39.3; 39.3; 38.5; 37.6
  - Total expenditures: 52.0; 49.9; 49.2; 50.1; 49.6; 49.3; 48.5; 46.3
  - Current expenditures and current transfers: 45.7; 44.3; 45.1; 46.1; 45.6; 45.3; 44.3; 42.2
  - Interest payments: 4.0; 4.0; 4.1; 4.4; 4.3; 4.5; 4.2; 4.2
  - Capital expenditures: 4.3; 3.6; 2.6; 2.7; 2.6; 2.7; 2.7; 2.9
  - General government balance: -9.3; -4.9; -3.7; -3.9; -3.9; -3.8; -3.8; -2.8
  - Primary balance: -5.4; -0.9; 0.4; 0.4; 0.5; 0.7; 0.4; 1.4
  - Gross public debt: 65.6; 65.8; 72.9; 77.8; 77.3; 74.5; 71.2; 67.6; 64.0 (series formatting as presented)
- Memorandum and nominal items (HUF billions, selected):
  - Total revenue (HUF billions): 10,133; 11,411; 12,077; 11,876; 11,913; 11,922; 11,908; 12,278
  - Total expenditure (HUF billions): 12,350; 12,666; 13,069; 12,884; 12,918; 12,925; 12,927; 13,071
  - Primary balance (HUF billions): -1,276; -227; 107; 115; 120; 176; 113; 405
  - Overall balance (HUF billions): -2,217; -1,256; -992; -1,008; -1,005; -1,003; -1,019; -793

### Banking Sector and Financial Soundness
- Capital and asset quality (selected):
  - Regulatory capital to risk-weighted assets: 11.6; 11.0; 10.4; 11.2; 12.9
  - Capital (net worth) to assets: 8.2; 8.3; 8.2; 8.0; 8.5
  - Annual growth of bank loans: 19.8; 18.4; 22.1; 20.9; -8.4
- Sectoral distribution of bank loans (percent of total loans, selected):
  - Corporates: 45.7; 43.2; 39.8; 35.3; 34.8
    - o/w in foreign currency: 21.8; 20.3; 20.9; 21.3; 21.4
  - Households: 29.2; 31.5; 32.7; 36.0; 37.0
    - o/w in foreign currency: 9.5; 14.8; 19.3; 25.4; 26.0
  - Other loans: 25.0; 25.3; 27.5; 28.7; 28.1
- Denomination of FX loans to corporates (percent composition): EUR 74.7; 70.8; 67.6; 66.9; 75.2; USD 5.7; 4.6; 4.9; 4.1; 3.4; CHF 19.2; 24.4; 26.4; 27.8; 20.6; Other 0.4; 0.2; 1.0; 1.1; 0.8
- Non-performing loans and provisioning (selected):
  - NPLs to gross loans (90 days+ overdue): 2.3; 2.6; 2.3; 3.0; 6.7
  - Provisions to NPLs: 65.1; 57.1; 64.8; 58.9; 53.2
  - NPLs net of provisions to capital: 6.3; 8.9; 6.8; 11.3; 24.1
- Profitability and liquidity (selected):
  - ROA (after tax, annualized): 1.4; 1.5; 1.2; 0.8; 0.7
  - ROE (after tax, annualized): 24.5; 23.8; 18.4; 11.6; 9.8
  - Net interest income to gross income: 64.4; 64.4; 61.3; 56.0; 55.7
  - Loans to deposits: 107.7; 109.9; 121.6; 125.1; 115.0
  - Liquid assets to total assets: 21.0; 20.0; 16.4; 15.6; 22.7
  - Net open position in FX to capital: 3.5; 7.2; 6.0; 13.7; 16.4
- Sources: Magyar Nemzeti Bank.

### IMF Program Financing and Fund Credit
- Schedule of reviews and purchases (SDRs and percent of quota, selected dates):
  - November 6, 2008: 4,215.0 millions of SDRs; 405.9 percent of Quota; Approval of arrangement
  - March 25, 2009: 2,107.5; 203.0; First review and end-December 2008 performance criteria
  - June 23, 2009: 1,264.5; 121.8; Second review and end-March 2009 performance criteria
  - September 25, 2009: 50.0; 4.8; Third review and end-June 2009 performance criteria
  - December 18, 2009: 725.1; 69.8; Fourth review and end-September 2009 performance criteria
  - March 15, 2010: 725.1; 69.8; Fifth review and end-December 2009 performance criteria
  - June 15, 2010: 725.1; 69.8; Sixth review and end-March 2010 performance criteria
  - September 15, 2010: 725.2; 69.8; Seventh review and end-June 2010 performance criteria
  - Total: 10,537.5 millions of SDRs; 1,014.8 percent of Quota
  - Note: 1/ For November 2008–September 2009. After September 2009 it reflects the amounts available for purchase.
- Indicators of Fund credit (stock and flows, selected):
  - Disbursement (existing): 4,215; 3,422; 1,450; 0; 0; 0; 0; 0; 0 (series as presented)
  - Stock of existing and prospective Fund credit (millions of SDR): 4,215; 7,637; 10,538; 10,538; 7,317; 2,683; 635; 0; 0
  - Stock in percent of quota: 405.9; 735.5; 1,014.8; 1,014.8; 704.7; 258.4; 61.1; 0.0; 0.0
  - Stock in percent of GDP: 4.3; 9.1; 11.5; 10.9; 7.2; 2.5; 0.6; 0.0; 0.0
  - Stock in percent of exports of goods and services: 5.2; 11.7; 15.0; 14.0; 9.1; 3.1; 0.7; 0.0; 0.0
  - Stock in percent of gross reserves: 18.8; 27.6; 33.6; 32.5; 22.6; 8.3; 2.1; 0.0; 0.0
  - Obligations to the Fund from existing and prospective Fund arrangements (in percent of quota): 0.0; 14.2; 23.2; 26.8; 33.5; 46.2; 19.9; 9.6; 1.6; 0.0
- Table note: 1/ End of period. Assumes that all prospective Fund resources would be disbursed.
- Sources: IMF staff estimates.

*Source: IMF staff estimates and Hungarian authorities as presented in the document.*

### Appendix Table 1. Hungary: External Debt Sustainability Framework, 2005-15

### Appendix Table 1. Hungary: External Debt Sustainability Framework, 2005-15

### Key statistics and projections (public sector debt, percent of GDP)
- Public sector debt (General government gross debt) by year:
  - 2005: 61.8
  - 2006: 65.6
  - 2007: 65.7
  - 2008: 72.9
  - 2009: 77.7
  - 2010: 78.9
  - 2011: 77.3
  - 2012: 74.5
  - 2013: 71.2
  - 2014: 67.6
  - 2015: 64.0
- Of which foreign-currency denominated (percent of GDP):
  - 2005: 17.4
  - 2006: 18.5
  - 2007: 18.5
  - 2008: 26.3
  - 2009: 33.2
  - 2010: 32.5
  - 2011: 30.6
  - 2012: 27.9
  - 2013: 25.2
  - 2014: 22.7
  - 2015: 20.9
- Change in public sector debt (percent of GDP):
  - 2005: 2.4
  - 2006: 3.8
  - 2007: 0.0
  - 2008: 7.2
  - 2009: 4.8
  - 2010: 1.2
  - 2011: -1.6
  - 2012: -2.8
  - 2013: -3.3
  - 2014: -3.6
  - 2015: -3.6

### Identified debt-creating flows and residuals
- Identified debt-creating flows (4+7+12) (percent of GDP):
  - 2005: 5.2
  - 2006: 1.7
  - 2007: -1.2
  - 2008: 3.4
  - 2009: 5.3
  - 2010: 2.1
  - 2011: -1.6
  - 2012: -2.8
  - 2013: -3.3
  - 2014: -3.6
  - 2015: -3.6
- Primary deficit (percent of GDP) — as presented in table (preserve original formatting):
  - 3.7 5.4 0.9-0.4    -0.5-0.4-1.4-2.2-2.9-3.3-3.6
- Revenue and grants (percent of GDP):
  - 2005: 42.3
  - 2006: 42.6
  - 2007: 44.8
  - 2008: 45.5
  - 2009: 45.8
  - 2010: 44.7
  - 2011: 43.5
  - 2012: 43.3
  - 2013: 43.3
  - 2014: 43.3
  - 2015: 43.3
- Primary (noninterest) expenditure (percent of GDP):
  - 2005: 46.0
  - 2006: 48.0
  - 2007: 45.7
  - 2008: 45.1
  - 2009: 45.3
  - 2010: 44.3
  - 2011: 42.1
  - 2012: 41.1
  - 2013: 40.4
  - 2014: 39.9
  - 2015: 39.7

### Automatic debt dynamics and contributions
- Automatic debt dynamics (percent of GDP):
  - 2005: 3.4
  - 2006: -2.4
  - 2007: -2.1
  - 2008: 3.8
  - 2009: 5.8
  - 2010: 2.5
  - 2011: -0.2
  - 2012: -0.6
  - 2013: -0.5
  - 2014: -0.3
  - 2015: 0.0
- Contribution from interest rate/growth differential (percent of GDP):
  - 2005: 0.6
  - 2006: -0.7
  - 2007: -0.3
  - 2008: 1.5
  - 2009: 5.8
  - 2010: 2.5
  - 2011: -0.2
  - 2012: -0.6
  - 2013: -0.5
  - 2014: -0.3
  - 2015: 0.0
- Of which contribution from real interest rate (percent of GDP):
  - 2005: 2.9
  - 2006: 1.6
  - 2007: 0.3
  - 2008: 0.9
  - 2009: 1.1
  - 2010: 2.4
  - 2011: 2.2
  - 2012: 2.6
  - 2013: 2.3
  - 2014: 2.1
  - 2015: 1.9
- Of which contribution from real GDP growth (percent of GDP):
  - 2005: -2.3
  - 2006: -2.3
  - 2007: -0.7
  - 2008: 0.6
  - 2009: 4.7
  - 2010: 0.1
  - 2011: -2.4
  - 2012: -3.2
  - 2013: -2.8
  - 2014: -2.4
  - 2015: -1.9
- Contribution from exchange rate depreciation (percent of GDP):
  - 2005: 2.8
  - 2006: -1.7
  - 2007: -1.8
  - 2008: 2.3
  - (table continues with omitted rows in source)

### Other identified debt-creating flows and residual
- Other identified debt-creating flows (percent of GDP):
  - 2005: -2.0
  - 2006: -1.2
  - 2007: 0.0
  - 2008: 0.0
  - 2009: 0.0
  - 2010: 0.0
  - 2011: 0.0
  - 2012: 0.0
  - 2013: 0.0
  - 2014: 0.0
  - 2015: 0.0
- Privatization receipts (negative) (percent of GDP):
  - 2005: -2.0
  - 2006: -1.2
  - 2007–2015: 0.0 (each year)
- Residual, including asset changes (2-3) (percent of GDP):
  - 2005: -2.8
  - 2006: 2.1
  - 2007: 1.3
  - 2008: 3.8
  - 2009: -0.5
  - 2010: -0.9
  - 2011–2015: 0.0 (each year, projections)

### Ratios, financing needs, and scenarios
- Public sector debt-to-revenue ratio:
  - 2005: 146.3
  - 2006: 154.1
  - 2007: 146.6
  - 2008: 160.2
  - 2009: 169.8
  - 2010: 176.4
  - 2011: 177.5
  - 2012: 172.1
  - 2013: 164.4
  - 2014: 156.1
  - 2015: 147.8
- Gross financing need under baseline (percent of GDP, right scale in figure):
  - 2005: 24.6
  - 2006: 24.3
  - 2007: 18.6
  - 2008: 16.7
  - 2009: 18.0
  - 2010: 15.8
  - 2011: 18.9
  - 2012: 18.6
  - 2013: 18.5
  - 2014: 17.2
  - 2015: 14.9
- Gross financing need in billions of U.S. dollars:
  - 2005: 27.2
  - 2006: 27.5
  - 2007: 25.9
  - 2008: 26.0
  - 2009: 23.3
  - 2010: 23.0
  - 2011: 29.0
  - 2012: 30.3
  - 2013: 31.8
  - 2014: 31.0
  - 2015: 28.1
- Scenario with key variables at their historical averages (selected entries as presented):
  - 2009: 77.7
  - 2010: 77.1
  - 2011: 77.3
  - 2012: 77.5
  - 2013: 77.8
  - 2014: 78.0
  - 2015: 78.3
  - (table shows a trailing -0.8 entry but context truncated in source)
- Scenario with no policy change (constant primary balance) in 2009-2015 (selected entries):
  - 2009: 77.7
  - 2010: 82.3
  - 2011: 81.7
  - 2012: 80.6
  - 2013: 79.6
  - 2014: 78.9
  - 2015: 78.5
  - Debt-stabilizing primary balance: 0.2 (presented in table header)

### Key macroeconomic and fiscal assumptions underlying baseline (annual rates, unless indicated)
- Real GDP growth (in percent):
  - 2005: 4.0
  - 2006: 4.0
  - 2007: 1.1
  - 2008: -1.0
  - 2009: -6.3
  - 2010: -0.2
  - 2011: 3.2
  - 2012: 4.5
  - 2013: 4.0
  - 2014: 3.5
  - 2015: 3.0
- Average nominal interest rate on public debt (in percent) 8/:
  - 2005: 7.4
  - 2006: 6.9
  - 2007: 6.6
  - 2008: 6.6
  - 2009: 5.8
  - 2010: 5.6
  - 2011: 5.7
  - 2012: 5.8
  - 2013: 5.7
  - 2014: 5.7
  - 2015: 5.6
- Average real interest rate (nominal rate minus change in GDP deflator, in percent):
  - 2005: 5.2
  - 2006: 3.0
  - 2007: 0.6
  - 2008: 1.3
  - 2009: 1.1
  - 2010: 3.1
  - 2011: 3.0
  - 2012: 3.7
  - 2013: 3.4
  - 2014: 3.2
  - 2015: 3.1
- Nominal appreciation (increase in US dollar value of local currency, in percent):
  - 2005: -15.6
  - 2006: 11.5
  - 2007: 11.0
  - 2008: -11.2
  - (further years truncated in source)
- Inflation rate (GDP deflator, in percent):
  - 2005: 2.2
  - 2006: 3.9
  - 2007: 6.0
  - 2008: 5.3
  - 2009: 4.7
  - 2010: 2.5
  - 2011: 2.7
  - 2012: 2.0
  - 2013: 2.3
  - 2014: 2.5
  - 2015: 2.5
- Growth of real primary spending (deflated by GDP deflator, in percent):
  - 2005: 7.2
  - 2006: 8.6
  - 2007: -3.8
  - 2008: -2.3
  - 2009: -5.9
  - 2010: -2.4
  - 2011: -1.9
  - 2012: 2.1
  - 2013: 2.2
  - 2014: 2.3
  - 2015: 2.3
- Memorandum item — Growth of real public debt:
  - 2005: 7.0
  - 2006: 7.8
  - 2007: -0.2
  - 2008: 11.7
  - 2009: -1.0
  - 2010: 0.8
  - 2011: 1.3
  - 2012: -0.2
  - 2013: -1.3
  - 2014: -2.2
  - 2015: -3.0

### Footnotes and definitions (as presented)
- 1/ General government gross debt.
- 2/ 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, this line includes exchange rate changes.
- 6/ 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 include real GDP growth; real interest rate; and primary balance in percent of GDP.
- 8/ Derived as nominal interest expenditure divided by previous period debt stock.
- 9/ Assumes that 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, 2005-15.*

### 18. The banking system has continued to be profitable, with capital buffers well above

### 18. The banking system has continued to be profitable, with capital buffers well above regulatory requirements and stable funding

### Banking system performance and recent developments
- After-tax return on equity was 9.8 percent in 2009, compared to 11.6 percent in 2008.
- Interest margins remained stable in 2009.
- Profits from investment activities increased—due largely to rising prices of Hungarian government bonds.
- Costs were compressed, resulting in a sizeable increase in pre-provisioning profits.
- Non-performing loans increased to 6.7 percent at end-2009, compared to 5.9 percent at end-September and 3.0 percent at end-2008.
  - Footnote: Non-performing loans are defined as corporate, household, interbank, foreign and other loans that are past due for more than 90 days.
- The corresponding sharp increase in provisioning triggered a reduction in net profits.
- The banking system’s capital adequacy ratio stood at 12.9 percent at end-December, compared to 11.2 percent a year earlier, reflecting retained profits, capital injections, and reductions in risk-weighted assets.
- Banks’ credit to the private sector fell by 4.7 percent in 2009, with a stronger contraction in credit to small and medium-sized enterprises.
  - Footnote: Exchange rate adjusted growth rate of bank credit to households, non-financial corporations and other financial corporations.

### Risks, outlook, and scenario assumptions
- Profits are expected to shrink substantially in 2010 and may be negative for some banks as:
  - interest margins narrow;
  - profits from investment activities fall;
  - banks continue to step up provisioning.
- Non-performing loans are expected to peak around 9-10 percent during the course of 2010.
- Under the macroeconomic baseline scenario:
  - most systemically important banks should be able to absorb projected loan losses from gross profits;
  - banks can dip into substantial capital buffers if needed.
- Less well capitalized banks are expected to take measures to safeguard capital cushions above the regulatory minimum, under close supervision from the Hungarian Financial Supervisory Agency (HFSA).
- Parent banks’ commitments and monitoring:
  - Parents’ minimum exposure level to Hungary was fixed at 95 percent of the level at end-September 2008.
  - At end-December 2009 all parent banks were in compliance based on HFSA data for their Hungarian subsidiaries.
  - Parents agreed to provide additional data on exposure to non-affiliated entities in Hungary; HFSA collecting these data, expected to be available by end-March.

### Strengthening supervision and institutional reforms
- Legislative changes approved by parliament on December 14:
  - HFSA upgraded to an autonomous organization accountable directly to Parliament.
  - HFSA management structure streamlined; performance incentives reinforced; management can reallocate staff flexibly and rapidly.
  - HFSA given the right to issue binding administrative acts to temporarily suspend financial products in case of threats to financial stability.
- Financial Stability Council (FSC):
  - New tri-partite FSC established in law, consisting of the Minister of Finance, the Governor of the Hungarian National Bank (MNB), and the Chairman of the HFSA.
  - FSC meets monthly to review developments and policies related to financial stability.
  - Both the MNB and the FSC have the right to propose legislation or regulation on a “comply and explain” basis: the government needs to indicate agreement within 15 days or explain why it disagrees.
  - Note: Looking forward, effectiveness would be increased if the HFSA obtained the right to issue binding regulations.
- Banking supervision capacity and inspection program:
  - Comprehensive on-site inspections of the seven largest banks were finalized in 2009.
  - Inspection of another large bank to be completed in April 2010.
  - HFSA priority: targeted follow-up on-site inspections focusing on credit portfolios.
    - By end-March 2010 thematic inspections will be completed for two large credit institutions without a foreign parent (structural benchmark).
    - By end-June 2010 thematic inspections will be completed for two large subsidiaries of foreign parent banks (structural benchmark).
    - Credit portfolios of other large systemically important banks to be inspected in the second half of 2010.
  - Reviews of foreign subsidiaries of Hungarian banks within EU countries progressing as scheduled.
  - Public tender to commission reviews of subsidiaries outside the EU was inconclusive; a new tender is being launched.

### Government support, monitoring, and conditionality
- Sub-committee of the FSC:
  - Continued to monitor the three credit institutions that received loans from the government in 2009, per the continuous structural benchmark.
  - Any request for a loan or stand-by facility from the government will be granted only under:
    - unusually unfavorable funding conditions for the institution,
    - a well-documented public interest,
    - in-depth verification by the sub-committee of the institution’s financial standing and stress-resilience, including supervisory reports and HFSA recommendations.
  - Compliance with EU rules will be ensured.
  - Sub-committee to report regularly to the FSC and additionally when supervisory and external audit reports become available.

### Remedial action and resolution framework
- Amendments and legislative actions:
  a. Amendments to the Law on Credit Institutions and Financial Enterprises passed on December 14, 2009, meeting the end-December structural benchmark:
     - Stipulate an additional mandatory threshold for the appointment of a supervisory commissioner.
     - Clearly state that only the HFSA has the power to initiate bank liquidation proceedings.
  b. Draft legislation submitted to parliament on February 12 to further strengthen the bank resolution framework (in line with structural benchmark):
     - Broadens resolution techniques by allowing purchase-and-assumption transactions and creation of bridge banks.
     - These powers would apply to systemically important credit institutions where financial condition deteriorated significantly but prior to liquidation threshold.
     - Parliament will not consider these amendments before the elections scheduled for April; draft legislation will need to be reintroduced when parliament reconvenes, allowing opportunity for further improvement.
  c. Government will seek the European Commission’s approval for extension of the capital enhancement fund under the financial stability act until end-2010.
     - The act grants extended resolution powers and provides a safety net while the enhanced bank resolution framework is not yet in place.

### Monetary and exchange rate policy measures
- MNB policy stance:
  - MNB remains committed to the inflation target of 3 percent over the medium term, while acting as needed to mitigate financial stability risks.
  - Since July 28, 2009 the MNB has cut the key policy rate by a cumulative 375 bps to 5.75 percent.
  - Given inflation projected below target at the policy horizon, there is room for further gradual and cautious cuts should market sentiment improvement prove sustainable.
- Mortgage bond market support:
  - From March 2010, the MNB will purchase mortgage bonds in primary and secondary markets up to a total notional value of HUF100 billion (0.4 percent of GDP) to improve liquidity.
  - Central bank will buy parts of primary market issues only if issuer proves continuous market making in the secondary market.
  - Experience with the facilities will be reassessed later in the year.
  - Longer-term objective: support alternative domestic currency funding options for banks to help boost domestic currency lending.
  - Facility will be complemented by regulatory initiatives to support the mortgage market.
- International reserves and program target:
  - Key objective: maintain an adequate level of international reserves, taking into account access to official external financing.
  - Government will refrain from issuing short-term debt for the purpose of meeting the NIR target.

### Program monitoring: Net international reserves and external disbursements (TMU)
- Outstanding stock of NIR: end-December 2008 18,493.8 (Millions of Euros).
- Floor on cumulative change in net international reserves from end-December 2008 (Millions of Euros):
  - End-March 2009 (actual) 1,464
  - End-June 2009 (actual) -1,195
  - End-September 2009 (actual) 1,574
  - End-December 2009 (actual) 1,028
  - End-March 2010 (performance criterion) -1,075
  - End-June 2010 (performance criterion) -937
- 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 3,500
  - End-March 2010 (technical assumption) 3,500
  - End-June 2010 (technical assumption) 4,300
  - End-September 2010 (technical assumption) 5,200

### Inflation consultation mechanism (TMU)
- Quarterly consultation band based on headline CPI published by the Hungarian Central Statistical Office.
- Central point for end-quarter inflation: 3 percent.
- Bands: lower and upper bands around each target of ±1 and ±2, respectively.
- Targets for end-March and end-June 2010 are performance criteria.
- For monitoring, CPI inflation will be adjusted by 3.0 percentage points (estimated impact of VAT increases 2.2 percentage points and excise taxes 0.8 percentage points).

*Source: IMF staff report text provided in the content unit*

### 9. The CPI inflation consultation band will be an important part of each review

### 9. The CPI inflation consultation band will be an important part of each review

### CPI inflation consultation band and consultation mechanics
- The MNB will conduct discussions with Fund staff if the observed year-on-year rate of CPI inflation falls outside the inner band.
- If the observed year-on-year rate of 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.
- The Fund and authorities are committed to report to the public the reasons for any breach of the inner band and the policy response.

### C. Floor on the Cash Primary Balance of the Central Government System
- Definition: The primary balance of a budgetary institution is defined as the difference between total revenues and non-interest expenditures of that institution.
- Monitoring: The floor on the primary balance of the CGS will be monitored from above the line on a cash basis. Transfers among entities of the CGS are mutually consistent; the simple sum of revenues minus the simple sum of primary expenditures across all CGS entities yields the consolidated CGS balance. Reconciliation between reported transfers and reported revenues from other CGS entities will be required if discrepancies arise.
- Adjustments:
  - The floor will be adjusted upward for the revenue from the sale of emission credits accrued under the Kyoto protocol.
  - The floor will be adjusted downward for the expenditure on new environmental projects financed from this revenue.
- Data provision: Data will be provided by the Ministry of Finance to the IMF with a lag of no more than seven days past the test date.
- Exclusions and classifications:
  - Primary expenditure of the CGS excludes any cash payment related to bank recapitalization and transfers to the Bank Guarantee Fund.
  - Net lending of any component of the CGS will be considered as a non-interest expenditure item; negative net lending of any component of the CGS will be considered as a revenue item.
- Numeric targets (In billions of forints):
  - Cumulative primary balance from January 1, 2009:
    - End-December 2009 (actual) 273
  - Cumulative primary balance from January 1, 2010:
    - End-March 2010 (performance criterion) -280
    - End-June 2010 (performance criterion) -280

### D. Indicative Ceiling on Overall Stock of Debt of the Central Government System
- Scope: Ceiling applies to the HUF value of total stock of debt contracted by the central government system.
- Exclusions from the indicative ceiling: credits from the IMF, external program financing, normal trade-related credits, reserve and long-term liabilities of the MNB, and the 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: ÁKK’s stated benchmarks in terms of public debt management will be maintained as much as possible, depending on market conditions and the possible use of IMF credit.
- Mark-to-market deposits: ÁKK uses cross-currency and interest rate swaps when issuing in non-Euro currencies. Collateral cash deposits placed/accepted in such transactions increase public debt for reasons autonomous to government financing plans; these mark-to-market operations are excluded from the indicative ceiling.
- Data provision: Data on the 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:
  - The indicative ceiling will be adjusted upward (downward) by the shortfall (surplus) in net EU transfers relative to the baseline projection which forms the basis of the 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 the public debt.
  - The indicative ceiling will also be adjusted upward (downward) for an increase (decrease) of the ÁKK’s cash reserves in the Single Treasury Account held at the MNB relative to the 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 (actual) 14,992
  - End-March 2010 (indicative ceiling) 15,800
  - End-June 2010 (indicative ceiling) 15,800
- Net EU Transfers (Baseline Projection) (In billions of forints):
  - End-March 2010 (program projection) 73
  - End-June 2010 (program projection) 160
- Cash reserves at the Single Treasury Account (Baseline Projection) (In billions of forints):
  - End-March 2010 (program projection) 466
  - End-June 2010 (program projection) 220

### E. Continuous Performance Criteria on Non-accumulation of External Debt Payments Arrears by the Central Government System
- Performance criterion: The central government system will accumulate no new external debt arrears during the program period.
- Definition: An external debt payment arrear is defined as a payment by the central government system which has not been made within seven days after falling due.
- Calculation and reconciliation: The stock of external arrears will be calculated based on the schedule of external payment obligations reported by the ÁKK. Data on external arrears will be reconciled with relevant creditors, and any necessary adjustments will be incorporated in the targets as they occur.
- Reporting: The ÁKK will provide the final data on the stock of the central government system external arrears to the Fund, with a lag of not more than seven days after the test date.
- Scope: This performance criterion does not cover trade credits.

*Prepared by the European Department — March 5, 2010*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1080.pdf_