Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey: Hungary Succeeds in Early Return to Market Financing

August 3, 2009

  • Crisis-hit Hungary has focused on restoring fiscal, financial health
  • Strengthened policies have helped rebuild confidence
  • Government succeeds in issuing €1 billion bond

Hungary's government raised €1 billion ($1.41 billion) in July by selling bonds on international capital markets—a step that signals the return of investor confidence in the central European country.

Hungary Succeeds in Early Return to Market Financing

Crafts market in Budapest, Hungary, where fiscal strategy aims to protect poor, low-income earners from impact of global crisis (photo: Newscom)


Hungary, one of the countries hardest hit by the global financial crisis, received an emergency $25 billion financing package from the IMF and other institutions in October 2008. Since then, the government has implemented a series of measures designed to restore health to its economy. The success of the euro-denominated bond issue shows how effective these measures have been in winning back the trust of investors.

“Hungary has regained access to international finance, which is a testimony to the progress the Hungarian authorities have made in pursuing the right policies to address the effects of the crisis,” said James Morsink, the IMF’s mission chief for Hungary.

Confronting the crisis

Hungary was one of the first emerging economies to be hit hard by the global crisis. Global deleveraging in the fall of 2008 led to immediate financing difficulties for Hungary, with its high levels of government and external debt.

Signs of external financing difficulties were evident. Interest rates on government debt shot up, the secondary market for government securities froze, and primary auctions of government bonds had to be suspended. The exchange rate depreciated rapidly and the swap market for foreign exchange dried up. Since a large share of bank loans were denominated in foreign currency, households and corporations experienced debt-servicing difficulties as the exchange rate depreciated. This, in turn, triggered concerns about the health of the banking system.

Policy response

In response to the crisis, the government of Hungary improved its economic policies in two key areas: fiscal sustainability and financial stability. To ensure that it would be able to repay its debt in the future, the government reduced its spending in a durable way. At the same time, to avoid exacerbating the economic contraction, the authorities allowed the fiscal deficit to increase somewhat. Altogether, the government is expected to improve its underlying fiscal position by about 4 percentage points of GDP in 2009, and a further 1 percentage point of GDP improvement is planned for 2010. This means that, once economic activity fully recovers from the crisis, the overall government budget should be close to balance.

Hungary’s fiscal strategy aims at protecting the poor and low-income earners from the impact of the crisis—for instance, by preserving the purchasing power of low-income civil servants despite the nominal freeze of the public sector wage bill, replacing a universal housing subsidy by a targeted scheme to help the needy have access to adequate housing, canceling increases in disability pensions while increasing benefits for the poorest disabled, and creating a social fund to provide temporary relief to those particularly affected by the crisis.

The second policy priority was to ensure financial stability by maintaining adequate liquidity and strong levels of capital in the banking system. As key immediate measures, the government initiated a capital enhancement scheme and direct foreign exchange lending to banks without foreign parents. The central bank also introduced foreign exchange swap facilities to substitute for the frozen swap market. Over the longer term, the government will also aim to strengthen bank supervision and reinforce the remedial action and bank resolution framework.

These policies were supported by the IMF financing package approved in late 2008. Most of the money was disbursed between November 2008 and March 2009, when Hungary’s financing difficulties were most severe because of the global financial crisis.

Signs of recovery

The country has avoided financial collapse. External financing conditions have improved, so Hungary was able to issue a €1 billion euro-denominated bond in July. Interest rates on government debt have fallen, and auctions of government bonds have gone well. The forint exchange rate, after depreciating to a low of 317 against the euro in March, has now recovered to about 270. And the swap market for foreign exchange is returning to normal, while funding from parent banks to their Hungarian subsidiaries has remained stable.

But even if Hungary has dodged financial disaster, the country is not out of the woods yet. Hungary is closely integrated into the global economy: at end-2008, portfolio investment by nonresidents in Hungarian assets amounted to about 38 percent of GDP, more than twice as large as in any other new EU member state. Global deleveraging and the challenging economic outlook mean that banks in Hungary will remain careful about lending. And Hungary’s exports—80 percent of the country’s GDP—are doing poorly because of the sharp global downturn. All told, GDP is projected to contract by about 7 percent in 2009 and 1 percent in 2010.

But risks to this outlook are large, said Morsink. “Hungary remains vulnerable to a worsening of global or regional financial market conditions or a renewed deterioration of global economic prospects,” he stressed.

Against this background, the Hungarian authorities would do well to continue to implement policies aimed at improving fiscal sustainability and strengthening financial stability, Morsink said, noting that this would provide a solid foundation for a strong economic recovery.

Comments on this article should be sent to imfsurvey@imf.org