IMF Survey: Hungary Succeeds in Early Return to Market Financing

IMF News, August 3, 2009

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Hungary's government raised €1 billion ($1.41 billion) in July by selling bonds on international capital markets, signaling a return of investor confidence.
Hungary received an emergency $25 billion financing package from the IMF and other institutions in October 2008.
James Morsink, the IMF’s mission chief for Hungary, stated: “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.”

Global deleveraging in the fall of 2008 led to immediate financing difficulties for Hungary, given its high levels of government and external debt.
Observed effects included:
- Interest rates on government debt shot up.
- The secondary market for government securities froze; primary auctions of government bonds had to be suspended.
- The exchange rate depreciated rapidly; the swap market for foreign exchange dried up.
- A large share of bank loans were denominated in foreign currency, causing households and corporations to experience debt-servicing difficulties as the exchange rate depreciated, which in turn raised concerns about the health of the banking system.
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.
Exports account for 80 percent of the country’s GDP.

Two key policy focuses: fiscal sustainability and financial stability.
Fiscal measures:
- The government reduced its spending in a durable way while allowing the fiscal deficit to increase somewhat to avoid exacerbating the economic contraction.
- 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.
- Fiscal strategy aimed at protecting the poor and low-income earners by measures such as 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; 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.
Financial-stability measures:
- Immediate measures included a capital enhancement scheme and direct foreign exchange lending to banks without foreign parents.
- The central bank introduced foreign exchange swap facilities to substitute for the frozen swap market.
- Over the longer term, the government aims to strengthen bank supervision and reinforce the remedial action and bank resolution framework.
Most IMF financing was disbursed between November 2008 and March 2009.

External financing conditions improved sufficiently to allow a €1 billion euro-denominated bond issue in July.
Interest rates on government debt have fallen; auctions of government bonds have gone well.
Forint exchange rate: depreciated to a low of 317 against the euro in March, and has recovered to about 270.
The swap market for foreign exchange is returning to normal, and funding from parent banks to their Hungarian subsidiaries has remained stable.

GDP is projected to contract by about 7 percent in 2009 and 1 percent in 2010.
Risks are large: Hungary remains vulnerable to a worsening of global or regional financial market conditions or a renewed deterioration of global economic prospects.
Continued careful bank lending is expected given global deleveraging and the challenging economic outlook.

Continue implementation of policies aimed at improving fiscal sustainability and strengthening financial stability to provide a solid foundation for a strong economic recovery.

IMF Survey: Hungary Succeeds in Early Return to Market Financing — By Alina Carare, IMF European Department, August 3, 2009.