Transcript of a Conference Call on the Completion of the First Review of Hungary’s Stand-By Arrangement

March 26, 2009

Washington, D.C.
Thursday, March 25, 2009

MS. GAVIRIA: Hello, everyone. I'm Angela Gaviria with the IMF External Relations Department. This is a conference call on the completion of the first review of Hungary's Stand-By Arrangement. Here with me is James Morsink, the Mission Chief for Hungary. He will make some brief remarks to start with, and then he'll be happy to take your questions.

MR. MORSINK: Thank you, Angela. Yes, I'm James Morsink. I'm the Mission Chief for Hungary, and as Angela said a moment ago, the IMF Executive Board just completed the first review under the Stand-By Arrangement with Hungary.

I just want to say a few words, and then I'll be happy to take your questions. First, policy implementation under the program has been good. All the quantitative performance criteria and indicative targets, as well as the structural performance criteria and benchmarks for the fourth quarter of 2008 were met. And this is despite a worsening economic outlook and a persistence of financial market stress.

Secondly, in light of the worse outlook and the persistence of stress, the policy settings under the Fund- supported program have been adapted to strike the right balance between preserving investor confidence in the soundness of Hungary's fiscal and external positions, as well as avoiding measures that would further deepen the recession. So I just want to say a couple of words about each of the main key policy areas.

On fiscal policy, the additional fiscal measures aim to strengthen fiscal sustainability while avoiding an excessively large negative impulse to demand. The measures combine permanent reductions in spending, which will affect spending over the medium term, with a small rise in the 2009 general government budget deficit relative to the original program. The revised program continues to put emphasis on measures to safeguard essential social spending.

Secondly, to help preserve financial stability, the program includes measures to extend the safety net for banks, to strengthen the remedial action and resolution regimes, and to improve the capabilities of the Hungarian Financial Supervision Agency.

Third, monetary policy will continue to target inflation over the medium term while being prepared to act quickly, and as needed, to mitigate the risk to financial stabilities.

So, looking forward, we expect that the implementation of the policies under the program will improve Hungary's economic prospects. The large external financial support provided by the IMF, the European Union, and the World Bank helps to provide reassurance that Hungary's external obligations can be met and also sends a strong signal of the international community's confidence that Hungary will weather its current difficulties.

MS. GAVIRIA: Thank you, James. Now we're ready for questions.

QUESTIONER: I was hoping you could just clarify the greater room for fiscal policy that you have given for 2009. What was the previous target, the budget balance, and what is it going to be now?

MR. MORSINK: Sure. The previous target for the general government balance in 2009 was a deficit of 2.6 percent of GDP. Since that target was set, the macroeconomic outlook has worsened, which means that prospects for revenue have worsened. Overall, we expect the impact on revenue to be about 1 percent of GDP. So, without the additional measures, we'd be talking about a deficit of about 3-1/2 percent of GDP.

The government has proposed measures that offset the revenue loss by about three-quarters of that amount, and at the same time, allow the deficit to increase from projected 2.6 to 2.9 percent of GDP. That is the additional room for maneuver.

QUESTIONER: I was wondering if you could address the political situation there, given the resignation of the prime minister, and how that affects the outlook for the economy.

MR. MORSINK: As you know, the prime minister has said that he intends to propose a constructive vote of no confidence in the next few weeks. Such a vote requires that parliament approve a new prime minister at the same time as it dismisses the old prime minister. So it's not exactly correct to say that he has resigned. For now the government is in place, and it has been implementing good policies. The IMF supports policies and not particular governments. Going forward, as long as good policies are in place our support will continue.

QUESTIONER: I have two questions. First, how does the IMF’s recently adopted more flexible lending policy affect the existing Hungarian Stand-By credit line? Is Hungary eligible for the new flexible credit line facility?

And, Why did the IMF decide to open a permanent office in Budapest?

MR. MORSINK: The main impact of the new conditionality guidelines for Hungary’s Stand-By Arrangement is that going forward there will be no more structural performance criteria. Henceforth, all of the structural conditions will be benchmarks and will be reviewed as part of the regular review rather than being considered to be special performance criteria. So for Hungary that's the main impact.

Regarding the resident representative, it is very typical for the IMF to have resident representatives in countries, especially where there is a borrowing arrangement with the IMF. I believe we have about 80 resident representatives in countries around the world. I think this is just standard operating procedure with regard to Hungary.

QUESTIONER: Could you just clarify that part about the conditionality reforms, which I understood from yesterday's press conference were not actually effective until May 1st. Can you just say that part again about how it affects the structural reforms for Hungary or for anyone else?

MR. MORSINK: You’re absolutely correct that there's a transition period with regard to the abolition of the structural performance criteria. In the case of Hungary, the Executive Board just completed the first review, and as part of this first review the Executive Board approved structural performance criteria that apply for the end of March.

Going forward, at the time of the next review, there will no longer be any structural performance criteria. Does that answer your question?

QUESTIONER: Okay, the structural reforms are now seen to just be part of the program, but they're not, as you said, benchmarks?

MR. MORSINK: That's correct. In our conditionality, we make a distinction between items that are called performance criteria and other things that are called benchmarks. The reform of the conditionality guidelines means that there will no longer be this special category of structural performance criteria. Henceforth, any structural conditions to which we want to draw attention will be considered benchmarks and will be reviewed as part of the regular review process.

Just as background, a performance criterion under an IMF arrangement is one that can hold up a review or a disbursement. So that's the sense in which the IMF conditionality guidelines have become more flexible.

QUESTIONER: You didn't answer if Hungary is eligible for the new flexible credit line facility in the future. Thank you.

MR. MORSINK: I believe the guidelines talk about a country’s policy track record. In the case of Hungary, this would have to be assessed. At this point we have not made that assessment, so I cannot say whether it would be eligible or not.

MS. GAVIRIA: If there are no more questions, we conclude this conference call here. Thank you, everybody.


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