Hungary: Staff Concluding Statement of the 2017 Article IV Mission
IMF News, March 9, 2017
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- Published: March 9, 2017
Growth, outlook, and inflation
- Hungary achieved several consecutive years of high economic growth and debt reduction.
- GDP growth temporarily slowed in 2016 to an estimated 2 percent, mainly due to a decline in investment caused by subdued absorption of EU funds related to the beginning of a new program period.
- Growth is projected to reach about 3 percent in 2017, driven by a recovery in EU funds’ absorption (and thus investment) and continued strong consumption as wage increases boost disposable income.
- Employment is projected to further grow and the economy may begin to operate at full capacity in the course of 2017.
- Inflation is likely to gradually pick up, reaching its 3 percent target by early 2018.
Risks to the outlook
- External risks:
- Weakening in the still-fragile euro area recovery could dampen exports.
- Further slowdown in global trade on the back of higher trade barriers could dampen exports.
- Normalization of monetary policy in the U.S. and the euro area could lead to an increase in financing costs and volatility of capital flows.
- Domestic risks:
- Rising demand and the expansion of the housing scheme could inflate asset prices.
- Limited fiscal policy room could leave the economy more exposed to new shocks.
- Mitigating factors:
- Improvement in the current account and international investment position over the past years.
- Enhanced market sentiment towards Hungary.
Fiscal policy assessment and recommendations
- Recent performance and estimates:
- Preliminary data indicate likely over-performance of the 2016 target for the general government deficit.
- Staff preliminarily estimates that the general government deficit declined to about 1.8 percent of GDP in 2016.
- The slowdown in EU funds disbursement coincided with improved collection of social security contributions and corporate income tax driven by higher wage earnings and exceptional tax collection from corporates.
- Interest and EU funds-related outlays declined, but other expenditures increased, including on the wage bill.
- Staff estimates the overall deficit for 2017 at about 2.6 percent of GDP (slightly larger than the budget target), reflecting staff’s more conservative estimate for the revenue impact of the tax package and for GDP growth.
- The 2017 budget target is 2.4 percent of GDP and would imply a further decline in the cyclically-adjusted structural fiscal balance.
- Staff recommendations:
- Continue fiscal policy that achieves a marked reduction in public debt over the medium term.
- Adopt additional fiscal measures that would yield annual improvements in the cyclically-adjusted fiscal balance consistent with a reduction of public debt to about 60 percent of GDP over the projection period.
- For 2017, staff recommends an overall deficit of 2.2 percent of GDP (slightly below the budget target).
- For 2018 and beyond, aim for appreciable annual reductions in the fiscal deficit.
- Make consolidation growth friendly by:
- Rationalizing current expenditures and improving the tax system.
- Implementing administrative reforms to gradually reduce the elevated wage bill while maintaining a competitive scale of public salaries and improving public service provision.
- Reducing and better targeting generalized subsidies to decrease costs and protect the poor more efficiently.
- Enhancing revenue mobilization by reducing exemptions and continuing to build on improvements in tax administration.
- Continuing reduction of the tax wedge and some distortive sectoral taxes; streamline multiple VAT rates and exemptions for fuel and tobacco excises.
Monetary policy and financial sector
- Monetary policy:
- The Magyar Nemzeti Bank (MNB) appropriately continued to ease monetary policy in 2016 as inflation was subdued and growth was less than initially projected.
- The MNB continued to adjust its unconventional monetary policy instruments.
- Staff welcomes the decision to let the Funding for Growth Scheme expire by end-March 2017.
- The impact on some SMEs may be partially mitigated by the Market-Based Lending Scheme of the MNB and EU-funded schemes.
- Given increased global risks, the monetary stance can remain accommodative in the near term, but the situation should be monitored and stimulus removed as underlying inflationary pressure picks up.
- Banking sector:
- On average, banks are liquid and well capitalized.
- In 2016, bank profitability improved significantly, driven in large part by revoked provisions and one-off factors.
- Staff welcomes the MNB’s intention to continue enhancing supervisory practices and guidelines, including in view of the large write-back of provisions and rapid increase in real estate prices.
- The substantial reduction of the bank levy has helped after-tax revenue and likely contributed to increased willingness to lend.
- Banks continued to deleverage and increase placements in government securities.
- Deleveraging appears to be gradually coming to an end and new lending, albeit still tepid, is beginning to pick up.
- Macroprudential rules introduced and strengthened in recent years have been prudent pre-emptive measures to improve lending practices.
Structural reforms and labor market
- Policies to boost productivity and broaden growth:
- Ensure effective utilization of EU funds, including by further enhancing the procurement process.
- Continue upgrading vocational training.
- Enhance the public works scheme to improve skills and productivity of participants and gradually move them to the primary labor market.
- Boost activity rates, particularly for women, including through affordable childcare to increase employment and output.
- Enhance the business environment by addressing perceived corruption through improved transparency, enhancing policy predictability, continuing to improve the ease of paying taxes, and streamlining regulations.
Mission
- A staff team led by Khaled Sakr visited Budapest during February 23 – March 8 2017.
- The mission met with H.E. Mihály Varga Minister for National Economy, the Honorable György Matolcsy Governor of the National Bank, other senior officials, and representatives of the private sector and think tanks.
Hungary: Staff Concluding Statement of the 2017 Article IV Mission (March 9, 2017)