Hungary: Staff Concluding Statement of the 2019 Article IV Mission
IMF News, October 15, 2019
Source details
- Canonical URL
- Hungary: Staff Concluding Statement of the 2019 Article IV Mission
Other formats
Bibliographic details
- Published: October 15, 2019
Overview
- Hungary’s growth continued to exceed expectations, registering one of the highest rates in Europe in 2018.
- The speed of income convergence to advanced economy levels has been impressive.
- The economy is now running above capacity, wages are growing rapidly, and unemployment is declining to historically low levels.
- Given these conditions, growth is likely to slow unless coordinated structural reforms improve competitiveness.
- The accommodative monetary stance is appropriate amid global headwinds, but policymakers should be ready to respond to building inflationary pressure.
Outlook and risks
- Short-term outlook:
- The economy is expected to finish 2019 on a strong footing, growing well above 4 percent.
- Domestic credit growth is envisaged to remain buoyant.
- Medium-term outlook:
- The fiscal position is expected to improve.
- Public and external debts would decline further.
- Risks:
- Wavering global growth, trade tensions, and Brexit cloud short-term prospects.
- With a positive output gap, growth is very likely to decelerate unless structural reforms boost productivity and potential output.
Need to bolster potential growth and competitiveness
- Existing strategies:
- The government’s “Program for a More Competitive Hungary” and the Central Bank’s extensive agenda target competitiveness, especially for SMEs.
- Priority implementation and reform focus:
- Timely implementation of prioritized reform measures to reduce impediments to doing business.
- Further simplify and shorten processes required to obtain building permits and business licenses.
- Continue to speed up connection to utilities.
- Enhance governance and public procurement practices.
- SME and labor market measures:
- Simplify and streamline regulations for SMEs and change regulations less frequently.
- Complement efforts to increase labor market participation (especially for women) with improved education, vocational training, and public services.
- Continue timely downsizing of public works schemes to release workers to the tight primary labor market.
Fiscal policy: targets and recommended measures
- Government stance:
- The government’s target of steady fiscal consolidation to eventually eliminate the deficit over the medium term.
- Targets are based on further improving tax collection and moderating investment, which has reached historically high levels.
- Staff baseline:
- In the absence of specific measures, staff’s baseline scenario implies somewhat higher deficits.
- Recommended policy mix (growth-friendly revenue and expenditure measures):
- Revenue-side:
- Reduce exemptions and preferential regimes.
- Broaden the tax base.
- Continue to phase out sectoral taxes.
- Expenditure-side:
- Reduce spending on goods and services, which is above the peers’ average.
- Reduce the public wage bill, building on progress at the central government administrative level.
- A small reduction should focus on rationalizing public employment based on a diagnostic analysis that identifies possible inefficiencies.
- Pair reductions with increased digitalization and improved processes.
- Release labor to the private sector while protecting competitiveness of remaining public sector salaries.
- Rationalize public transport and energy subsidies.
- Use of savings:
- If measures produce more savings than needed to reach the targeted fiscal balance, use savings to finance infrastructural investment in the medium term to compensate for the eventual decline in EU funds.
- State-owned enterprises:
- Implement the government’s plan to enhance monitoring of state-owned enterprises to improve efficiency and reduce the risk of contingent liabilities.
- Debt management:
- Reduce currency risks prudently, while avoiding a large increase in domestic interest payments and consider a lengthening of maturities.
Monetary policy and housing market
- Monetary stance:
- Given the recent moderation of inflation, uncertain global growth, and the resumption of monetary easing by the ECB, it is appropriate for the monetary stance to remain accommodative.
- Attention should be given to any emerging price pressures, including second-round effects of the recent oil shock.
- Clear and timely communication is essential for effective forward guidance.
- Close monitoring of unconventional arrangements is warranted to continually assess their success and reduce the risk of market distortions.
- Real estate market:
- The Hungarian real estate market is booming, particularly in Budapest.
- Macroprudential policies are helping to preserve financial stability and limit the risk of a credit-fueled housing boom.
- The share of purchases financed by private savings is high and household debt is relatively low.
- Measures to moderate house price increases:
- Review fiscal incentives for house purchases, basing them on means-testing and targeting.
- Reduce impediments to doing business in the construction sector.
- Improve the transportation network and commuting options.
- Proactively facilitate an increase in housing supply over time via effective urban planning.
Financial sector and banking system
- System-wide assessment:
- The banking system is, on average, well capitalized, profitable, and liquid.
- Loan quality of banks has continued to improve.
- Macroprudential policies are in place to contain excessive risk-taking.
- Efficiency and resilience recommendations:
- Continue market-based consolidation of the banking system.
- Promote digitalization and optimization of branch networks.
- Advance financial deepening to improve cost efficiency.
- Strengthen predictable contract enforcement to help lower relatively high bank intermediation costs.
Mission visit
- A staff team led by Khaled Sakr visited Budapest during September 24 - October 3, 2019.
- The mission met with Ministry of Finance State Secretaries Banai, Gion, and Rákossy; Magyar Nemzeti Bank Deputy Governors Nagy and Patai; other senior officials; and representatives of the private sector and employers’ associations.
- Staff expressed gratitude for the authorities’ collaboration, hospitality, and candid discussions.
IMF Staff Concluding Statement, October 15, 2019.