IMF Executive Board Concludes 2019 Article IV Consultation with Hungary
IMF News, December 4, 2019
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- Published: December 4, 2019
Economic performance and growth outlook
- Over the last decade, Hungary "achieved further income convergence at an impressive speed and has become less vulnerable to shocks."
- In 2018, Hungary "was one of the fastest growing economies in Europe," largely driven by domestic demand, including "record-high EU funds-related investment."
- Growth projections:
- "Growth is projected to register 4.9 percent in 2019."
- Growth is projected "to gradually decelerate from its highs starting in amid relatively sluggish global activity and declining EU funds-related investment, but to remain above 2 percent over the medium term despite the negative demographics."
- Domestic demand contributions:
- Total domestic demand (contribution to growth) for 2019: 5.2
- Private consumption and gross fixed investment supported expansion; foreign balance was a drag in recent years ("Foreign balance (contribution to growth)" shows negative contributions).
Inflation and monetary policy
- Inflation:
- "Average inflation should stay around 3.4 percent in 2019 and move back towards the midpoint of the tolerance band over the medium term."
- CPI inflation (average) for 2019: 3.4
- CPI inflation (end year) series: -0.9 (2014), 0.9 (2015), 1.8 (2016), 2.7 (2017), 3.2 (2018)
- Monetary policy actions and stance:
- Monetary policy remained accommodating, with a modest tightening in spring 2019: the MNB increased the overnight deposit rate from -15 to -5 bp.
- The MNB "modestly reduced excess liquidity by limiting the rollover of its FX liquidity swaps, resulting in a slight increase in short-term money market rates."
- Directors "supported the current monetary policy stance" and noted challenges from divergent domestic and external conditions.
- Directors encouraged the MNB "to be attentive to demand pressures," including close monitoring of the housing market and consideration of measures to reduce housing bottlenecks and scale down incentives that stimulate demand.
- Directors recommended continued assessment of unconventional arrangements to "reduce the risk of market distortions" and emphasized "clear and timely communication" for effective forward guidance.
Labor market, wages, and competitiveness
- Labor market developments:
- "Unemployment fell threefold to new historical lows amid a tight labor markets, intensifying wage pressures."
- Structural concerns:
- Directors highlighted "rapidly rising wages relative to productivity," "decelerated export growth," and "remaining shortcomings in the business environment" as reasons to invigorate supply‑side reforms.
- Authorities' agenda welcomed to "improve competitiveness and to help address demographic challenges."
- Prioritized reform measures should focus on:
- "Leveling the playing field for small and medium‑sized enterprises"
- "Improving governance and transparency"
- "Increasing labor force participation, particularly of women"
- "Enhancing education and vocational training"
Fiscal policy, public debt, and public sector management
- Fiscal performance:
- The 2018 budget deficit target was met due to higher-than-expected VAT collection and lower spending on goods and services.
- Fiscal policy "appears to have stayed procyclical and the primary structural balance worsened further."
- The 2019 budget deficit target "will likely be met, driven by strong revenue due to the rapid growth in private consumption and gains in tax collection efficiency," but with output growth above potential, "the structural primary balance would continue to deteriorate."
- Public debt and consolidation:
- Public debt series: 76.8 (2014), 76.1 (2015), 75.5 (2016), 72.9 (2017), 70.2 (2018), 66.5 (2019), 64.0 (2020)
- Directors encouraged "continued fiscal consolidation and supply‑side reforms, to further build resilience and sustain the growth momentum."
- Directors supported the government's medium‑term fiscal targets as a way to "reverse the procyclical fiscal stance, alleviate demand pressures, and increase the available fiscal space that can be used in future downturns."
- Specific fiscal policy recommendations:
- Encourage "specific growth‑friendly revenue and expenditure measures, including reducing exemptions, broadening the tax base, phasing out sectoral taxes"
- "Moderately reducing spending on goods and services, containing the public wage bill and rationalizing generalized subsidies"
- Implement a public debt management strategy that "reduces rollover and foreign exchange rate risks, while avoiding large increases in domestic interest costs."
- Implement the government's plan to "enhance the monitoring of state‑owned enterprises to improve efficiency and reduce the risk of contingent liabilities."
External sector, reserves, and exchange rate
- Current account and external balances:
- "The current account surplus has disappeared reflecting the high level of investment-related imports and buoyant consumption."
- Gross external debt series: 118.4 (2014), 107.0 (2015), 95.7 (2016), 83.3 (2017), 79.6 (2018), 69.5 (2019), 63.0 (2020)
- Reserves and external liquidity:
- Reserves (billions of Euros) series: 34.6 (2014), 30.3 (2015), 24.4 (2016), 27.4 (2017), 29.2 (2018), 28.5 (2019)
- Gross official reserves (percent of short-term debt at remaining maturity) series: 161.8 (2014), 139.5 (2015), 129.7 (2016), 136.4 (2017), 156.7 (2018), 168.6 (2019), 178.5 (2020)
- Exchange rate and competitiveness indicators:
- Exchange rate, HUF per euro, period average 1/: 309 (2014), 310 (2015), 311 (2016), 319 (2017), 332 (2018)
- Nominal effective rate (2000=100, average) 2/: 114.2 (2014), 116.5 (2015), 116.7 (2016), 115.5 (2017), 118.6 (2018), 120.5 (Q2 2019)
- Real effective rate, CPI basis (2000=100, average) 2/: 77.7 (2014), 79.7 (2015), 78.4 (2016), 79.8 (2017), 79.5 (2018)
Executive Board assessment and policy priorities
- Directors agreed with the thrust of the staff appraisal and commended "continued strong economic performance" that led to "faster income convergence towards the European Union average and reduction of vulnerabilities."
- Main Board recommendations:
- Continue fiscal consolidation and implement supply‑side reforms to build resilience and sustain growth.
- Pursue growth‑friendly revenue and expenditure measures: reduce exemptions; broaden the tax base; phase out sectoral taxes.
- Contain public spending pressures: modestly reduce spending on goods and services; contain the public wage bill; rationalize generalized subsidies.
- Strengthen public debt management to reduce rollover and FX risks without substantially raising domestic interest costs.
- Enhance monitoring of state‑owned enterprises to improve efficiency and limit contingent liabilities.
- Monetary policy: remain attentive to domestic demand pressures, monitor housing market, reassess incentives that stimulate housing demand, and evaluate unconventional tools for market-distortion risks.
- Implement prioritized structural reforms to improve the business environment, level the playing field for SMEs, improve governance and transparency, increase female labor force participation, and enhance education and vocational training.
Selected economic indicators (highlights from 2014–20 series)
- Real GDP (percentage change): 4.2 (2014), 3.8 (2015), 2.2 (2016), 4.3 (2017), 5.1 (2018), 4.9 (2019), 3.5 (2020, Proj.)
- Total domestic demand (contribution to growth): 2.3 (2014), 1.6 (2015), 4.8 (2016), 6.7 (2017), 7.0 (2018), 5.2 (2019)
- Gross fixed capital formation (percent of GDP): 22.1 (2014), 22.3 (2015), 19.7 (2016), 22.2 (2017), 25.2 (2018), 26.6 (2019), 26.7 (2020)
- Gross national saving (percent of GDP, from BOP): 23.4 (2014), 24.6 (2015), 24.2 (2016), 24.5 (2017), 25.7 (2018), 26.0 (2019)
- Overall balance (general government): -2.8 (2014), -2.0 (2015), -1.8 (2016), -2.3 (2017), -1.6 (2018), (2019 value not tabulated)
- Primary balance (general government): 1.4 (2014)
- Primary structural balance (percent of potential GDP): -0.8 (year not specified)
- Broad money (end-of-period): 6.3 (2014), 7.1 (2015), 7.8 (2016), 11.8 (2017), 9.1 (2018), 7.3 (2019)
- Lending to the private sector, flow-based 1/: -10.9 (2014), 6.5 (2015), 10.7 (2016), 12.0 (2017), 10.0 (2018)
- T-bill (90-day, average) 1/: 0.7 (year not specified)
- Government bond yield (5-year, average) 1/: 3.9 (year not specified), 1.7 (year not specified)
- Current account: 4.5 (year not specified)
- Reserves (billions of Euros): 34.6 (2014), 30.3 (2015), 24.4 (2016), 27.4 (2017), 29.2 (2018), 28.5 (2019)
- Gross external debt: 118.4 (2014), 107.0 (2015), 95.7 (2016), 83.3 (2017), 79.6 (2018), 69.5 (2019), 63.0 (2020)
- Gross official reserves (percent of short-term debt at remaining maturity): 161.8 (2014), 139.5 (2015), 129.7 (2016), 136.4 (2017), 156.7 (2018), 168.6 (2019), 178.5 (2020)
- Exchange rate, HUF per euro, period average 1/: 309 (2014), 310 (2015), 311 (2016), 319 (2017), 332 (2018)
- Nominal GDP (billions of Forints): 32,694 (2014), 34,785 (2015), 35,896 (2016), 38,835 (2017), 42,662 (2018), 46,095 (2019), 49,139 (2020)
- Per capita GDP (EUR): 10,723 (2014), 11,389 (2015), 11,725 (2016), 12,816 (2017), 13,685 (2018), 14,743 (2019), 15,670 (2020)
- Output gap (percent of potential GDP): -2.7 (year not specified), 1.2 (year not specified)
- Potential GDP growth: 3.6 (year not specified)
Press Release No. 19/442 — IMF Executive Board Concludes 2019 Article IV Consultation with Hungary (December 4, 2019).
