{
  "title": "Hungary--Concluding Statement of the 2010 Article IV Mission",
  "publication": "IMF News, October 25, 2010",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs102510",
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  "summary": "Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries).",
  "publishDate": "2010-10-25",
  "sections": [
    {
      "heading": "Macroeconomic outlook and risks",
      "content": "- Recovery status and drivers:\n  - Hungary has emerged from a severe crisis; recovery is fragile.\n  - Export-led recovery underway; domestic demand remains sluggish as the private sector continues to adjust balance sheets.\n  - Output expected to grow slightly less than 1 percent in 2010.\n  - Inflation expected to decline slowly to 3¾ percent by year-end.\n  - External current account is temporarily in surplus.\n- Near- and medium-term projections:\n  - Real GDP growth of 2½ percent in 2011.\n  - Real GDP growth rising to about 3 percent in the medium term.\n  - Average inflation expected above 3½ percent in 2011.\n  - Output gap will close only slowly; real exchange rate close to equilibrium.\n- Uncertainty and scenarios:\n  - Upside risks:\n    - Accommodative monetary policy in advanced economies may spur global growth and stronger capital inflows, potentially compressing Hungary’s borrowing spreads.\n    - Recent policy package could boost employment and investment more than assumed if supplemented by structural reforms and improvements in the business climate.\n  - Downside risks:\n    - Global recovery and increased global risk appetite may prove temporary.\n    - Change in investor sentiment could compound financing risks as large sovereign redemptions fall due in 2011-14.\n    - Further strengthening of the Swiss Franc could increase household debt servicing costs and depress domestic demand.\n    - Failure to restore fiscal sustainability could increase policy uncertainty and depress household and investor behavior."
    },
    {
      "heading": "The policy agenda",
      "content": "- Strategic objective:\n  - Solidify stability gains, head off downside risks, and create conditions for a permanently higher growth trajectory.\n  - Articulate a coherent policy framework beyond the 2011 budget with high-quality measures and conservative medium-term assumptions.\n- Assessment of government program:\n  - Recent program elements include adherence to EU fiscal targets and reduction of taxation of labor.\n  - Reliance on temporary and distortive measures risks medium-term fiscal sustainability, increases uncertainty, and may harm growth.\n  - Recommendation to spell out additional elements: permanent spending reductions and efficiency improvements in public services.\n- Program improvements recommended:\n  - Include well-specified structural measures to replace recently introduced temporary taxes.\n  - Reverse distortive measures that disregard Hungary’s dependence on foreign trade and investment.\n  - Ensure household pension savings are not used as a substitute for structural fiscal adjustment.\n  - Complete the financial sector reform agenda.\n  - MNB to continue a cautious monetary policy stance to support efforts."
    },
    {
      "heading": "Fiscal policy: assessment and recommendations",
      "content": "- 2010 fiscal stance:\n  - Temporary measures appear sufficient to limit the fiscal deficit to 3.8 percent of GDP in 2010.\n  - Measures include levies on financial institutions, energy, telecommunication, and retailers, and redirection of pension contributions from the second to the first pillar.\n- 2011 fiscal requirements:\n  - Additional measures needed to meet the fiscal deficit target of 2.9 percent of GDP in 2011 agreed with the EU.\n  - Government tax package submitted October 16 includes phased flat-rate PIT and reduction of CIT rate in 2013; these reforms are expected to substantially reduce revenues.\n  - Recently announced expenditure cuts (reductions in staff and material costs) assessed as insufficient to bring the headline fiscal deficit below 3 percent of GDP.\n- Quality of measures and structural implications:\n  - PIT reform estimated cost: at least 3 percent of GDP over the medium term.\n  - Primary fiscal deficit expected to widen by slightly more than 1 percent of GDP in 2010 and to further increase in 2011 (structural deterioration).\n  - Levies discriminate among sectors and send negative signals to foreign investment; taxes partly passed on to consumers via higher prices.\n  - Redirection of pension contributions may undermine confidence and raises questions about compensation to contributors.\n- Durable expenditure rationalization recommended (implementation starting in 2011 and continuing over the medium term):\n  - Reduce generosity of social benefits; introduce means-testing to universal transfers (e.g., child benefits).\n  - Eliminate untargeted price subsidies (e.g., for gas).\n  - Scale down public works programs (pathway to work).\n  - Restructure main public transportation companies, notably MAV.\n  - Administrative reforms, including at local government level, to lower operational expenditures.\n- Additional structural revenue and governance measures:\n  - Introduce a property tax over the medium term.\n  - Mobilize more EU transfers.\n  - Strengthen public finance management to avoid spending slippages.\n  - Improve revenue collection via continued implementation of tax administration’s compliance strategy and planned merger of customs and tax administrations.\n- Concerns on pension system changes:\n  - Winding down the second pillar would allow improvement of headline fiscal indicators without structural fiscal adjustment; recorded assets would be treated as revenue.\n  - Risks: reduced fiscal transparency, increased fiscal risks, negative impact on domestic capital market liquidity, potential reduction in national savings and investment.\n  - Consider regulatory measures to address relatively low second pillar pension fund returns.\n- PIT reform caveats:\n  - Reduced taxation of labor improves competitiveness by lowering the tax wedge, but labor supply response may be limited without reductions in generous universal social benefits.\n  - Short-term consumption impact may be limited because benefits primarily accrue to high income earners with lower propensity to consume.\n  - Compliance gains likely to materialize only in the medium term and depend on tax administration improvements."
    },
    {
      "heading": "Monetary policy",
      "content": "- MNB stance:\n  - The MNB’s cautious monetary policy stance remains appropriate.\n  - Large output gap suggests downward pressure on prices, but inflation forecasts over the policy horizon are above target, limiting scope for monetary stimulus.\n  - Inflation is highly sensitive to exchange rate developments and exposed to changes in risk premia.\n  - Credibility of government medium-term adjustment, level of risk premia, and inflation outlook are key considerations before any change in monetary stance."
    },
    {
      "heading": "Safeguarding financial stability",
      "content": "- Banking sector performance and risks:\n  - Non-performing loans (MNB definition) increased to 8½ percent by end-June 2010 and are now expected to peak in 2011 at around 12 percent.\n  - Deterioration in credit quality reflects commercial real estate weakness, household defaults amid Swiss franc strength, and moratorium on foreclosures.\n  - Aggregate pre-tax profitability remains relatively sound; existing capital cushions provide stress-absorbing capacity for most banks.\n  - MNB stress tests suggest only modest recapitalization needs under further sharp deterioration and large depreciation against the Swiss franc.\n  - System-wide stress tests indicate banks seem well prepared to meet forthcoming higher Basel III capital standards, though detailed analysis pending.\n  - Sector generally well placed to meet expected Basel standards for liquidity; lack of quantitative domestic liquidity requirements poses risks if sudden liquidity demands arise from parent companies or subsidiary holdings.\n- Measures to assist households and restore mortgage market functioning:\n  - Support scheme by the Ministry for the National Economy (MfNE) addresses households struggling with mortgage servicing while limiting explicit and contingent fiscal liabilities and minimizing moral hazard.\n  - Scheme avoids a national asset management company.\n  - Once the new scheme is introduced, the moratorium on mortgage foreclosures should be ended to restore a functioning mortgage market and support covered bond market development.\n  - Initiatives to enhance predictability and transparency of loan terms are welcome if they do not violate existing contracts or impose arbitrary penalties on financial institutions.\n  - HFSA’s new consumer protection responsibilities and MNB’s focus on financial stability considered important.\n- Financial sector levy concerns:\n  - Financial sector levy equals 0.7 percent of GDP—more than three times the largest such tax elsewhere—and serves fiscal purposes.\n  - For less profitable banks the levy amounts to a de-facto expropriation of capital.\n  - Design places disproportionate burden on foreign banks.\n  - Payment obligation fixed for 2010 and 2011; undetermined for 2012 and beyond.\n  - Risk: uncertainty about future design could lead banks to reduce balance sheets over time, harming credit supply and growth.\n  - Recommendation: government should signal that the levy will be substantially reduced and/or aligned with emerging EU standards after 2011.\n- Institutional and supervisory developments:\n  - HFSA upgraded to an autonomous institution accountable to Parliament.\n  - Tri-partite Financial Stability Council (FSC) established, composed of the MfNE, the HFSA, and the MNB, to coordinate macro- and micro-prudential oversight.\n  - FSC and MNB can make regulatory and legislative proposals on a “comply or explain” basis with 15-day government response requirement; important that this mechanism and FSC regular meetings with published minutes continue.\n  - HFSA should obtain authority to issue regulations in its own right.\n  - Continue work on draft legislation to strengthen bank resolution framework; informed by European Commission initiatives on cross-border crisis management and resolution.\n- On-site supervision and international cooperation:\n  - HFSA enhanced on-site inspection capacity; conducted comprehensive inspections of eight largest banking groups with follow-up targeted inspections on credit quality; thematic inspections underway.\n  - Current legislation requires regular mandatory inspections of all banking groups, credit cooperatives and other financial enterprises.\n  - Continued close cooperation between on-site and off-site supervisors needed.\n  - Progress on inspecting foreign subsidiaries of domestically incorporated banks where HFSA is the home state supervisor; HFSA developing relationships with home and host state supervisors.\n\nConcluding statement issued in Budapest, October 25, 2010.\n\n---\n\n\n References\n\n- Hungary and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- Article IV\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs102510"
    }
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    "Published: October 25, 2010",
    "Recovery status and drivers:",
    "Near- and medium-term projections:",
    "Uncertainty and scenarios:",
    "Strategic objective:",
    "Assessment of government program:",
    "Program improvements recommended:",
    "2010 fiscal stance:",
    "2011 fiscal requirements:",
    "Quality of measures and structural implications:",
    "Durable expenditure rationalization recommended (implementation starting in 2011 and continuing over the medium term):",
    "Additional structural revenue and governance measures:",
    "Concerns on pension system changes:",
    "PIT reform caveats:",
    "MNB stance:",
    "Banking sector performance and risks:",
    "Measures to assist households and restore mortgage market functioning:",
    "Financial sector levy concerns:",
    "Institutional and supervisory developments:",
    "On-site supervision and international cooperation:",
    "[Hungary and the IMF](http://www.imf.org/external/country/HUN/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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