Transcript of a Press Conference on the Executive Board Approval of a Stand-by Arrangement for Hungary, With Anne-Marie Gulde, Senior Advisor in the IMF's European Department and Mission Chief for Hungary, James Morsink, Division Chief in the European Department

IMF News, November 21, 2008

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Canonical URL: Transcript of a Press Conference on the Executive Board Approval of a Stand-by Arrangement for Hungary, With Anne-Marie Gulde, Senior Advisor in the IMF's European Department and Mission Chief for Hungary, James Morsink, Division Chief in the European Department

IMF Executive Board approved a Stand-By Arrangement for Hungary in the amount of 12.3 billion euros.
Hungary was among the first emerging-market countries affected by the global financial crisis.
Program focus: restore financial-market stability and economic growth through fiscal and banking sector measures.
Complementary financing: major contributions to the overall financing packages are committed by the European Union and the World Bank; discussions with the EIB and the EBRD are ongoing regarding potential increased commitments.

Objective: reduce the size of the public sector through lower expenditures to ease short-term financing pressures and lower high levels of debt.
Social protection: authorities mindful of social impact; pension measures exclude low-income pensioners from cuts of benefits.
Specific measures:
- Wage freeze for public-sector employees.
- Suspension of the 13-month bonus for public-sector employees in 2009 (introduced in 2003), resulting in a nominal wage cut for public-sector workers.
- Elimination of the 13-month pension for higher-income pensioners; the 13-month pension is preserved for those with pensions up to 80,000 forints.
- Across-the-board expenditure restraint.
Impact on public expenditure: combination of measures yields a reduction in expenditure as a share of GDP of about 2 percentage points between this year and next year.
Fiscal targets and debt trajectory:
- Size of public sector: about 45 to 50 percent of GDP.
- Public debt: about two-thirds of GDP, about 66 percent of GDP.
- Government target: fiscal deficit in 2009 of about 2-1/2 percent of GDP.
- This is consistent with a primary surplus of about 2 percent of GDP to help reduce public debt over time.

Second pillar: decisive measures in the banking area, including:
- Preemptive recapitalization of eligible banks.
- Strengthening of the supervisory and crisis-management abilities of Hungarian supervisory agencies.
Intended outcomes:
- Ensure banks' capital in Hungary remains high.
- Ensure supervisory authorities are prepared to recognize risks and take necessary preemptive measures.
Performance criteria include submission of the bank support package to parliament in the next few days and strengthening supervisory powers.

Conditionality focused on short-run stabilization: government deficit and banking system are primary areas of performance criteria.
Consultation clause on inflation projection:
- Inflation projected to come down from its current level of about 5-3/4 percent to about 4 percent by the end of 2009, and eventually to the inflation target of 3 percent.
Emphasis on strong ownership: program developed by the government, the central bank, and the authorities; this underpins confidence in implementation.

Exchange rate: encouraging signs of stabilizing; flexible, market-determined exchange rate maintained under the program (no change to regime or band limits expected).
Banking sector market signals: partial recovery in the stock price of a regionally active bank cited as a positive sign; full stabilization of that bank would be a further indicator of progress.
Treasury bill market: earlier vulnerabilities included undersubscribed auctions and very high yields; authorities reduced supply. Return to normal conditions and ability to rollover maturing debt would signal restored confidence.
Timeline scenario:
- Reaction to initial program announcement was strong.
- Barring major global or regional banking home-country problems, a good-case scenario for visible stabilization could occur in weeks.

Stand-By Arrangement amount: 12.3 billion euros.
Public sector size: about 45 to 50 percent of GDP.
Public debt: about two-thirds of GDP, about 66 percent of GDP.
Fiscal deficit target for 2009: about 2-1/2 percent of GDP.
Primary surplus target: about 2 percent of GDP.
Reduction in expenditure as share of GDP: about 2 percentage points between this year and next year.
Inflation path: from about 5-3/4 percent to about 4 percent by the end of 2009, ultimately to 3 percent.
Pension preservation threshold: up to 80,000 forints.

Transcript: Washington, D.C., Thursday, November 6, 2008; transcript posted November 21, 2008 — speakers Anne-Marie Gulde and James Morsink.