Hungary: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, June 21, 2024
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- Published: June 21, 2024
Mission overview
- An IMF mission, led by Anke Weber and comprising Chris Jackson, Jakree Koosakul, Augustus Panton, and Atticus Weller, visited Budapest during June 11-21 to conduct discussions on the 2024 Article IV Consultation.
- The mission assessed recent macroeconomic developments, policy settings, and structural challenges, and issued policy advice to support sustainable and inclusive growth.
Key near-term macroeconomic findings and risks
- Hungary is emerging from a period of shocks: the pandemic, Russia’s war in Ukraine, and crisis-related stimulus widened fiscal and external imbalances and triggered double-digit inflation in 2022.
- Monetary policy tightening, falling commodity prices, and a tighter fiscal stance in 2023 helped rapidly reduce inflation; labor market and financial sector have remained resilient.
- A large current account deficit in 2022 turned into a surplus; output is starting to recover.
- Risks are tilted to the downside for growth and upside for inflation:
- Absence of measures addressing fiscal imbalances and structural challenges could weaken investor confidence and deter private investment.
- Lack of progress in governance reforms could prolong suspension of important EU funds.
- Forint depreciation and higher risk premia could prolong tight monetary policy and weaken growth.
- Inflation could rise again with energy supply disruptions or faster-than-expected Hungarian wage growth.
- Monetary policy miscalibration by major economies could impact Hungary’s macroeconomic and financial stability.
Economic outlook (IMF staff projections)
- 2023: real GDP contracted by 0.9 percent.
- 2024: real GDP projected to grow by 2.3 percent, driven by domestic consumption.
- Q4 2024: inflation projected to increase to 4.2 percent year‑on‑year.
- 2025: real GDP projected to grow by 3.3 percent as investment gradually picks up.
- Medium term: growth expected to converge to potential of around 3 percent.
- 2026: inflation projected to durably converge to the authorities’ 3 percent target.
- Current account: a modest surplus expected in 2024 with gradual improvement over the medium term in line with anticipated increase in battery and electric vehicle exports.
Strengthening fiscal sustainability
- Fiscal positions and debt:
- Government targets: fiscal targets of 4.5 percent of GDP in 2024 and 3.7 percent of GDP in 2025.
- Staff projection without additional measures: fiscal deficit to reach 5.3 percent of GDP in 2024 and exceed the Maastricht limit of 3 percent of GDP through 2026.
- Public debt ratio projected to remain above 70 percent of GDP through 2028.
- Recommended fiscal goals and framework:
- Aim to bring the deficit below 3 percent of GDP by 2026 to enable exit from the EU’s excessive deficit procedure.
- Bring the structural deficit to 1.5 percent of GDP by 2029, in line with the preliminary assessment of the new EU fiscal framework.
- Root measures in a fully‑fledged medium-term budget process, as required by the new EU Governance Framework.
- Tax and spending recommendations:
- Move toward a universal VAT rate with fewer exemptions to enhance efficiency and simplify administration.
- Consider higher marginal personal income tax rates for high earners to increase revenue and enhance fairness.
- Make corporate taxation more equitable and efficient by rationalizing tax incentives and increasing the tax rate, using additional revenues to eliminate distortive windfall taxes.
- Explore scope for raising more revenue from property taxes.
- Limit retail utility subsidies to a basic subsistence amount to protect vulnerable households, yield savings, reduce fossil fuel consumption, and insulate the budget from energy price fluctuations.
- Rationalize the public wage bill and goods and services spending, which are above EU averages, to provide further savings and room for more productive spending, including on education.
- Implement reforms to contain long-term spending pressures related to pensions and healthcare.
- Fiscal risk management:
- SOE assets have grown significantly over the past five years; the stock of government guarantees has doubled relative to GDP.
- Develop a comprehensive centralized fiscal risk management framework to improve monitoring and assessment of contingent liabilities.
- Prudently manage, centrally monitor, and provision guarantees, keeping the stock of outstanding guarantees on a downward path.
Bringing inflation durably back to target and monetary policy
- Monetary stance:
- Policy rates need to remain in restrictive territory into the next year to deliver a sustainable return of inflation to target.
- Loosening to date has been broadly appropriate; monetary policy remains tight and simplification of the toolkit improves communication.
- Limited scope for further rate cuts this year given elevated underlying inflation pressures, particularly for services.
- Exchange rate is likely a binding constraint on the pace of loosening given its importance for inflation dynamics.
- Central bank governance and balance sheet:
- Recent amendment to the central bank law no longer mandates recapitalization from the budget within a specific timeframe, allowing the MNB to offset current losses against future income.
- MNB’s balance sheet position will improve gradually as assets mature and policy rates fall.
- To ensure adequate capitalization: the law specifies that the MNB should not pay out advanced dividends and no dividends are to be distributed until the minimum capital required by the law is reached.
- Activities related to creation of a business or foundation should be scaled down if they are unclear relative to the MNB’s primary objective of price stability.
- Exchange rate and reserves:
- Authorities remain committed to a flexible exchange rate regime to facilitate adjustment to shocks.
- Staff assesses reserves to be adequate.
- Further reserve accumulation during risk-on periods would help bolster external buffers.
Deepening financial sector resilience
- Sector resilience and vulnerabilities:
- Financial sector remained resilient despite sharpest monetary tightening in decades.
- Macroprudential frameworks, capital and liquidity buffers are well above regulatory thresholds; NPL ratio for banks is relatively stable.
- Structural changes: substantial increase in share of fixed-rate mortgages and lower household leverage have dampened housing market effects.
- Emerging risks and recommended actions:
- High profitability is likely temporary; potential lagged effects on NPLs, interest rate and maturity risks in corporate sector, and default risks in CRE remain.
- Housing programs and easing conditions could fuel housing demand and price increases—monitor to avoid renewed imbalances.
- Prevent migration of risks to non-bank institutions through robust surveillance and supervision.
- Build resilience by locking high bank profits into capital buffers:
- Scheduled increase of the countercyclical capital buffer (CCyB) and reactivation of the systemic risks buffer for CRE in July 2024 are appropriate.
- Moving to a higher positive neutral rate than targeted for the CCyB could be an option to further boost resilience.
- Prudential climate-policy approach:
- MNB should play an active role in climate-risk supervision, but prudential regulation should remain risk-focused and consistent with the MNB’s price and financial stability mandate.
- AML/CFT:
- Hungary has strengthened AML/CFT frameworks and should prioritize implementing the EU's 2024 AML/CFT legislative package agreed in April 2024 while enhancing national frameworks for non-profit organizations, as highlighted by MONEYVAL.
- Market distortions and credit allocation:
- Interest rate caps and subsidized lending have distorted market rates and artificially lowered lending and deposit rates; these measures are likely regressive and may encourage credit rationing.
- Caps on deposits and SME lending rates ended in April 2024; mortgage caps and various voluntary caps remain and should be fully phased out.
- Scale back fiscal incentives, including for house ownership, to moderate future house price growth and safeguard financial stability.
- State-owned banks’ subsidized lending should be carefully monitored and targeted to address market failures.
Reforms for bolstering sustainable and inclusive growth
- Structural constraints on productivity:
- Long-standing challenges: strong presence of state-owned enterprises in some key sectors, stringent entry conditions, rigid industry structures, inequalities of opportunity, and lagging digitization.
- Sustained implementation of a reform program addressing these issues is necessary to compete in the digital and low-carbon economy.
- Digital competitiveness and AI:
- Hungary is highly exposed to rapid advancement of AI technologies.
- Authorities should prioritize and speed up reforms in the National Digitalization Strategy and implement the new EU AI Act.
- Further measures: invest in reskilling the workforce and promoting STEM education.
- Climate transition:
- Hungary committed to the EU Green Deal, aiming to cut emissions by 50 percent (relative to 1990) by 2030.
- Explicit and implicit fossil subsidies are above the EU average; share of renewables in the energy mix remains among the lowest in the EU.
- Phasing out fossil-fuel subsidies would enhance energy efficiency and security, level the playing field for renewable investment, and generate fiscal savings.
- Investment needs: renewable-compatible energy grids and electric charging stations.
- Regional disparities and social policy:
- Regional income disparities remain high and may worsen with digital and green transitions.
- Recommend means-tested social transfers for vulnerable households and reskilling of workers for the green and digital transitions to promote social cohesion and inclusion.
- Policies must be calibrated to support regional economic agility during structural transformations.
- Governance and industrial policy:
- Good governance is foundational for structural transformation; progress would enhance predictability and unlock EU financing.
- Industrial policy (IP) should target market failures, be time-bound, consistent with EU norms, and avoid negative cross-border spillovers.
- State presence in some sectors, including recent telecom and airport acquisitions, should be guided by legal, regulatory and policy frameworks to ensure fair competition.
Closing remarks
- The mission emphasized that with the right policies—credible, growth-friendly fiscal adjustment, stability-oriented macro-financial policies, and coordinated structural reforms—sustainable and inclusive growth is within Hungary’s reach.
- The mission thanked the Hungarian authorities and interlocutors for productive collaboration, constructive policy dialogue, and warm hospitality.
Source: Hungary: Staff Concluding Statement of the 2024 Article IV Mission (June 21, 2024).