## Hungary: Staff Concluding Statement of the 2024 Article IV Mission

_IMF News, June 21, 2024_

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## Bibliographic details
- Published: June 21, 2024

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### 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).*

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## References

- [Hungary and the IMF](http://www.imf.org/external/country/HUN/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2024/06/21/mcs-062124-hungary-staff-concluding-statement-of-the-2024-article-iv-mission_