November 21, 2008
MS. GAVIRIA: I am Angela Gaviria with the IMF's Press Office. Welcome to this conference call on the IMF's approval of a Stand-By Arrangement for Hungary. Now let me introduce the speakers. We have Anne-Marie Gulde, who is Senior Advisor in the European Department and the Mission Chief for Hungary. And we also have James Morsink, who is Division Chief in the European Department. Anne-Marie will make some brief points to start and then they both will be happy to take your questions. Anne-Marie?
MS. GULDE: Good afternoon. I want to give you some background on the situation in Hungary. As you know, Hungary was among the first emerging-market countries affected by the current global financial crisis. In response to this situation, the Hungarian authorities developed a strong program to restore financial-market stability and economic growth, and the Executive Board of the IMF supported this program by approving the Stand-By Arrangement for Hungary in the amount of 12.3 billion euros.
The economic program rightly focuses on the fiscal and banking sectors, which were the two key areas of vulnerability at the outset of the difficulties. In the fiscal sector, a necessary reduction in the size of the public sector through lower expenditures will ease the country's short-term financing pressures and bring down the high levels of debt. In the short-term, the rollover of debt will become easier and debt will become more sustainable in the medium-term. The fiscal measures are also in line with the country's goal to slowly reduce the large size of its public sector and to provide more room for private activities to grow. In deciding on the necessary adjustments, the authorities have been mindful of the social impact, and on the pension measures that are included in the program, low-income pensioners are excluded from cuts of benefits.
The second pillar of the program are decisive measures in the banking area. They include a preemptive recapitalization of eligible banks and a strengthening of the supervisor and crisis-management abilities of the Hungarian supervisory agencies. Those steps will ensure that banks' capital in Hungary remains high and that the supervisory authorities are always well prepared to recognize risks and take necessary preemptive measures should vulnerabilities occur.
The nature and the strength of the measures under the authorities' program justify the large level of access under the IMF's arrangement. The authorities' commitment has also helped gathering broad support for their program by the international community. So in addition to the IMF, major contributions to the overall financing packages are committed by the European Union and the World Bank.
We are all aware that the road ahead is challenging, yet the measures in the program will facilitate a hopefully rapid return of investor confidence in the Hungarian market and confidence that they should allow the country to resume on its convergence and growth path.
MS. GAVIRIA: Thank you, Anne-Marie. Now we are ready to take questions.
QUESTIONER: Thanks very much for that. I'm not sure if I got all of the details. I wonder if you could elaborate on what exactly Hungary has decided to do with its public pensions. And also, how large exactly is its public sector relative to its GDP? And what kind of specific targets does it have on reducing its public debt?
MS. GULDE: Mr. Morsink will take this question.
MR. MORSINK: Three points. First, on the size of the public sector, it's about 45 to 50 percent of GDP, which is much larger than other countries in the region. Secondly, with regard to how they're going to go about reducing their public debt, right now public debt is about two-thirds of GDP, about 66 percent of GDP, and so the government has set a target of a fiscal deficit in 2009 of about 2-1/2 percent of GDP. This is essentially consistent with a primary surplus of about 2 percent of GDP which will help reduce public debt over time.
The third question you had was about the composition of the measures to reduce expenditures, and there is a broad range of measures that include a wage freeze and a cut in the 13-month bonus for public-sector employees. Back in 2003 a 13-month salary was introduced for the public sector and this is now being suspended for 2009. And so that will result in a nominal wage cut for public-sector workers.
In the pension sector, essentially the 13-month bonus is being eliminated for higher-income pensioners. In other words, the 13-month pension for those who have pensions up to 80,000 forints will be preserved. Then there is also across-the-board expenditure restraint. So the combination of those measures yields a reduction in expenditure as a share of GDP of about 2 percentage points between this year and next year.
QUESTIONER: I was wondering if you could just talk a little bit more broadly. Are you seeing some impact in the market since this deal was announced? How quickly do you think Hungary can stabilize itself if it sticks to this program? I'm talking generally, more confidence in Hungary. What are the sorts of things that you think are going to be tangible signs that the country is now on a more surer footing?
MS. GULDE: I think one has to look at various elements. One question is clearly what is happening to the exchange rate. Do you see an exchange rate overshooting? And we have seen some very encouraging sign of the exchange rate stabilizing. Another source of vulnerability has been the issue that there is a bank that's regionally active. We have seen that the stock price of that bank had recovered, there has been renewed pressure, and I think, in terms of stabilization, we would look toward a fuller stabilization of the situation of that bank.
In addition, very clearly there is the question of what is happening in the treasury bill market. The difficulties originated in the treasury bill market, where several auctions were undersubscribed and the yield was very high. The authorities have been very careful in dealing with these auctions. They have reduced the supply. So a return to more normal market conditions where the authorities would feel confident that they can rollover the maturing debt would be another way where we would see the return of confidence.
On how quickly we should expect that, I think the reaction to the initial announcement of the program has been very strong and a lot clearly depends on confidence. So we would think that, barring big problems in the global markets and in home countries of banks that are operating in Hungary, a good-case scenario could be that this happens in weeks.
QUESTIONER: Is there any sort of further money in the bag from any other European countries?
MS. GULDE: As to bilateral money?
QUESTIONER: Yes.
MS. GULDE: We are not sure. Nothing has been committed. But there are definitely discussions with the EIB and the EBRD that already are active in Hungary and they're looking at potentially increasing their commitment to the country.
QUESTIONER: I wondered if you could say something about conditionality. As these loans start to come in, people will be assessing whether the conditions attached to IMF loans are less strict and more focused than it was the case under the Asian crisis. When you look at these conditions overall, in what way would you say that they are more focused and more relevant than the conditions that the Fund was asking for a decade ago?
MR. MORSINK: I would say that conditionality in this case is focused on the key measures that are required to stabilize the situation in the short-run. So that means that we focus on the government deficit and the banking system. Those are the two main areas that we have performance criteria, in terms of the submission of the bank support package to parliament, which will happen in the next few days, as well as in terms of the strengthening of the supervisory powers of the supervisory agency.
More generally, I would emphasize that this economic program and the set of policies that underpin it was developed by the government, by the central bank, by the authorities generally, and that therefore we feel very confident about its implementation because they have very strong ownership of this program.
QUESTIONER: There is also some conditionality on inflation targeting. Is that correct?
MR. MORSINK: Yes, that's absolutely right. I should have mentioned that too. There's what's called a consultation clause on the projection for inflation. So inflation is 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. So, yes, there is also conditionality on that.
QUESTIONER: I wanted to follow-up on the exchange rate. Is there any sort of policy shift when it comes to the exchange rate at all?
MS. GULDE: You're talking about a change in the exchange rate regime?
QUESTIONER: Right.
MS. GULDE: No. We think at this stage that a flexible exchange rate is the most appropriate regime for Hungary. There are a lot of global changes, a lot of domestic changes so any kind of band or limit would create a vulnerability of reserve loss for the country, and so under the program we expect that the exchange rate will remain market determined.
MS. GAVIRIA: If we don't have any more questions, we end the conference call here. Thank you all for participating.
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