Following the conclusion of the 2008-2010 EU balance of payments assistance programme in November 2010, European Commission staff conducted a sixth and possibly final post-programme surveillance mission to Hungary from 25 to 28 November 2014 to review recent economic and financial developments and policy initiatives.
The mission welcomed the fact that on the back of a strong economic recovery, Hungary recorded one of the highest GDP growth rates in the EU over recent quarters (well over 3% year-on-year). Nevertheless, the high growth is partly due to the substantially increased absorption of EU funds at the end of the seven-year programming cycle. In addition, other short-term stimulus measures (such as the Hungarian Central Bank’s Funding for Growth Scheme, cuts in regulated utility prices as well as the continued expansion of the Public Works Scheme) also contributed to the growth performance. The expected abatement of the bulk of these stimulus measures is reflected in the projected decelerating growth path included in the Commission’s 2014 autumn forecast for the years beyond 2014.
The mission concurred with the authorities that Hungary was on track to achieve this year’s deficit target of 2.9% of GDP. Nevertheless, it stressed that government debt is not yet on a firm downward path and that based on the Commission’s 2014 autumn forecast, the projected pace of debt reduction appears at risk of breaching the requirements of the Stability and Growth Pact. Looking ahead, while the government’s decision to lower the deficit target for 2015 is welcomed, the mission emphasised that there were important concerns regarding the substantiation of a number of revenue-increasing measures contained in the 2015 draft budget. The sustainability of the fiscal adjustment would benefit from the further reinforcement of fiscal governance, as recommended by the Council, most notably through the decisive introduction of the already legislated medium-term budgetary framework.
Restoring a normal operation of financial intermediation is essential to revive growth in a sustainable manner. This requires improving banks’ capital accumulation capacity along with an enhanced portfolio-cleaning effort. In the light of the progressively increased tax and regulatory burden on the financial sector, the advocated policy adjustment should include a reduction in this burden to bring it more in line with the European average. The mission took note of the recent series of laws on the settlement and subsequent phasing-out of foreign-currency mortgages, and in that respect emphasised the importance of a consultative approach and of an appropriate burden sharing for the final phases of the process, also with a view to mitigating moral hazard. In that respect, measures that hinder the resolution of long-term non-performing loans, such as the moratorium on foreclosures, could be gradually lifted in parallel with government assistance to the most distressed borrowers. The mission also strongly invited the MNB (Magyar Nemzeti Bank), the Hungarian Central Bank, to ensure that its recently launched asset management company initiative will be in full compliance with EU Treaties. Furthermore, it was highlighted that a substantial state ownership in the banking sector has the potential to expose public finances to a contingent liability, as evidenced during the recent financial crisis.
More generally, the mission underlined that the current cyclical upturn should be seized as an opportunity to pursue structural reforms along the lines of the 2014 country-specific recommendations, in order to lift Hungary’s still relatively low growth potential. In this context, the mission called for ensuring a stable and more balanced corporate tax system, and regretted that the reliance on sector-specific corporate taxation had even been further increased with the recent adoption of new targeted taxes. Moreover, the mission identified a clear need for more predictable and competitiveness-oriented policies, in particular by removing entry barriers in the service sector.
In the context of rapid improvements in external indebtedness, albeit declining from a very high level, financing of the sovereign has been smoothly ensured as the local bond market was characterised by healthy demand and historically low yields. With the EUR 2 billion repayment of the second tranche of the EU balance of payments loan in early November, Hungary has repaid over 70% of the originally disbursed amount; the legal requirement to automatically continue with post-programme surveillance has thus expired. Therefore, the Commission, after having consulted the Member States, will decide in the coming weeks about the possible end of its post-programme surveillance. After the post-programme surveillance process, it will nonetheless be essential to continue with the implementation of structural reforms and achieve fiscal and financial prudence, elements which will be monitored through the European Semester framework.