OREANDA-NEWS. On March 27, 2015 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Hungary.

The Hungarian economy is growing at a strong pace helped by accommodative macroeconomic policies and improved market sentiment. Driven by strong domestic demand, output grew by 3.6 percent in 2014. Unemployment declined sharply reflecting the expansion of public works programs and job creation in the private sector. Headline and core inflation decelerated sharply, and inflation expectations fell below the National Bank of Hungary’s (MNB) inflation target. Improving terms of trade and strong export volume growth helped maintain a sizeable current account surplus. Private sector credit continued to contract and the banking sector remains under pressure reflecting the heavy tax burden and high non-performing loans.

Vulnerabilities continued to decline thanks to large and persistent current account surpluses, and recent policy measures, including the conversion of foreign exchange mortgages into local currency loans. However, debt levels remain high and the associated financing needs together with heavy reliance on nonresident financing, large concentration of the investor base and the economy’s large open FX position continue to pose risks. At the same time, the state has been increasing its role in the economy including through acquisition of stakes in the banking and energy sectors thereby contributing to a buildup of contingent liabilities.

The 2014 fiscal deficit came in below target, as revenues were propelled by accelerating economic activity and tax administration improvements, and were only partially offset by higher expenditures. However, the fiscal stance eased significantly and public debt declined only moderately to just below 77 percent of GDP. For 2015, the deficit is projected at 2.7 percent of GDP, implying a broadly neutral fiscal stance despite relatively favorable cyclical conditions, and the debt ratio is expected to decline only modestly.

Comforted by decelerating inflation, low risk premia, and a negative output gap, the MNB kept its policy rate at 2.10 percent since July 2014 and cut it to 1.95 percent on March 24. It also doubled the allocation for the second phase of the Funding for Growth Scheme (FGS) and extended the program to end-2015.

Going forward, output growth is projected to decelerate to 2.75 percent this year, on account of a smaller domestic-demand impetus due to less supportive fiscal stance and lower investment growth. Private consumption is expected to continue to grow, reflecting lower household indebtedness, accommodative monetary conditions, and higher employment. Headline inflation is projected to remain very low in the coming months on account of a still negative output gap and lower import prices. Over the medium-term, growth prospects remain subdued, as private consumption is still constrained by the ongoing deleveraging; while the difficult business environment continues to weigh on private investment. Labor participation, while somewhat increasing, remains low, particularly among women and older workers. These challenges are further compounded by competitiveness pressures and lack of attractiveness for foreign direct investment.