Republic of Hungary Fiscal consolidation and sustainable convergence

1
Republic of HungaryFiscal consolidation and
sustainable convergence

• October 2007

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Hungary at a Glance
Hungary in the New EU

• Member state of the EU since 2004 fully
  integrated with the global economy and member of
  all the main international organisations (IMF,
  OECD, WTO etc.)
• A leader among transition countries in economic
  liberalisation
• Stable domestic financing for government debt
• Capital totally invested in Hungary US 88
  billion
• USA capital investments in Hungary including FDI
  US 9 billion

 
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Competitive business environment
- high productivity, relatively low labour cost
Productivity and labour cost (2005)
Source Eurostat

• Political stability
• Highly qualified workforce
• Progress in business environment reflected in
  recent World Bank Doing Business survey
• Top American investors are GE, General Motors,
  Alcoa and Coca-Cola

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Rapid Export Growth and Product Diversification

• One of the largest trade volume among CEE
  countries
• Very open economy (XM / GDP ratio around 130
  in 2006)
• Share of exports to the EU amounts to close to
  80 of total exports
• Diversified export structure
• Imports machinery and manufactured goods

Export growth dynamics,
Composition of exports, 2006
Source CSO, MoF
Source CSO
5
Developed financial sector - integrated
into global markets

• Budapest Stock Exchange (BSE) re-opened in
  1990, first among Visegrád countries
• Institutional and legal background of the
  financial sector has been adjusted to
  international, and especially to European,
  standards
• Privatisation of the banking sector completed
  by the second half of 1990s, with major US
  financial institutions (Citigroup, GE Capital)
  being present on the market

Holdings of shares quoted on the BSE in sectoral
breakdown, at market prices, 2007 Q2
Relative stock exchange performance (January
2003100)
Source Reuters
Source National Bank of Hungary
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Fiscal consolidation
- economic policy background

• Government coalition re-elected in May 2006
• Fiscal consolidation programme, to return to
  the balanced growth path, was launched
  immediately
• Front loaded
• Focusing increasingly on the expenditure side
• Timetable set in December 2006 Convergence
  Programme (CP)
• Large scale fiscal consolidation in 2006-2009
• Balanced growth from 2009
• Consolidation relies both on tax increases
  (2006-2007) and on expenditure cuts (over the
  whole medium term period)

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Fiscal consolidation
- targets and first results
Public debt (ESA95, of GDP)
General government deficit (ESA95, of GDP)
Source CSO, MoF
Source CSO, MoF

• 2006 deficit 9.2 vs. 10.1 target in CP
• Q1-Q3 2007 GFS deficit lower than expected
• New 2007 deficit forecast 6.4 vs. 6.8 target in
  CP
• 2008 deficit target lowered to 4.1 vs. 4.3 in
  CP

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Fiscal consolidation - decreasing
redistribution

• Deficit reduction increasingly relying on
  spendig cuts
• Structural reforms (in public administration,
  health care, education and pension system) ensure
  the sustainability of keeping the expenditure
  targets

Expenditures/GDP ()
Source MoF
9
Medium-term outlook - GDP growth

• Growth returns to its potential level on medium
  term
• Due to the fiscal consolidation the financing
  conditions of investments improve
• Increasing EU transfers accelerate growth

GDP and investment(year-on-year growth, )
EU flows through the budget( of GDP)
Source MoF
Source MoF
10
Medium term outlook - external balances

• The reduction of the fiscal deficit and the
  increasing inflow of EU funds improve the
  external financing position of the country

Financing capacity/need of public and private
sector ( of GDP)
External financing need and CA( of GDP)
Source National Bank of Hungary, CSO, MoF
Source National Bank of Hungary, CSO, MoF
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Why is it worth visiting Hungary?

• What Hungary is promising stability and fast
  development
• Stability
• In terms of politics well-functioning
  democratic system
• In social terms there are no significant
  strains because of racial and ethnic conflicts
  while public law and order is solid
• In economic terms - significant modernization due
  to the reforms
• - European legal framework,
• - stable equilibrium and finances,
• - fast process of convergence adoption of
  the euro

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Thank you for your attention!