The IMF says that in Hungary external financing risks are rising, in the wake of growth and financial spillovers from the eurozone crisis.
Stock vulnerabilities remain high while fiscal and external buffers are under pressure. Meanwhile, obstacles to higher medium-term potential growth–namely poor investment growth and low labour participation–persist. Unexpected and interventionist policy measures, many affecting the financial sector, have further increased policy uncertainty, contributing to elevated risk premia and a weakening of the exchange rate. Against this background, the authorities have requested precautionary financial assistance from the IMF and EU. With constrained room for policy accommodation, a policy mix which builds credibility, strengthens the policy framework, increases competitiveness and lays the groundwork for sustainable medium-term economic growth will be critical.
Fiscal policy
Ambitious deficit targets remain appropriate, although their attainment may be jeopardised by deteriorating macro-economic conditions and policy slippages. The increasingly complex tax system should be revisited to take account of medium-term growth and distributional aspects, planned structural reforms should be implemented in full, and distortions in the labour market must be avoided.
Financial sector
Regulators should thoroughly examine banks’ financial health and continue proactively to prepare them for a weakening in the economic outlook and possible funding pressures. The government’s efforts to address the foreign currency mortgage burden have generally been ineffective; the most recent scheme is an improvement but still falls short of best practice.
Monetary policy
Under current circumstances, the MNB’s tightening bias is justified. While the output gap remains relatively large, the scope for rate cuts is constrained by the worsened inflation outlook and the need to avoid a destabilising weakening of the exchange rate and capital outflows. Official reserve levels are too modest to provide additional room for manoeuvre. Recent initiatives to change the governance structure of the Central Bank (MNB) raise serious concerns, both in terms of process and content.
Full Staff report
© International Monetary Fund
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