RaboResearch - Economic Research

Country Report Hungary

Country Report


Jan-Willem van Tongeren 

Over 2014 Hungary's economic growth increased to 3% thanks to a surge of EU-funds, the central bank’s “Lending for Growth” scheme, a peak in (car) industry investments, a good harvest and low inflation. For 2015 an economic growth of about 2.5% and a budget deficit below 3% is expected. Concerns remain about the continuation of unorthodox economic policies.

Strengths (+) and weaknesses (-)

(+)      Favourable geographic position and well-developed infrastructure

Due to its location at the heart of Central Europe and its good infrastructure, Hungary’s economy benefits from short transportation routes to major markets and industrial production centres.    

(+)      Commitment to fiscal discipline

Hungary’s government is strongly committed to fiscal discipline, as it strives to reduce the country’s dependency on external financing. Yet, oftentimes populist measures depress private investment and thereby put potential growth and the sustainability of fiscal policy at risk.

(-)       Very high external debt load and FX-denominated debt

Given a foreign debt of about 120% of GDP (2015) and considerable amounts of FX-denominated local debt (even after the FX-loan conversion), Hungary is strongly exposed to a deterioration of external funding conditions and a sustained depreciation of its local currency.

(-)       Populist unorthodox economic policies undermine business climate

The current government tends to opt for populist unorthodox ad-hoc short-term policy measures that create considerable policy uncertainty. Economic policy favours industrial production at the detriment of services and strives to replace foreign by Hungarian (state) ownership in key sectors.

Key developments

1. A policy-induced economic recovery

The economic recovery that started in 2013 continued, with the economy growing by 3% last year.
This was due to strengthening domestic demand (stimulated by government stimulus preceding the April 2014 elections), low inflation, a peak in (car) industry investments and a good harvest. Growth was also supported by factors such as higher absorption of EU funds and the central bank’s Funding for Growth Scheme. However, the economic recovery has been limited so far to the volatile agricultural sector, car manufacturing and construction. In 2015 growth is likely to slowdown (to about 2.5%) due to lower demand growth from major trade partners. In the coming years inflows of EU funds are expected to decline, which will be partly compensated by an expected  improvement of the employment rate and lower debt instalments for households after the conversion of FX denominated loans, which are likely to boost consumption. 

Figure 1: Growth performance
Figure 1: Growth performanceSource: EIU
Figure 2: Current account
Figure 2: Current accountSource: EIU

2.  FX loan conversion of household borrowers

In the years before the global financial crisis banks extended a lot of forex loans in Hungary, especially Swiss franc-dominated loans. In Hungary, many home-owners were thus able to benefit from relatively low interest rates. However, when the currency tanked after the crises this resulted in a sharp increase of debt payments. In 2014, FX-loans accounted for 28% of all retail loans. To reduce this foreign-currency denominated debt, Hungary’s government announced in November 2014 a series of laws which will lead to a conversion of FX-loans into forint-denominated loans. The conversion will take place in the first half of 2015 and will be at the market exchange rate of November 2014. Although the conversion take place in consultation with the banks and the final version had a less drastic nature than earlier proposals, the terms and conditions have grave impacts on their profitability. The estimated net cost for banks amount to USD 2bn or 1.6% of GDP. Debt instalments are expected to fall by 25%. 

3. Fidesz-KDNP’s populist policy

Hungary’s governing centre right Fidesz-Hungarian Civic Union party comfortably became the winner of the April 2014 elections and obtained two-third of the seats in Parliament. Fidesz was helped by the vote of ethnic Hungarians living outside the borders and popular government measurements in the previous year (e.g. mandatory utility tariff cuts and the prospect of another attempt at converting foreign-currency denominated debt). Although the elections were efficiently administered and offered voters a diverse choice, the Organisation for Security and Co-operation in Europe (OSCE) was very critical. The OSCE stated that the main governing party enjoyed an undue advantage because of restrictive campaign regulations, biased media coverage and campaign activities that blurred the separation between political party and the state.
In the middle of 2014 Prime Minister Victor Orbán declared that Hungary needs to break with the principles of liberal society organisation and has to transform in an organised illiberal community.
These statements caused a lot of serious criticism, especially from the EU. Meanwhile, the launch of a plan to introduce an internet tax in October 2014 brought a lot of protest from mostly young educated and middle class people, who saw the tax as an attack on free speech. This, combined with some corruption scandals led to a decline of support for the Fidesz (a poll in January 2015 by Median showed a drop from 38% to 26%). Six Hungarian officials have been banned from entering the USA on suspicions of corruption, which is a highly unusual sanction for a NATO ally.The internet tax proposal has been withdrawn in the meantime . However further populist and nationalistic policies and constitutional changes can be expected. Next to the bank conversion tax (relief package) for foreign currency loan holders, new restrictions (tax) for large retail chains have been introduced/planned. As in the past, these restrictions are often constructed in such way that these predominantly harm foreign corporations.

Factsheet of Hungary
National facts of HungarySource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Hungary is a small open economy with a nominal GDP of USD 133bn (2014) and about 10m inhabitants. Benefitting from its proximity to developed markets in Austria, Germany and Italy and its well-educated low-cost workforce, it has been a major recipient of foreign direct investment prior to the global economic crisis. Its largely privatized and well-diversified economy is closely integrated into Central and Western European supply chains, which contributes to close business cycle synchronicity with the euro area. Manufacturing, particularly car production (Audi, Mercedes Benz, Opel, Suzuki), and food processing constitute important export industries, as does tourism. Hungary’s rapid economic transition in the last two decades went hand in hand with a considerable increase in corporate and household indebtedness, oftentimes in foreign currencies (mainly Swiss franc), while very lax fiscal management prior to the global economic crisis boosted public debt levels. In spite of strict fiscal consolidation measures initiated since 2006, Hungary was forced to apply for EU/IMF financial assistance in 2008. Considerable public disenchantment with the austerity measures imposed by the previous government brought the centre-right Fidesz-party to power in 2010. Driven by its conviction to reduce foreign involvement in Hungary’s economy and the perceived influence of opposition parties on public institutions, the Fidesz-government has implemented major political and economic changes in recent years, including the introduction of a new constitution. As various policies threatened to undermine the checks and balances of Hungary’s democratic system and populist economic policies tend to target sectors dominated by foreign ownership, Hungary’s relations with the EU and USA deteriorated and its appeal among foreign investors cooled markedly. Given ongoing weak public support for the opposition parties, Fidesz will likely dominate Hungarian politics in the years to come.

Economic indicators of Hungary
Economic indicators of HungarySource: EIU

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