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Efficient infrastructures and regulatory framework
Diversified economy
Skilled workforce
Important stock of foreign direct investments
High public debt
Considerable external financing needs
Borrowers highly exposed to exchange rate risk
Authoritarian drift of the political power
2011 2012 2013(e) 2014(f)
GDP growth (%) 1.6 -1.7 0.5 1.5
Inflation (yearly average) (%) 3.9 5.7 2.2 2.5
Budget balance (% GDP) 4.2 -2.0 -2.9 -3.0
Current account balance (% GDP) 0.9 1.6 1.7 1.7
Public debt (% GDP) 81.4 79.2 79.8 80.0
(e) Estimate (f) Forecast
Growth driven by its external components
In 2014 external demand will be the main contributor to growth due to a buoyant demand from Europe (76% of good
exports), in particular Germany (26%). Hungary’s export industry is concentrated on multimedia goods and household
appliances (40% of exports) and the automotive sector (20%). Many car manufacturers are investing in the country to
ensure their subcontracting. Furthermore, agriculture, services (financial and telecommunications), as well as construction
are expected to continue to grow. In contrast, household consumption will remain hampered by the drying up of bank credit,
which began in 2009. The excessive expansion of foreign exchange loans (Swiss francs and euros) in the past, enabled by
foreign capital, is expected to continue to fall in 2014 on the back of household deleveraging and regulatory measures
B A2
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imposed on the banks. The banking system is characterized by a significant and growing stock of non-performing loans
(18% of total loans), restrictive regulation (moratorium on mortgages, freezing exchange rates of foreign exchange loans)
and the highest taxes in Europe. Bank profitability has collapsed since 2010. They will continue to restrict lending to the
private sector, which will restrain investment in 2014. Finally, inflation slowed sharply in late 2013, recording its slowest level
since 1993, in the wake of cuts of 10% in January and then 11% in November in the regulated prices of gas and electricity.
The Central Bank’s accommodative monetary policy, under which its key rate fell to a historic low of 3.4% in October 2013,
is therefore expected to continue.
Fiscal deficit expected to remain under control despite electoral context
In June 2013, the European Commission ended its Excessive Deficit Procedure (EDP) to which Hungary has been subject
for nine years. To boost its popularity, the Fidesz party could be inclined to increase public spending in the run-up to the
parliamentary elections due in April 2014. Public investment increased considerably in 2013, reflecting impact on public
accounts of the government’s electoral campaign. With the highest debt in central and Eastern Europe, interest payments
put a strain on State budget by 10%. Nevertheless, to maintain his popularity the Fidesz cannot afford to be placed under
Excessive Deficit Procedure again. In this context, the public deficit should not exceed the 3% ceiling.
In 2014, stronger European demand will shore up the current account surplus. Hungary’s central bank applies a floating
parity regime against the euro with fluctuation bands of +/-15%. Although the current account surplus supports the forint, the
level of foreign exchange reserves (covering 5 months of imports) would probably be insufficient should there be a lasting
crisis of financial market confidence, especially in the event of budget slippage (as in 2010 in a electoral context).
A controversial political environment
The government has been seen to be shifting towards authoritarianism since the election victory of the centre-right Fidesz
party in April 2010. With a two-thirds majority, the government of Prime Minister Viktor Orban adopted a new constitution in
January 2012 restricting, in particular, the independence of the judiciary, the central bank and the media. This move is
accompanied by the adoption of some thirty laws which can be amended only with a two thirds majority, making it difficult for
any future majority government to change them. In March 2013, the former minister of the economy, Gyorgy Matolcsy, a
close ally of Prime Minister Orban, was appointed to head the central bank. This appointment raises doubts over the bank’s
independence. At the same time, an income tax rate of flat 16% on household was introduced which hit the lowest-income
households. Although a worsening social situation cannot be completely ruled out, it’s very probable that the Fidesz will hold
onto its stranglehold at the parliamentary elections in April 2014 against a dispersed opposition. Finally, the business
environment is deteriorating but the country is still one of the better places to do business in Central and Eastern Europe.
Nonetheless, the business climate remains tense and investor confidence has been damaged by the exceptional taxes
introduced in October 2010.
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