Economy and Trade
Hungary, which joined the European Union in 2004 but has not yet joined the euro, has made a successful transition from being a centrally planned economy to a market economy. Its per capita income is nearly two-thirds of the EU average, and the private sector accounts for more than 80% of GDP. Foreign ownership and investment in Hungarian firms is widespread, with cumulative foreign direct investment totaling more than US$60 billion since 1989. Austerity measures imposed in late 2006 have helped reduce the deficit from more than 9% of GDP in 2006 to 3.3% in 2008. However, due to an impending inability to service its short-term debt—brought on by the global credit crunch in late 2008—Hungary’s government was forced to seek assistance from the IMF in October 2008. The global financial crisis, declining exports, low domestic consumption, and fixed asset accumulation—dampened by government austerity measures—will result in a negative growth rate of between 3% and 5% in 2009.
Economic Policy over 12 Months
During October 2008, the currency, the forint, went into freefall, slumping by 40% against the US dollar and the euro. The central bank sought to put a floor under the currency’s slide by raising the benchmark interest rate to an economy-crunching 11.5% (up from 8.5%) on October 22, 2008. Protecting the forint is seen as a priority , as many Hungarian households and businesses have their borrowings in foreign currencies, including the Swiss franc and the euro.
In November 2008, Hungary received a US$25.1 billion package of loans from the International Monetary Fund, the European Union and the World Bank, largely because the country was deemed at risk of defaulting on its short-term debt.
In exchange for the rescue package, Hungary agreed to restructure its public sector finances through a series of austerity measures—including reduced public-sector pay, tax rises, and curbs on social spending. “The policies Hungary envisages justify an exceptional level of access to Fund resources,” said IMF managing director, Dominique Strauss-Kahn, at the time.
The program is unpopular, as Hungary’s economic growth was already weak, and the government had already reined in spending and increased taxes under the earlier IMF-mandated austerity measures of late 2006. Furthermore, the government lacked scope to introduce any anti-cyclical fiscal stimulus, because it is struggling to meet the Maastricht criteria for euro membership, including a budget deficit of below 3% of GDP.
In November 2008, Prime Minister, Ferenc Gyurcsany, announced plans for a HUF1.4 trillion (US$6.9 billion), two-year stimulus package to kick-start economic growth. His government will raise value-added tax from 20% to 23% in July 2009, and raise corporate tax from 16% to 19% from January 2010. He has also sanctioned some tax cuts in the hope of boosting the economy.
In the first two months of 2009, the forint was Europe’s worst-performing currency. In March 2009, the Hungarian National Bank took further action, saying it would use its “entire monetary policy toolkit” to ensure the currency fell no further. The bank was concerned, among other things, that a weaker forint could jeopardize its 3% medium-term inflation target, and boost defaults on overseas loans. The weakening of the currency has left the bank with little ability to cut interest rates.
In March 2009, Gyurcsany said that one of his government’s core goals was to ensure Hungary meets “all criteria that are needed to enter the ERM2 regime.” He also said the government was willing to consider deeper and more comprehensive reforms than those unveiled earlier, to revive the economy and stem job losses.
The government would like to reduce the budget deficit to below 3% of GDP during 2009, compared to a 3.3% deficit in 2008. It has already slashed HUF200 billion (US$809 million) off its 2009 spending. Gyurcsany has also indicated his government is willing to reduce state spending even further.
Economic Performance over 12 Months
In 2007, the economies of Central and Eastern Europe, including that of Hungary, were seen as the poster children of economic reform. Many seemed on course to converge with Western Europe within a few years. However, a large number of these economies have since entered deep recessions—largely because of overborrowing from overseas banks, the bursting of asset-price bubbles, weakening demand for their exports, and plummeting currencies.
By April 2008, the Hungarian economy was one of the worst affected in the region. Inflation had soared to 6.6%, more than double the central bank’s target of 3%. Economists claim that the country, along with Latvia and Ukraine, would probably be bankrupt by now, had it not been for the IMF-led rescue package.
The government’s 2006 austerity program meant that the economy was already weak when the global financial crisis struck. GDP growth slowed to 1.3% in 2007, and, at the time, Hungary’s policymakers felt unable to raise interest rates in case they strengthened the forint, and weakened the country’s important export sector. Gyurcsany’s government could only meet its fiscal targets through higher taxes and expenditure cuts.
For the full year of 2008, the Hungarian economy expanded by 0.5%. However, it contracted by 2.3% in the fourth quarter of 2008, according to revised government data issued in March 2009. The figure suggests that the economy is likely to experience a deeper-than-expected recession, with some economists predicting negative growth of up to 5% in 2009, largely as a result of a collapse in exports, which has been much worse than the government’s forecast of a 2.5–3.0% contraction.
On the consumption side, the paucity of credit and fears over unemployment have slowed domestic consumption, including new car sales. A survey of domestic and international banks by the central bank (published in March 2009) identified a serious decline in lending appetite in the corporate market, mainly in financing large and medium-size companies, and real-estate deals.
In the final quarter of 2008, output declined in all sectors of the economy, except for construction and agriculture, with industrial output sliding by 10.7% year-on-year, due to a sharp fall in demand from the Eurozone countries, coupled with domestic fiscal tightening. Annual consumer price inflation slowed to 3.0% in February 2009 from 3.1% in January, the KSH added.
The government expects the economy to shrink by between 3.0% and 3.5% in 2009, as a result of the collapse in demand in the Eurozone. However, some analysts believe that the downturn could be as high as 5%, especially if the recession in Western Europe turns out to be deeper than expected.
Support for Inward Investment and Imports
The Hungarian Investment & Trade Development Agency (ITD Hungary) is able to provide advice and other services to foreign investors through its Invest in Hungary section. ITDH’s Trade with Hungary section focuses on providing assistance to importers, and can supply comprehensive lists of current business offers from Hungarian suppliers. The organization’s Enterprise Europe Network aims to promote cooperation between SMEs. The Ministry for National Development and Economy focuses on transforming Hungary’s economy into a high-value-added, knowledge-based, and competitive one.
The Hungarian government can grant customized incentive packages for projects in sectors including manufacturing, R&D, and regional service and logistics centers. The projects must have minimum investment values ranging from €10 million to €50 million. The projects must create a certain number of jobs (more than 10, or more than 100, depending on the type of project). The grants are doubly generous in the regions of northern Hungary, the northern great Hungarian Plain and south Transdanubia. The government will raise corporate taxes from 16% to 19% in January 2010.
GDP growth: 0.5% (2008, government statistics office)
GDP per capita: US$20,500 (2008, est.)
CPI: 3% (March 2009, government statistics office)
Key interest rate: 9.5% (Central Bank)
Exchange rate versus dollar: forints per US dollar—171.8 (2008, est.)
Unemployment: 8% (2008, est.)
Current account deficit: −US$6.89 billion (2008, est.)
Population: 9.9 million (July 2008, est.)
Source: CIA World Factbook except where stated