Hungary has maintained its course in implementing its economic reform programme, the European Commission (EC) said on February 15 2010, after the fourth review done under the EU’s balance of payment assistance scheme.
 
The review was done in close co-operation with the International Monetary Fund (IMF), the EC said.
 
"In view of the sustained improvement of the external financing situation, Hungary is not requesting the release of international assistance upon the completion of this review as was already the case at the last review," the EC said.
 
European Economic and Monetary Affairs Commissioner Olli Rehn said that, thanks to a series of saving measures, Hungary seemed to have managed to contain its deficit at 3.9 per cent of GDP in 2009, in spite of the sharp economic contraction.
 
The countries 2010 budget foresees a further reduction of the deficit.
 
"The authorities continue to implement their economic policy programme, which has improved investors’ confidence and restored access to market-based financing", Rehn said.
 
"Looking forward, the same commitment will be needed to keep public finances on course, achieve the budget deficit target in 2010, and to bring the deficit below three per cent of GDP in 2011 as committed by Hungary and recommended by the Council."
 
After a GDP contraction of 6.3 per cent in 2009, Hungary’s economy is expected to stabilise and return to positive growth in the course of 2010.
 
It is supported by the strengthening of the international environment whereas domestic demand remains subdued, reflecting the continued adjustment of the labour market.
 
Hungary has been on track in fulfilling its obligations, laid down in the memoranda of understanding linked to the EU medium-term financial assistance, the EC said.
 
The expected achievement of the general government deficit target of 3.9 per cent of GDP (ESA definition) has resulted in a substantial improvement in the structural balance of close to three per cent of GDP, bringing the total structural adjustment over the past three years to 8.5 per cent
 
"This has been recognised by the Commission in its communication of 27 January on effective action taken by Hungary in response to the Council recommendation of July 2009 under the excessive deficit procedure," the EC said.
 
The 2010 budget adopted by Hungary was in line with the target of 3.8 per cent of GDP and contained a significant level of reserves.
 
 
"Nevertheless, the considerable budgetary risks do not only call for a rigorous implementation but may also require a rebuilding of reserves if needed," the EC said.
 
Hungary also made further progress in improving fiscal governance by adopting government regulation that accelerates and improves the budget planning process, according to the Commission.
 
Additional steps were also taken to enhance the compliance with EU internal market rules regarding the financial sector and to broaden the powers of the Hungarian Financial Supervisory Authority including in the area of consumer protection.
 
Finally, some steps have been taken to improve the financial situation of the public transport sector, but further measures of a more structural nature will be required, the EC said.
 
EC services will continue to monitor the situation in Hungary "not only in the context of the EU medium term assistance but also via its regular EU fiscal surveillance under the Stability and Growth Pact".
 
So far, Hungary received three instalments of the EU’s 6.5 billion euro balance of payments loan: two instalments of two billion euro each on December 9 2008 and March 26 2009 and a further 1.5 billion euro on July 6 2009.
 
In view of the improved access to financing, Hungary has not drawn on EU and IMF assistance upon the completion of the previous review in November 2009 and has neither requested a disbursement after the current review.
 
The outstanding amount of EU assistance (of up to a billion euro) remains available and can be disbursed if needs arise, as usual subject to policy conditionality. The EU assistance has been granted for a period of 2 years which will end on November 3 2010.
 
In its own statement, the IMF said that a mission, led by James Morsink, held discussions with the Hungarian authorities from February 3 to 15, 2010 as part of the fifth IMF review of the country’s Stand-By Arrangement (SBA).
 
Morsink said that the mission had reached an agreement with the authorities on a package of policies that aims at completing the fifth review under the SBA.
 
"Reflecting the reduction in Hungary’s macroeconomic and financial vulnerabilities, the authorities are taking decisions about drawing on a review-by-review basis," he said.
 
As at the last review, Hungary did not intend to draw the amount that would be made available on completion of this review (725 million Special Drawing Rights, SDR, or about 800 million euro), according to Morsink.
 
The cumulative IMF resources from the fourth and fifth reviews (SDR 1450 million or about 1.6 billion euro) that would remain available subject to satisfactory policy performance help to provide insurance against the impact of any unforeseen deterioration in external financing conditions, the IMF said.
 
"The significant strengthening of policies over the past one-and-a-half years has improved confidence and placed Hungary on a path towards stability and growth," the IMF said.
 
"Government spending has been reduced in a durable way, while the fiscal deficit target was increased to 3.9 per cent of GDP in 2009 to avoid exacerbating the economic contraction.
 
"In the financial sector, liquidity support was provided in a timely way, and bank supervision and the remedial action framework were substantially enhanced. By better anchoring market expectations, these measures have helped to create room for cautious reductions in the policy interest rate."
 
The end-December targets on the central government’s primary balance, central government debt, CPI inflation, and net international reserves, as well as the targets related to government lending to banks and strengthening the remedial action and resolution regime, were all met.
 
"Looking ahead, the economy is on the road to recovery, supported by external demand. After falling by 6.3 per cent in 2009, economic activity is expected to contract by 0.2 per cent in 2010 and then increase by more than three per cent in 2011," the IMF said.
 
CPI inflation, which is being temporarily boosted by the increases in the VAT rate and excise taxes, was projected to fall to below the three per cent target in the first half of 2011.
 
The current account balance, which improved sharply to a surplus of about 0.4 per cent of GDP in 2009, is projected to deteriorate modestly to a deficit of 0.4 per cent of GDP in 2010, according to the IMF.
 
"Regarding policies, much has been accomplished, but more remains to be done," the IMF said.
 
"The general government deficit target for 2010 of 3.8 per cent of GDP is achievable, but will require strict expenditure control and—to insure against risks—a cautious use of budgetary reserves and readiness to take additional action if necessary. In 2011, additional measures will be needed to reduce the general government deficit to below three per cent of GDP and put government debt firmly on a declining path.
 
"Further improving banking supervision and the resolution framework for banks will contribute to the preservation of financial stability. To the extent allowed by financial market conditions, further gradual and cautious cuts in the policy interest rate would be appropriate," the IMF said.