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Brussels, 15 February 2010

Commission concludes fourth review of the EU balance-of-payments assistance for Hungary

On 15 February 2010, the European Commission services, in close cooperation with the International Monetary Fund staff, completed the fourth review under the EU balance of payments assistance concluding that Hungary has maintained its course in implementing its economic programme. 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.

"Thanks to a series of savings measures, Hungary seems to have managed to contain its deficit at 3.9% of GDP in 2009, despite the sharp economic contraction. The 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", Commissioner 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 3% of GDP in 2011 as committed by Hungary and recommended by the Council."

After a GDP contraction of 6.3% in 2009, the 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 expected achievement of the general government deficit target of 3.9% of GDP (ESA definition) has resulted in a substantial improvement in the structural balance of close to 3% of GDP, bringing the total structural adjustment over the last three years to 8½%. 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 adopted 2010 budget is in line with the target of 3.8% of GDP and contains 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.

Hungary also made further progress in improving fiscal governance by adopting government regulation that accelerates and improves the budget planning process. 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 Commission 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 €6.5 billion balance of payments loan: two instalments of €2 billion each on 9 December 2008 and 26 March 2009 and a further €1.5 billion on 6 July 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 EUR 1 billion) 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 3 November 2010.

On the Commission side, the mission was led by Matthias Mors, Acting Director at the Economic and Financial Affairs Directorate (ECFIN) and Barbara Kauffmann, Head of Unit at ECFIN for a group of countries that comprises Hungary.

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