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European Commission

MEMO

Brussels, 1 July 2014

Commission staff concludes the fifth Post-Programme Surveillance mission to Hungary

European Commission officials conducted a mission to Hungary from 24 to 27 June 2014 to review recent economic developments and policy initiatives in the context of post-programme surveillance linked to EU balance of payments assistance provided between 2008 and 2010. This was the fifth surveillance visit since the expiry of the financial assistance programme in November 2010.

The mission welcomed recent improvements in the macroeconomic situation as both exports and domestic demand have strengthened over the last half year. While the recent expansion of newly installed capacities in the automobile sector is boosting exports and industrial output, the economic recovery is also to a large extent driven by stimulus measures (the central bank's Funding for Growth Scheme, cuts in regulated utility prices, the expansion of the public work scheme and the increased absorption of EU funds). This calls for caution when assessing the underlying economic situation. Economic growth is projected to slow down somewhat in 2015, as the effect of these stimulus measures fades away.

The continuous current and capital account surpluses have decreased external debt and the sovereign financing has been smoothly ensured in a context of strong demand for government securities and record-low yields. At the same time, the still high public and external debt levels, the high rollover needs and low growth potential remain important vulnerabilities.

There was a wide agreement with the authorities that the 2014 and 2015 general government deficit targets were within reach. At the same time, the mission highlighted that although the general government deficit has been kept below the 3% of GDP threshold, government debt is not yet on a firm downward path. Furthermore, it warned that based on the Commission’s 2014 spring forecast, the country appears at risk of breaching the requirements of the Stability and Growth Pact. In particular, compliance with the debt reduction benchmark would likely require additional fiscal consolidation efforts, in order to avoid that an inadequate pace of debt reduction could trigger the re-opening of an excessive deficit procedure in spring 2015. Moreover, the mission underlined the benefits of pursuing growth-friendly fiscal consolidation in a further enhanced fiscal governance framework.

The mission also stressed the need to strengthen Hungary's medium-term growth prospects by giving a strong impetus to structural reforms along the lines of the 2014 country-specific recommendations endorsed by the European Council on 27 June. In this context, the mission called for ensuring a stable and more balanced corporate tax system, including by phasing out distortive sector-specific taxes, and for reducing the tax wedge on low-income earners in order to foster employment. Restoring normal lending to the economy is essential to stimulate economic growth in a sustainable manner and requires accelerating the clean-up of banks' asset portfolios and improving banks' operating environment, including through a reduction in their tax burden. In this respect, while the mission welcomed the authorities' intention to incentivise portfolio cleaning, it warned that any initiative on setting up a bad bank should duly take into account EU state aid rules for banks. The mission took note of the government's efforts to address the issue of foreign currency mortgage loans, but insisted on the need for a consultative approach and appropriate burden sharing between stakeholders on any government decision, in order to avoid moral hazard and endangering financial stability. Finally, the mission called for improving the business environment and emphasised the need to stabilise the regulatory framework and foster market competition, in particular by removing entry barriers in the service sector.


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