Hungary strategy overview

Full strategy  (0.4Mb) Approved 22  Jan 2008

Magyarország stratégia  (0.8Mb)

Summary of public comments  (0.1Mb)

Hungary continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. Since the beginning of transition Hungary has made considerable progress in reforms with about 80 per cent of economic activity in private hands, an open foreign trade regime and liberal foreign investment conditions.

Economic growth

The macroeconomic environment in Hungary is dominated by large fiscal deficit and implementation of a reform package to restore balance in public finances. Economic growth slowed down to an estimated 0.9 per cent year-on-year in the third quarter of 2007, driven largely by a fall in consumer spending caused by higher taxes, tight monetary policy and hikes in utility bills. A collapse of public finances was averted last year by the introduction of fiscal austerity measures. As a result, the full-year fiscal deficit closed at an estimated 9.2 per cent of GDP in 2006 and at around 5.7 per cent in 2007. This has been achieved at the expense of substantial tax hikes which further increased the cost of doing business in Hungary. The current account deficit narrowed to an estimated 6.5 per cent of GDP in 2006, mainly on the basis of a smaller trade deficit. Driven by tax increases, inflation picked at 9 per cent in March 2007 and is expected to gradually decline in 2008.

Structural reforms

The progress in structural reforms over the last year was driven by the need to reduce fiscal expenditures and decrease the deficit in government finances. The government outlined a number of ambitious medium-term structural reforms. The implemented measures include cuts in subsidies for prescription medicines, tightening of eligibility criteria for disability benefits, co-payment by healthcare patients and a move to reduce the number of hospitals. Further structural reforms awaiting implementation include changes in the healthcare insurance system, modifications of the early retirement and special pension rules, review of the tax system and introduction of a merit-based appraisal scheme in public and higher education.

Following the privatisation of Budapest Airport and Malev, the national airline, steps are being taken to complete restructuring of the national railway company and privatise some of its business lines. Pressure on fiscal discipline has also led to increased private-sector involvement in the provision of some public services, including healthcare, which is expected to lead to substantial efficiency gains and improvements.

Key challenges

Looking forward, a number of key challenges still require attention:

• Structural measures to reduce public expenditures need to be fully implemented to reduce the fiscal deficit and allow for a reduction of the tax burden in the medium term.
• Investments in the diversification of energy supply, in energy efficiency and renewable energy need to be promoted to enhance energy security, reduce energy intensity and meet environmental targets.
• Transport and environmental infrastructure need to be improved with the assistance of EU structural and cohesion funds, private-sector involvement and commercial co-financing from local sources. The development of municipal projects requires the strengthening of municipal administrative capacity and cooperation, particularly among smaller municipalities, as well as improvements in procurement and project management standards.
• Financial institutions would benefit from the introduction of new products, increased efficiency of the pension fund system, and the diversification of their investment portfolios through the development of local equity markets and the introduction of new financial instruments.

Investments

As of 31 October 2007, the Bank had committed EUR 1.84 billion which attracted a further EUR 6.01 billion from sponsors and co-financiers. 2005 and 2006 were characterised by a slowdown in corporate investments due to the elections and the Government’s fiscal stabilisation measures. The Bank continued its financing mainly under the EU/EBRD SME facility. As the new Government renewed its reform commitment, the Bank has found an increased number of new investment opportunities in its focal areas where its transition impact is the highest.

Operational objectives

The Bank’s activities in Hungary will be consistent with the strategic outline for the years 2006-2010 agreed upon in CRR 3 with respect to graduation and will be based on the following operational objectives:

• Support the involvement of the private sector in the provision of public services, including through public-private partnerships in the infrastructure area and also in cooperation with Cohesion/Structural Funds.
• Promote investments in the diversification of energy supply, in energy efficiency and renewable energy to enhance energy security, reduce energy intensity and meet environmental targets.
• Provide higher-risk products such as equity and structured debt for local corporations to fund their growth. Particular attention will be paid to local companies’ investments in the context of cross-border expansion.
• Participate in the introduction of new capital market products by financial institutions and support innovative products/financial institutions that provide financing for SMEs.
• Actively manage the Bank’s portfolio to maintain its high quality.

The Bank will continue to ensure that all EBRD operations in Hungary meet sound banking principles, have transition impact, are additional and are subject to the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans.