The International Monetary Fund (IMF) has presented its annual report containing an evaluation of Hungary’s economic policy. A delegation of IMF experts stayed in Budapest from 21-30 January to prepare the report, consulting governmental representatives, the Hungarian National Bank (MNB) and financial experts.
The IMF appreciates that the Hungarian economy has finally found its way back to the path of growth. However, the middle-term prospects are quite modest, as long as Hungary carries such a large debt burden.
The growth of gross domestic product (GDP) is expected to fall back this year to a moderate 2.7% from the top figure of 3.6% last year, and in the coming years to decrease further to 2.3% and 2.2%. The IMF certified that Hungary booked a really strong growth in the course of the past year. On top of this, the economy managed to compensate vulnerability by generating a large trade surplus.
SMEs counter forced modernisation
Although the foreign trade balance stayed positive, the growth dynamic of exports only reached about 5%. In this perspective the IMF considers the export boom of last year as only a flash in the pan and has moderate expectations.
It’s interesting, however, that the trade balance managed to stay positive while the dynamic of imports developed in a very similar way to that of the export side. Many Hungarian research institutions have a different opinion about this: due to forced modernisation a new import boom could be next, they say.
On the other hand the government would like to support the domestic small- and medium-sized enterprises (SMEs) in releasing their potential and opening towards markets outside Hungary. Let’s just consider the policy of opening towards the south (developing the Latin American and African export markets), which is following the policy of opening towards the east, and the excellent funding available to SMEs under the new EU budget cycle, when, according to the intention of the Orbán government, a never-experienced ratio of 60% of all funds should be invested in economic development.
Private consumption is expected to grow 1.5% each year, thereby inducing growth stronger than investments. Domestic consumption will contain not much more than the expenditures of consumers. According to the IMF, state expenditures will be practically left alone.
This is a point where the Washington statistics are quite different from the ones of the domestic researchers. All in all, the domestic institutes named the state as the saviour of economic growth in the past few years. This was the case in the years following the global economic crisis, in which private investments were flying quite low for a number of different reasons.
According to some domestic sources the investment rate will fall to a bottom value of 16% of GDP, which caused some renowned economic professors, such as former president of the National Bank Péter Ákos Bod, to sound the alarm bells. If we take a look at the timeline of the IMF report, the absolute depth was 19.1%, recorded in 2012.
The fact that the target of 21.3% last year is the highest recorded by the IMF during the past eight years is a bit less flattering for Hungarian economic policy. Hungary just reached the average value of the eurozone – which is around 20% in the medium term, according to the IMF – so it’s going to fall back again.
Interest payments make the difference
Another issue, which is handled by the government with an unusual enthusiasm and – since blending in the assets of the private pension funds – success, is the deficit of the state budget.
The IMF, which used to be especially critical of this aspect in the previous years, now trusts that Hungary will be able to stabilise the ratio under 3% of GDP, which was first accomplished in 2012. In the meantime, the primary surplus will decrease to half.
While in 2013 the IMF still mentioned Hungary in the same category as Germany and Italy, the three countries that have the highest primary surplus compared to the nominal GDP within the EU (around 2%), in the middle term Hungary can be happy even about 1%.
A positive primary surplus shows that a state can fulfil its core functions in an independent way, so the financial situation has to be judged positively. In addition, according to the definition of the Maastricht deficit the additional interest payments for accrued liabilities are included – Hungary for instance paid EUR 4.6 billion in 2013.
Even when the country is able to safely fulfil the Maastricht criteria about the budget deficit (the IMF expects with 2.5% of GDP in the medium term), this is only enough to slightly lower the state debt. If everything works out well, the debt may fall to 74% of GDP within three years.
In 2011 the Orbán government stopped the increase of gross debt at 81% of GDP, and by making huge sacrifices they managed to reduce it to 76.9% by the end of 2014 – on a long-term chart these years of bitter struggle will only appear as stagnation.
Ranked average in R&D
According to the latest available comparable data by Eurostat from the year 2013, Finland spent 3.32% of its GDP on R&D, the other end of the scale is Romania with only 0.48% Two thirds of the total expenditures is covered by companies (in absolute numbers EUR 175 billion), higher educational institutions contributed with one quarter (around EUR 65 billion), the contribution of public money amounted to a modest 12% (a bit more than EUR 33 billion). Finland and even Sweden have been doing much better back in 2008, with 3.5% of the GDP invested in R&D. On the other hand other countries such as Switzerland and Germany and Austria as well came out stronger from the crisis than before considering the ration of R&D expenditures. Hungary could improve their investments in a similar way, from around 1% to 1.4%. Only Slovenia, the Czech Republic and Estonia are performing better in the Eastern-European region. Poland and Slovakia for instance are still fighting to get to the level mastered by Hungary already by 2008.
Responsible financial management still an unknown term
When we consider soberly, the numbers are not that impressive, not even speaking about the “soft” points of criticism, which the IMF wanted to publish in their report in any case. The neo-liberal International Monetary Fund does not approve the way the state is lurking in several economic branches – they mention the banking and energy sectors specifically.
Financial experts fear that potential liabilities may arise; in consequence the state involvement could lead to bad management. The recent broker scandal also proves that responsible financial management is still an unknown term in the Hungarian culture, even 25 years after the political turn.
So all “victims” are going to be compensated. MKB, which is supposedly strong in terms of capital and was taken over by the state last year, will be getting fresh capital very soon, according to the announcement by National Bank governor György Matolcsy, and Budapest Bank, acquired for USD 700 million, will be handed down to domestic oligarchs within two or three years, who are surely not going to pay amounts of comparable size in return.
All of these are points that will surely be mentioned in the next IMF report.