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Challenges facing
Hungary
Mihály Varga
November, 2008
Financing risks
General government consolidated gross debt exceeded
60% of GDP, a Maastricht criterion, in 2005
80
73,7
70
(Hungary’s general government debt in relation to GDP 1996-2007)
64
62
61,1
60
54,3
55,7
58
59,4
2003.
2004.
65,6
65,8
2006.
2007.
61,7
52,1
50
40
30
20
10
0
1996.
1997.
1998.
1999.
2000.
2001.
2002.
2005.
Source: Eurostat
Hungary is highly vulnerable
(Net financing capacity of the main sectors and external
equilibrium as a percentage of GDP 2003 -2008)
6
6
4
4
2
2
0
0
2003
-2
2004
I.
II.
III.
IV.
2005
I.
II.
III.
IV.
2006
I.
II.
III.
IV.
2007
I.
II.
III.
IV.
I.
2008
II.
III.
IV.
I.
II.
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
Corporate sector
External financing requirement
General government
Household sector
-12
Source: Hungarian
National Bank
In Hungary, the oversized state
chokes the economy, 2006
Budgetary balance
in GDP %
4
Estonia
2
Government
expenditure
in GDP %
Latvia
0
30
35
40
-2
-3
Slovenia 45
Czech Republic
Slovákia
50
55
Maastricht criteria
-4
-6
-8
-10
Hungary
Source:
Convergence
programs
0
80
Denmark
Netherlands
Sweden
Austria
Finland
United Kingdom
Cyprus
Germany
Estonia
Latvia
Portugal
Slovenia
Ireland
Czech Republic
France
Spain
Luxembourg
Lithuania
Bulgaria
Greece
Belgium
Slovakia
Romania
70
Italy
Poland
Hungary
60
Malta
Employment rate decreased by 1% in one year
(Employment rate in the European Union, 2nd quarter of 2008,15-64)
78,4
EU-27 average: 66%:
55,2
56,5
50
40
30
20
10
Source: Eurostat
30118.12
(23 July 2007)
The history of BUX
index
Since January 2007
Source: Budapest Stock Exchange
10751.23
(27.October 2008)
Credibility risks
Ratings of the long-term debt of Hungary
Moody’s:
09/12/2002
12/22/2006
11/07/2008
A1
A2
A3-
Standard and Poor’s:
12/19/2000
06/15/2006
10/15/2008
ABBB+
BBB+ with negative expectations
Fitch Ratings:
11/30/2000
12/06/2005
11/10/2008
ABBB+
BBB
Hungary pays a substantial interest rate
premium as a consequence of losing its credibility
(The central interest rates of the Visegrad countries)
IV. Hitelességi kockázat
Kamat mi és régió,
állampapírhozamok
Hungarian
Polish
Czech
Slovak
Source: Hungarian
National Bank
The proximity of the Euro-zone decreases interest premium
(5-year interest rate differences in relation to the Euro in 5 years
in the Visegrad countries, 2006-2008)
basis point
basis point
Hungarian
forint
Polish
zloty
Czech crown
Slovak crown
Source: Hungarian
National Bank
In Hungary, the oversized state
chokes the economy, 2006
Budgetary balance
in GDP %
4
Estonia
2
Government
expenditure
in GDP %
Latvia
0
30
35
40
-2
-3
Slovenia 45
Czech Republic
Slovákia
50
55
Maastricht criteria
-4
-6
-8
-10
Hungary
Source:
Convergence
programs
Lack of credibility played a decisive role in the
financial rescue package
(The stand-by cost of the package for Hungary is HUF 7.26 billion in 2009)
EU
IMF
WB
$1.3 billion
$8.1 billion
$15.7 billion
Source: Ministry of Finance
in Hungary
Hungary is highly vulnerable
(Net financing capacity of the main sectors and external
equilibrium as a percentage of GDP 2003 -2008)
6
6
4
4
2
2
0
0
2003
-2
2004
I.
II.
III.
IV.
2005
I.
II.
III.
IV.
2006
I.
II.
III.
IV.
2007
I.
II.
III.
IV.
I.
2008
II.
III.
IV.
I.
II.
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
Corporate sector
External financing requirement
General government
Household sector
-12
Source: Hungarian
National Bank
Growth risks
The growth rate of the Hungarian economy has
sharply slowed down: 10 year low
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
95:Q1
95:Q3
96:Q1
96:Q3
97:Q1
97:Q3
98:Q1
98:Q3
99:Q1
99:Q3
00:Q1
00:Q3
01:Q1
01:Q3
02:Q1
02:Q3
03:Q1
03:Q3
04:Q1
04:Q3
05:Q1
05:Q3
06:Q1
06:Q3
07:Q1
07:Q3
08:Q1
6
Output gap
Actual growth rate
Potential growth rate
Source: Hungarian
National Bank
Hungary had the lowest economic growth rate in
the European Union in 2007
(The economic growth rate of Hungary and some of its competitors in 2007)
Slovakia
10,4
Latvia
10,2
Lithuania
8,9
Slovenia
6,8
Poland
6,6
Estonia
6,3
Bulgaria
6,2
Czech Republic
6
Romania
6
Hungary
1,1
Source: Eurostat
Labour market risks
Due to tax increases, the situation of the labour market
deteriorates
Thousand persons
(Changes in employment and unemployment,15-64, 2006 -2008)
60
60
40
40
20
20
0
0
-20
-20
-40
-40
employed
unemployed
-60
-60
-80
-80
2008
2007
2006
I.
II.
III.
IV.
I.
II.
III.
IV.
I.
II.
III.
Source: Central
Statistics Office
0
80
Denmark
Netherlands
Sweden
Austria
Finland
United Kingdom
Cyprus
Germany
Estonia
Latvia
Portugal
Slovenia
Ireland
Czech Republic
France
Spain
Luxembourg
Lithuania
Bulgaria
Greece
Belgium
Slovakia
Romania
70
Italy
Poland
Hungary
60
Malta
Employment rate decreased by 1% in one year
(Employment rate in the European Union, 2nd quarter of 2008,15-64)
78,4
EU-27 average: 66%:
55,2
56,5
50
40
30
20
10
Source: Eurostat
Competitiveness risks
Enterprises are the biggest losers of the 2006 autumn
austerity measures
(Tax increases September 2006 – January 2007)
30
2006
2007
25
25
20
20
20
16
15
15
15
10
5
0
Company tax rate*
middle VAT rate
EVA rate
*4% extra tax, the basis of which is roughly
the same as the company tax base
Source: Tax laws
Due to the 2006 autumn austerity measures
the tax burden of employees
increased by 3.5%
The average tax burden in Hungary was
the second highest in the European Union (2007)
Out of HUF 100, the state gets HUF 54.5,
the employee gets HUF 45.5
Total tax wedge
Personal income
tax
Social security
contributions for
employee
Social security
contributions for
employer
Belgium
55,5
21,5
10,7
23,3
Hungary
54,5
16,1
12,6
25,7
Germany
52,2
18,4
17,4
16,4
France
49,2
9,9
9,6
29,7
Austria
48,5
12
14
22,5
Italy
45,9
14,4
7,2
24,3
Sweden
45,4
15,6
5,3
24,5
44
12,1
18,6
13,3
Finland
43,7
18,9
5,4
19,4
Czech Republic
42,9
7,7
9,3
25,9
Poland
42,8
5,4
20,4
17
Greece
42,3
7,9
12,5
21,9
Denmark
41,3
30,2
10,6
0,5
Spain
38,9
10,8
4,9
23,2
Slovakia
38,5
7,1
10,6
20,8
Luxembourg
37,5
13
12,6
11,9
Portugal
37,4
9,3
8,9
19,2
United Kingdom
34,1
16
8,4
9,7
Ireland
22,3
7,9
4,7
9,7
Country
Netherlands
Source: OECD database
Suggestions of Fidesz
Our suggestions
• EUR 5 billion tax reduction
• EUR 5 billion for SMEs from EU
resources
• Stopping luxury expenditures
• Introduction of an expenditure ceiling
• Setting up Budgetary Council
Thank you for your attention