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Regional workshop
Vilnius 9-10 June 2009
The characteristics
of the economic crisis in Hungary
Dr. Imre Szabo
LIGA
Factors of vulnerability of CEE economies
• High external financing need
• Current account deficits are high (in certain countries this was
accompanied by high external debt levels)
• Macroeconomic imbalances, chronic dependence on
external financing and a high level of economic and
trade integration with the EU15
• Western banks made extraordinary profits in the region
and were expecting continued expansion in the region
(over 80% of the banks of Central and Eastern European countries
are affiliates of Western banks)
• Household debt in several new member states largely
denominated in foreign exchange
• Dependent position (also appears on the micro-level, as a large
part of CEE economies are dominated by foreign multinational
enterprises with strategic decisions made at the Western company
headquarters)
• Highly dependence on external demand.
Challenges facing Hungary
Financing risks
•Debt risk
•Currency risk
•Social risk
Growth risks
•Producing risk
•Job risk
Credibility risks
•Financial risk
•Investor confidence risk
•Political and social risk
Labour market risks
•Employment risk
•Unemployment risk
•Social risk
•Budget risk
Exchange rates vs. Euro I.
Lack of credibility played a decisive role in the
financial rescue package
EU
IMF
WB
$1.3 billion
$8.1 billion
$15.7 billion
Source: Ministry of Finance
in Hungary
Rates of the long government bonds
(from 2007 till 2009)
Hungary’s general government debt in relation to GDP
1996-2009
90
80
83
73,7
70
72
64
65,6
62
61,1
60
54,3
55,7
58
59,4
65,8
61,7
52,1
50
40
30
20
10
0
Source: Eurostat
1996.
1997.
1998.
1999.
2000.
2001.
2002.
2003.
2004.
2005.
2006.
2007.
2008.
2009
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
GDP
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
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
56,5
Italy
Poland
Hungary
60
Malta
Employment rate in the European Union, 2nd quarter
of 2008 (15-64)
78,4
70
EU-27 average: 66%:
55,2
50
40
30
20
10
Source: Eurostat
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
Tax wedge in certain group of countries and in Hungary
60
55
50
45
40
35
30
67% of average wage
average wage
133% of average wage
OECD countries
Visegrad countries
Hungary before consolidation
Hungary after consolidation
167% of average wage
EU-15
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
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
Share of foreign currency loans in total credit to
100
80
60
40
20
0
2005
Corporates
2006
2007
Households
2008
Other loans
The debt of the household sector
Hungary is highly vulnerable
Net financing capacity of the main sectors and external equilibrium
as a percentage of GDP
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
Exchange rates vs. Euro II.
320
310
300
290
280
270
260
2008.12.18
2009.01.07
2009.01.27
2009.02.16
2009.03.08
2009.03.28
2009.04.17
2009.05.07
2009.05.27
2009.06.16
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
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
Thousand persons
Changes in employment and unemployment,15-64,
2006 -2008
60
60
40
40
20
20
0
0
-20
-20
-40
-60
-40
employed
unemployed
-60
-80
I.
II.
III.
IV.
-80
2008
2007
2006
I.
II.
III.
IV.
I.
II.
III.
Source: Central
Statistics Office
The former PM Mr.Gyurcsány resigns
The new PM Mr.Bajnai attests
The volume index of the industry and processing
industry
LIGA Crisis Conference (debate)
LIGA demonstration of Labour Day on 1 May
Thank you for your attention
Dr. Imre Szabo
[email protected]