IMF Praises Hungary’s Economic Performance As Fitch Ratings Affirsm Country’s Stable Outlook
Tamás Székely 2017.05.15.
Executive directors of the International Monetary Fund (IMF) have praised Hungary for its continued strong economic performance but noted that the still high external and public debt levels call for rebalancing the policy mix and advancing structural reforms, in a statement issued on Friday.
The IMF encourages the authorities to pursue growth-friendly consolidation for faster deficit and debt reduction. Priority should be given to enhancing the quality of expenditure and composition of revenue while a gradual reduction in the elevated wage bill could be part of a comprehensive administrative reform to rationalize and better target subsidies. In its statement, the IMF welcomed an improvement in tax compliance and encouraged action to further improve revenue by reducing exemptions and the number of items subject to preferential VAT rates. The directors supported the current monetary policy stance, but highlighted the need to monitor inflationary pressures. With the economy and the banking sector improving and new lending resuming, the usual monetary policy transmission mechanisms are likely to be restored.
The IMF projects 2.9% GDP growth for this year and 3% growth for next year in Hungary. Private consumption could rise by 2% and 1.9%, respectively, and average inflation could be at 2.5% then 3.2%. The IMF’s projections are under the government’s forecasts for GDP growth of 4.1% in 2017 and 4.3% next year. In a statement, the economy ministry welcomed the IMF report and noted the IMF’s “appreciation of the Hungarian economy’s high performance now unbroken for several years” supported by a progrowth economic policy, efficient use of EU funds and a good external environment.
Meanwhile ratings agency Fitch affirmed Hungary’s sovereign rating at ‘BBB- ’, just over the investment grade threshold, in a scheduled review on Friday. The outlook for the rating is ‘stable’. “Hungary’s ‘BBB-’ ratings balance its high level of GDP per capita, strong governance indicators and European Union membership against a track record of unorthodox economic policy and high government and external debts,” Fitch said. However, it acknowledged that “a narrower government deficit and strong current account surpluses in recent years have allowed a decline in government and net external debt”.
Reacting to the review, the economy ministry said all of the big three credit ratings agencies recommend Hungary to investors, which it said demonstrated that the economy was continually strengthening. The ministry said in a statement that Fitch, too, projects accelerating economic growth and expansion supported by increased consumption thanks to the continued decrease in unemployment and higher wages. The ratings agency has acknowledged that economic growth does not involve higher indebtedness for Hungary, the ministry added. Assessments by markets generally precede credit ratings agencies’ decisions. Since the markets are currently more positive about Hungary’s economy than the agencies, it is likely that agency ratings will also further improve in the future, the ministry said.