• Fiscal discipline has been improved. The government has made good progress in bringing headline public deficits back within the limits mandated under European treaties. 
  • Overly generous social benefits have been capped. These steps have been taken along with much-needed changes to entitlements in the state pension system. 
  • The authorities have reached an agreement with the banking industry on restructuring foreign currency-denominated mortgages. This is a significant step in finding a balanced solution to this long-running problem, though the scheme that allowed borrowers to pre-pay outstanding foreign currency mortgages at discounted exchange rates led to a considerable capital loss in the banking system. 


  • A predictable tax and regulatory regime and revived bank lending could enable corporate capital formation. Problems in this long-running weakness have increased in the past year and constitute a key concern for long-term growth prospects. 
  • Measures are needed to increase employment and participation rates. However, it will be important not to raise the administrative burden on private enterprises or interfere in private employment contracts. 
  • A speedy conclusion of the discussions on the IMF/EU programme would help to rebuild the confidence of investors. This is important given the persistent vulnerability from external and domestic debt, and could stabilise expectations about financial regulation. A future programme would need to be backed up with comprehensive structural reforms that would limit quasi-fiscal deficits, in particular in the transport sector.


Hungary’s growth last year remained well below the regional average and the economy has now re-entered a mild recession. Growth of 1.6 per cent in 2011 benefited from a good harvest and export-led industrial production growth until late in the year. Domestic demand remains among the weakest of all countries with household consumption stagnant over 2011 and well below pre-crisis levels. The economy re-entered a recession with two successive quarters of contraction in the first half of 2012. A particular concern is the continued erosion in the private sector capital stock. The ratio of fixed investment to GDP remains the lowest of all central European countries and, unlike in other countries, declined again in 2011. 

The government made a genuine attempt to contain public debt but tax policies remain erratic. The budget recorded a sizeable surplus of over 4 per cent of GDP last year following the effective nationalisation of second pillar pension funds (accounting for about 9 per cent of GDP). Still, there has been a large deterioration in the underlying structural position. The so-called “crisis taxes” on a number of sectors, such as telecommunications, energy, retail and financial services have been widely criticised as discriminatory and punitive, and in the case of the telecommunications levy are before the European Court of Justice. Having failed to meet earlier EU demands for a fiscal correction, Hungary was briefly threatened with a suspension of about €500 million in EU cohesion funds. In its latest EU Convergence Programme in April 2012 the government presented consolidation measures of about 0.5 per cent of GDP for both this year and next. These measures would also include a new tax on the telecommunications sector and, from next year, a financial transaction tax (on top of the existing balance sheet tax). These proposals are encouraging for fiscal sustainability, though the composition of taxes and the erratic manner in which taxes are designed remain a problem for the investment climate. 

Monetary policy is restrictive, though some easing was initiated in August 2012. The restrictive monetary policy stance of the NBH has initially been motivated by high country risk premia and uncertain prospects for external financing. First reductions from the policy rate of 7 per cent were nevertheless undertaken in August and September 2012 and hinted at growing divisions within the monetary policy council. The central bank implemented a number of measures to stimulate stagnant lending in the economy, through broader collateral eligibility for central bank loans, a preferential two-year lending facility and a proposal to allow universal banks to issue mortgage bonds with support from a central bank mortgage bond purchase programme. Meanwhile, credit to the private sector contracted by 0.8 per cent of GDP in 2011 and showed a further contraction in the first half of 2012.

With the highest public debt ratio of all new EU member states, Hungary faces substantial refinancing requirements over the coming years. A second recession is likely to extend into 2013. The downgrade of Hungary’s sovereign rating into speculative grade by the three main ratings agencies in late 2011 put in doubt the country’s capacity to access capital markets. The government therefore requested a second financial support programme from the European Union/IMF at that time, and formal negotiations began in July 2012. 


The government has recognised the need to address growing competitiveness concerns and revive corporate investment. Hungary’s ranking in the 2012 World Bank’s Doing Business indicators declined in 2011. Unit labour costs have fallen since the financial crisis, though largely as a result of stagnant domestic wages. Through an extensive programme on the business environment adopted in November 2011, the government seeks to address the costs of doing business, setting out a catalogue of over 100 measures, many aimed at the micro, small and medium-sized enterprises (MSME) sector. 

The government has adopted wide-ranging labour market reforms, though the effects on employment are as yet unclear, and the costs to private sector employers significant. Hungarian unemployment has not declined over the past year (remaining at 11 per cent according to Eurostat), with the youth unemployment rate well above the EU average. The participation rate in the labour force, while slightly increased, remains the second lowest in the EU at just under 63 per cent, well below the EU target of 75 per cent. Following a series of measures throughout 2011 the government announced a package of measures in July 2012 that included tax incentives for employers taking on workers who are marginalised due to age or lack of skills. Active labour market policies, along with these tax incentives, could in principle address the damaging effects of long-term unemployment, though there remain a number of rigidities in the social benefits system that have perpetuated the low participation rate in the Hungarian labour market. Also, a simplification of taxes for small and medium-sized enterprises (SMEs), through a lump sum payment settling a number of taxes and social security payments, is envisaged. At the same time, a reform of the personal income tax introduced in 2011, which included mandatory compensation by employers to low-wage earners, has been criticised as highly intrusive and potentially damaging to overall employment. 

Financial sector taxation compounds deleveraging pressures. The financial sector as a whole has ample capital coverage, though it turned loss-making in 2011. A financial sector levy remains in place as part of the government’s 2010 package of crisis taxes. The tax is the highest such tax in Europe (at about 0.8 per cent of the 2010 balance sheets of each financial institution, including non-bank institutions), though it is to be halved in 2013, and will then be revised in line with a possible European framework for such taxes. 

Further progress was made on the long-standing issue of foreign currency mortgages. Two measures on this issue were adopted in May and September 2011 (when early pre-payment at preferential exchange rates was permitted). This prompted several foreign banks to undertake substantial write-downs of their portfolios in Hungary and forced recapitalisations by these bank groups. The government found some reconciliation with the industry in an agreement in December 2011. This agreement allowed those banks which had booked losses through the early repayment of mortgages at preferential exchange rates (made possible through the regulation of September 2011) to credit 30 per cent of such losses against the special financial sector levy. The December agreement led to the restructuring of delinquent mortgages and the shielding of performing mortgage borrowers from excessive exchange rate fluctuations. On both aspects some burden-sharing between banks and the government was agreed. 

Stability in financial sector regulation and taxation will be supportive of revived lending. The December 2011 agreement between the government and the banking industry also foresaw regular consultation on the role of the banking industry in stimulating growth, and a commitment not to impose a bank tax in 2014 higher than that in effect elsewhere in the European Union. Nevertheless, in July 2012 parliament adopted a tax that is to be levied on money transfers at a rate of 0.1 per cent up to a certain threshold per transaction, and on cash withdrawals (at 0.3 per cent), yielding an expected revenue of about 0.5 per cent of GDP in 2013 (earlier plans to also tax transactions by the central bank were dropped). While similar taxes have been prevalent in other emerging markets, transaction taxes are rare in the European Union, only used for securities, and so far there is no EU-wide transactions tax. While the government expects that this tax will be primarily borne by end-users of financial services, industry participants recalled the December 2011 agreement as specifically ruling out such additional taxes. An opinion on this tax by the ECB highlighted the risks to financial market liquidity and spillover effects in diverting financial activity into neighbouring countries.


icon-pdfOther Reports

Annual Report 2012
pdf English
pdf French
pdf German
pdf Russian

Financial Report 2012
pdf English
pdf French
pdf German
pdf Russian

pdf Donor Report 2013

pdf Sustainability Report 2012