“IMF Survey online: Describe the headwinds Hungary is leaning against.
Rosenberg: Much like the rest of Europe, Hungary faces the difficult task of addressing large debt burdens in an increasingly difficult growth environment. At the same time, traditional economic options such as loosening fiscal or monetary policy are more constrained than in many other countries in the region.
Because Hungary is a small open economy, it is very exposed to what happens in Europe and emerging markets world wide through trade and financial channels. Hungary has one of the highest export-to-GDP ratios in the region, and is strongly integrated with the German economy, which has been a plus in the last two years. But growth in the euro zone is predicted to slow down and that will affect Hungary as well, especially since exports have been the only source of growth since the crisis.
Equally important is financial integration. Hungary’s public sector is highly dependent on foreign financing. Almost two-thirds of Hungary’s public sector debt, which stands at about 80 percent of GDP, is held by foreigners, both foreign currency-denominated debt and domestic currency-denominated debt.
Similarly, the financial system depends heavily on foreign funding. Those investors, who roll over their exposures to the tune of €35–40 billion annually, are at times concerned by the policies pursued in Hungary. They are also, of course, also highly influenced by what happens in financial markets elsewhere.
In this difficult external environment, a key challenge is to support growth. As I said, external demand is weakening, but at the same time domestic consumption and investment have been extremely weak. There are many headwinds here: low real wage growth, rising debt service, unemployment, a credit crunch. Importantly, confidence has suffered in a policy environment that is perceived by many investors and consumers as unpredictable and discriminatory.
Unfortunately, there is no easy way to jumpstart growth in the short run. Fiscal stimulus is not an option for Hungary. The budget deficit needs to be reduced to ensure that debt remains sustainable, financing needs are contained, and European Union deficit targets are met. Lowering the central banks’ interest rate is not an option either, as this would lead to a weaker exchange rate and increase the debt burden of both the public and private sector, which are heavily indebted in foreign currency.”
Source: IMF Survey online
Last Updated on Thursday, 26 January 2012 07:04