EC says Hungary’s public finances continue to improve

November 10, 2015

economics

The European Commission has released its autumn 2015 economic forecast for Hungary, whose rate of economic growth is expected to slow down through 2016.  The report warns that Hungary’s industrial exports may be affected by the Volkswagen diesel engine crisis and China’s economic slowdown.

“Hungary’s economy grew by 3.7% in 2014 but real GDP growth in 2015 and 2016 is expected to slow to a more sustainable 2.9% and 2.2% respectively, as the boost from previously supportive factors, such as EU funds, loses strength,” the Commission says. Growth in 2017, however, should rebound as investment picks up. Hungary’s public finances are expected to continue improving.

Moody’s, a bond rating service, recently affirmed Hungary’s government bonds as Ba1, or “junk”, but changed the outlook from stable to positive. Moody’s has also said it would consider upgrading Hungary’s rating if convinced that “economic policy-making is more stable than in the past, in turn supporting sustained economic growth, fiscal consolidation and a further reduction of external vulnerabilities”.

The European Commission says the absorption of EU funds is pretty much the only thing driving economic growth in Hungary. EU funds “helped propel Hungary’s growth 11.2 percent in 2014”.

“Net exports, which are rising both because of higher exports linked to new investments in the automotive sector and because of lower imports stemming from the decline in EU funds, are also expected to positively contribute to GDP growth. The current account surplus is expected to increase further throughout the forecast horizon, in line with the widening of the trade surplus,” the Commission writes.

Net exports, however, may be hampered by an escalation of the Volkswagen crisis, affecting Hungary’s productivity in the longer run. The economic slowdown in China may also have an adverse effect on Hungary.

“Hungary’s agricultural sector so far in 2015 contributes negatively to growth and this could be a negative risk for the second half of 2015.”

The Commission thinks that Hungary may lose money as the country’s net cost of EU-funded projects might end up having a negative outcome pending financial corrections. It says revenues from Hungary’s land sales will help the country’s budget.

“The net cost of EU-funded projects could turn out to be higher than planned in 2015 and 2016 with a negative outcome of pending financial corrections. In addition, the tight operating budgets for healthcare and education sectors carry significant implementation risks. On the positive side, the receipts from land sales could well exceed the budgeted amount for 2016, and some revenues might be realised this year.”

The forecast touches on the economic impact of asylum seekers in Hungary, and says “the arrival of asylum seekers does not fundamentally affect the country’s macroeconomic outlook”.