Volatility or Stability: Macroeconomic prospects for 2004
Roundtable organised jointly by ICEG European Center (ICEG EC) and the British Chamber of Commerce in Hungary (BCCH)
Date: Thursday, 9 October 2003, 18:00.
Venue: Old Banking Hall, British Embassy (1051 Budapest, Harmincad utca 6.)Panelists:
- György Barcza, Chief Analyst of Central-Europe, ING Bank
- Péter Duronelly, Chief Investment Officer, Budapest Investment Management Company
- Pál Gáspár, Regional Director, ICEG European Center
- István Hamecz, Managing Director, National Bank of Hungary
- Károly Schweininger, Associate Director, Euro-Phoenix Financial Advisors Ltd.The roundtable was led by Róbert Láng, Chief Editor of Portfolio.hu Internet Economic Magazine.
The list of participants is available here.
Summary of the roundtableThe roundtable discussion centered around 6 major issues: fiscal policy, public sector borrowing requirements, public debt, FDI inflows, competitiveness and inflation.
The first set of questions was related to the state of public finances in Hungary. As the Finance Minister submitted the draft budget to the Parliament recently the first question was related to the role of this budget adjustment, namely whether the new budget contained the much needed adjustment measures to reduce the deficit, and whether the Government made any headway in structural reforms.
The general conclusion of the panelists was that while the proposed budget contains elements of adjustment the proposed measures and the extent of this adjustment seems to be less than needed. While some panelists noted the importance of further cuts in the budget deficit , others warned that the actual outcome could exceed the planned levels due to the worse than expected starting position and also due to the exogenous shocks the economy was facing. Several panelists noted that while budget adjustment is under way, this is carried out primarily through the simultaneous increase of revenues and expenditures, which could be counterproductive with respect of increasing the competitiveness of Hungarian economy. Finally, there seemed to be a general consensus that the next years’ budget does not contain the much needed structural reforms, even the first elements of the reform are missing, which would be indispensable to improve fiscal balances.
Another question related to the fiscal position was linked to the possible crowding out effect of fiscal deficit. As net financing position of the general government was close to 10% of GDP last year and deficit is expected to exceed 5% of GDP this year, interest rates have significantly increased recently and the question was related to the existence of the crowding out phenomenon. The general conclusion from the panelist was that crowding out was not an issue in the Hungarian economy due its openness and the financing structure of private sector investments. As significant share of company loans is dominated in foreign currency and borrowed directly from foreign banks or as intercompany loans from parent companies, the high public sector borrowing requirements do not create significant crowding out effects in the economy.
Another question related to deficit financing was related to the role played by foreigners in satisfying public sector borrowing requirements. The question asked from the panelists was whether the dominance of foreigners in financing implies any significant risks in the medium or long term. The position of the panelists was close to the one presented by Mr. Duronelly, who emphasized that the fact that some big institutional investors finance public sector borrowing requirements could be a source of both stability and concern. It is a source of stability when the investors are convinced about the consistency of economic policies, when they believe in the sustainability of fiscal policy. Their coordination measures could reduce the volatility of markets and could serve as a stabilizing device. But if they see that policies are unsustainable and /or inconsistent then self-fulfilling expectations about the policy framework, strength of the currency may emerge and accumulate which could easily lead to substantial weakening of the currency and exit from the domestic fixed income markets.
Another symptom of growing fiscal problems in Hungary is the increase of public debt, which amounts to 57% of GDP, which is very close to the 60% threshold level set in the Maastricht Treaty. The question and the discussion was related to the possibility of the debt/GDP ratio to exceed the Maastricht limit and the consequences of that. The general conclusion of the panelists was that the public debt to GDP ratio could exceed the threshold as both the primary balance was in deficit and the relationship between real interest rates on accumulated debt and real economic growth was unfavorable. Moreover, several structural and demographic changes warrant further corrections in order to avoid an explosive debt trap.
The second set of questions was related to the competitiveness and loss of relative attractiveness to FDI of Hungary compared to other neighboring countries. As large multinational companies have chosen Slovakia and the Czech Republic for deployment of new factories, could this be regarded as a sign that the Hungarian economy was losing its attractiveness for foreign capital? The general consensus was that the approach should be balanced. On the one hand, the differences between the amount of recent foreign direct investment inflows between Hungary and some other Central European economies are mainly due to the differences in statistical methodology and timing of privatization policies. While all other economies account the reinvested earning as a part of FDI , in Hungary this will be done only from 1 January 2004, which will simultaneously increase current account deficit and the amount of FDI inflow and stock. Moreover, Czech Republic and Slovakia, and to lesser extent Poland have recently completed the privatization of those enterprises, public utilities and banks, the sale of which have already occurred in Hungary in the second half of the 1990s.
While these differences should be accounted for, the attractiveness was also reduced due to the loss of competitive advantages as compared to other accession countries. The major reason behind this loss was the unsustainable increase of wages, which dramatically exceeded the increase of labor productivity. Panelists also noted that besides partial measures of competitiveness more general ones, including the insufficient supply of physical and human capital, the low mobility of the labor force, the inappropriate education system all cause additional problems for the competitiveness and attractiveness of the economy.
A final question was related to the evolution of inflation. The question was related to the most significant factors influencing price developments in 2004, and whether it was possible to push down the inflation rate below 3% by 2006 . The consensus was that inflation is a very serious phenomenon, that the current rates could not stay for long, as they need either to decline or can easily accelerate upwards to moderate levels. Next year inflation has several supply side factors, there can be second round effects from tax increases, from their effect on age increases, which will certainly push prices upwards. The consensus was that it would be extremely difficult to reduce prices below the Maastricht reference value by 2006.