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Regional workshopVilnius 9-10 June 2009
The characteristics of the economic crisis in Hungary
Dr. Imre Szabo LIGA
Factors of vulnerability of CEE economies • High external financing need • Current account deficits are high (in certain countries this was
accompanied by high external debt levels)
• Macroeconomic imbalances, chronic dependence on external financing and a high level of economic and trade integration with the EU15
• Western banks made extraordinary profits in the region and were expecting continued expansion in the region (over 80% of the banks of Central and Eastern European countries are affiliates of Western banks)
• Household debt in several new member states largely denominated in foreign exchange
• Dependent position (also appears on the micro-level, as a large part of CEE economies are dominated by foreign multinational enterprises with strategic decisions made at the Western company headquarters)
• Highly dependence on external demand.
Financing risks•Debt risk•Currency risk•Social risk
Credibility risks•Financial risk•Investor confidence risk•Political and social risk
Growth risks •Producing risk•Job risk
Labour market risks•Employment risk•Unemployment risk•Social risk•Budget risk
Challenges facing Hungary
Exchange rates vs. Euro I.
Lack of credibility played a decisive role in the financial rescue package
$8.1 billion
$1.3 billion
$15.7 billion
EU
IMFWB
Source: Ministry of Finance in Hungary
Rates of the long government bonds(from 2007 till 2009)
Source: Eurostat
Hungary’s general government debt in relation to GDP 1996-2009
73,7
6462 61,1
54,352,1
55,758 59,4
61,765,6 65,8
72
83
0
10
20
30
40
50
60
70
80
90
1996. 1997. 1998. 1999. 2000. 2001. 2002. 2003. 2004. 2005. 2006. 2007. 2008. 2009
-2
-1
0
1
2
3
4
5
6
95:Q
195
:Q3
96:Q
196
:Q3
97:Q
197
:Q3
98:Q
198
:Q3
99:Q
199
:Q3
00:Q
100
:Q3
01:Q
101
:Q3
02:Q
102
:Q3
03:Q
103
:Q3
04:Q
104
:Q3
05:Q
105
:Q3
06:Q
106
:Q3
07:Q
107
:Q3
08:Q
1
-2
-1
0
1
2
3
4
5
6
Output gap Actual growth rate Potential growth rate
The growth rate of the Hungarian economy has sharply slowed down: 10 year low
Source: HungarianNational Bank
GDP
1,1
6
6
6,2
6,6
6,3
6,8
8,9
10,2
10,4
Hungary
Romania
Czech Republic
Bulgaria
Estonia
Poland
Slovenia
Lithuania
Latvia
Slovakia
Source: Eurostat
The economic growth rate of Hungary and some of its competitors in 2007
Source: Eurostat
55,256,5
78,4
0
10
20
30
40
50
60
70
80
Mal
ta
Hu
ng
ary
Po
lan
d
Ital
y
Ro
man
ia
Slo
vak
ia
Bel
giu
m
Gre
ece
Bu
lgar
ia
Lit
hu
ania
Lu
xem
bo
urg
Sp
ain
Fra
nce
Cze
ch R
epu
bli
c
Irel
and
Slo
ven
ia
Po
rtu
gal
Lat
via
Est
on
ia
Ger
man
y
Cy
pru
s
Un
ited
Kin
gd
om
Fin
lan
d
Au
stri
a
Sw
eden
Net
her
lan
ds
Den
mar
k
EU-27 average: 66%:
Employment rate in the European Union, 2nd quarter of 2008 (15-64)
Source: OECD database
Country Total tax wedge Personal income tax
Social security contributions for
employee
Social security contributions for
employer
Belgium 55,5 21,5 10,7 23,3
Hungary 54,5 16,1 12,6 25,7
Germany 52,2 18,4 17,4 16,4
France 49,2 9,9 9,6 29,7
Austria 48,5 12 14 22,5
Italy 45,9 14,4 7,2 24,3
Sweden 45,4 15,6 5,3 24,5
Netherlands 44 12,1 18,6 13,3
Finland 43,7 18,9 5,4 19,4
Czech Republic 42,9 7,7 9,3 25,9
Poland 42,8 5,4 20,4 17
Greece 42,3 7,9 12,5 21,9
Denmark 41,3 30,2 10,6 0,5
Spain 38,9 10,8 4,9 23,2
Slovakia 38,5 7,1 10,6 20,8
Luxembourg 37,5 13 12,6 11,9
Portugal 37,4 9,3 8,9 19,2
United Kingdom 34,1 16 8,4 9,7
Ireland 22,3 7,9 4,7 9,7
Tax wedge in certain group of countries and in Hungary
30
35
40
45
50
55
60
67% of average wage average wage 133% of average wage 167% of average wage
OECD countries Visegrad countries EU-15
Hungary before consolidation Hungary after consolidation
The average tax burden in Hungary The average tax burden in Hungary waswas the second highest in the European Union (2007)the second highest in the European Union (2007)
Out of HUF 100, the state gets HUF 54.5, the employee gets HUF 45.5
Due to the 2006 autumn austerity measures the tax burden of employees
increased by 3.5%
Ratings of the long-term debt of Hungary
Moody’s: Moody’s: 09/12/2002 A1 12/22/2006 A2 11/07/2008 A3-
Standard and Poor’s:Standard and Poor’s: 12/19/2000 A-06/15/2006 BBB+10/15/2008 BBB+ with negative expectations
Fitch Ratings:Fitch Ratings: 11/30/2000 A-12/06/2005 BBB+11/10/2008 BBB
Share of foreign currency loans in total credit to
0
20
40
60
80
100
2005 2006 2007 2008
Corporates Households Other loans
The debt of the household sector
Hungary is highly vulnerable
-12
-10
-8
-6
-4
-2
0
2
4
6
I. II. III. IV. I. II. III. IV. I. II. III. IV. I. II. III. IV. I. II. III. IV. I. II.
-12
-10
-8
-6
-4
-2
0
2
4
6
Corporate sector External financing requirement
General government Household sector Source: HungarianNational Bank
2003 2004 2005 2006 2007 2008
Net financing capacity of the main sectors and external equilibrium as a percentage of GDP
Exchange rates vs. Euro II.
260
270
280
290
300
310
320
2008.12.18 2009.01.07 2009.01.27 2009.02.16 2009.03.08 2009.03.28 2009.04.17 2009.05.07 2009.05.27 2009.06.16
IV. Hitelességi kockázatIV. Hitelességi kockázat
Kamat mi és régió, Kamat mi és régió, állampapírhozamokállampapírhozamok
Hungary pays a substantial interest rate premium as a consequence of losing its credibility
(The central interest rates of the Visegrad countries)
Hungarian Polish Czech SlovakSource: Hungarian
National Bank
(5-year interest rate differences in relation to the Euro in 5 years in the Visegrad countries, 2006-2008)
The proximity of the Euro-zone decreases interest premium
Source: HungarianNational Bank
basis point basis point
Hungarian forint
Polish zloty Czech crown Slovak crown
1,1
6
6
6,2
6,6
6,3
6,8
8,9
10,2
10,4
Hungary
Romania
Czech Republic
Bulgaria
Estonia
Poland
Slovenia
Lithuania
Latvia
Slovakia
Source: Eurostat
The economic growth rate of Hungary and some of its competitors in 2007
Changes in employment and unemployment,15-64, 2006 -2008
-80
-60
-40
-20
0
20
40
60
-80
-60
-40
-20
0
20
40
60
employedunemployed
Tho
usan
d pe
rson
s
2006 2007 2008I. II. III. IV. I. II. III. IV. I. II. III.
Source: Central Statistics Office
The former PM Mr.Gyurcsány resigns
The new PM Mr.Bajnai attests
The volume index of the industry and processing industry
LIGA Crisis Conference (debate)
LIGA demonstration of Labour Day on 1 May
