Economic performance of GermanyCentral and Eastern European countries closing the gap The Hungarian Viewpoint

PROFESOR ÁRPÁD KOVÁCSUNIVERSITY OF SZEGED

FISCAL COUNCILHUNGARIAN ECONOMISTS ASSOCIATION

2013 spring

1. Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments

2. Broader outlook: Business contexts home and abroad, the pull of the german economy

3. Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries

Table of contents

1. Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments

2. Broader outlook: Business contexts home and abroad, the pull of the german economy

3. Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries.

Table of contents

According to the European Council, the CEE countries look forward to a better year

Source: European Commission (EC), *: EC Winter 2013 macroeconomic forecast (February 2013); annual average changes, %; except unemployment (%)

Growth can become stronger

Inflation rates can sink But unemployment rates can stay relatively high

Exportdynamics can speed up significantly

Since the autumn forecast of the EU, growth outlooks have worsened, so the fiscal plans look less bright as well

Source: European Commission (EC), Autumn 2012 forecast – November 2012; Winter 2013 forecast – February 2013

Change in growth forecasts (year/year, %)

Fiscal forecasts (as a % of GDP)

1,601,51

1,073,244,00

3,88

2,12 3,926,44

6,65

3,44

13,33

1,775,33

4,54

2,01

1,301,56

2,101,43

1,604,67

5,347,25

Source: EUROSTAT

Yields of long term government bonds in the EU27 countries, 2012 december, %Yields of long term government bonds in the EU27 countries, 2012 december, %

A welcome sight, that due to the low international rates, investors are looking for government bonds with relatively high rates…

… thus the CDS spreads could decrease. It also warns us that the attention of the investors can quickly change

Source: ÁKK, REUTERS

Yields of 10 year government bonds (%)Yields of 10 year government bonds (%)CDS spreads (basepoint)CDS spreads (basepoint)

1. Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments

2. Broader outlook: Business contexts home and abroad, the pull of the german economy

3. Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries

Table of contents

Foreign Trade between Hungary and Germany, Austria; investments from said countries to Hungary

Source: MNB, KSH

Hungary’s foreign trade with Germany and Austria (EUR bn) (bázispont)Hungary’s foreign trade with Germany and Austria (EUR bn) (bázispont)

Foreign direct investment in Hungary (EUR bn)Foreign direct investment in Hungary (EUR bn)

Export ranking (2012):

Germany – 1stRomania – 2ndSlovakia – 3rdAustria – 4th

Import ranking (2012):

Germany – 1stRussia – 2ndAustria – 3rd

Invesments ranking (2012):

Germany – 1stThe Netherlands – 2ndAustria – 3rd

Import from Germany in the EU10 countries, % of total German Import

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

HUNGARY BULGARIA CZECHREPUBLIC(CS->1992)

ESTONIA LITHUANIA LATVIA POLAND ROMANIA SLOVENIA SLOVAKIA

2008

2009

2010

2011

2012

Source:EUROSTAT

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

HUNGARY BULGARIA CZECHREPUBLIC(CS->1992)

ESTONIA LITHUANIA LATVIA POLAND ROMANIA SLOVENIA SLOVAKIA

Export to Germany from the EU10 countries, % of total German Export

2008

2009

2010

2011

2012

Source:EUROSTAT

Source:Bundesbank

FDI, % of German FDI to EU10 countries

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

30,00%

35,00%

Slovakia Slovenia Poland Hungary Romania Bulgaria Estonia Latvia Lithuania CzechRepublic

2007

2008

2009

2010

Forrás: Focus Economics, CEE :V4+Romania+Bulgary

Expected economic growth (Focus Economics, 2013. february; %)Expected economic growth (Focus Economics, 2013. february; %)

The main issue is that due to structural problems, Hungary is still considered the last of its peers in the region

Investments as a percent of GDPInvestments as a percent of GDP

Source: Eurostat, CEE : V4+Romania+Bulgary

Structural issues (1): investment rates are the lowest in the region

Source: National Banks, CEE=V4+Romania+Bulgary

Bank sector’s lending to private sector (seasonally adjusted, as % of GDP)Bank sector’s lending to private sector (seasonally adjusted, as % of GDP)

Structural issues (2): lending activity is the lowest in Hungary in the region

Source: Eurostat, European Commission Winter 2013 forecast

Structural issue (3): Fiscal expenditures are very high in Hungary, compared to the region

Total expenditures of the consolidated bugdet (as a % of GDP)Total expenditures of the consolidated bugdet (as a % of GDP)

Source: Eurostat, European Commission Winter 2013 forecast

Consolidated debt (as a % of GDP)Consolidated debt (as a % of GDP)

Structural issues (4): Hungary is the only country in its region with a debt level similar to the developed countries, which increases its vulnerability

Naturally, not only structural issues, but specific events and the fiscal policy itself also change how a country is viewed from abroad

Source: REUTERS, CEE avg. is the average of the countries, the individual lines represent the derivation from the average

CDS spreads of the CEE region and the specific positions of the countriesCDS spreads of the CEE region and the specific positions of the countries

Fiscal Balance and Government Debt

0

20

40

60

80

100

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

F

2013

F

Per cent of GDP

-9

-6

-3

0

3

6

Per cent of GDP

Magán-nyugdíjpénztári reform nélkül Cyclically adjusted structural primary balance

Excluding Private Pension Fund Effect

Source: Simor András: Stabilitás, kiszámíthatóság, bizalom, Hitelintézeti Szemle, 2013/12-1.

Corporate lending in the region

75

80

85

90

95

100

105

110

115

120

2008

. ok

t.no

v.de

c.20

09.

jan.

feb.

már

c.áp

r.m

áj.

jún.

júl.

aug.

szep

t.ok

t.no

v.de

c.20

10.

jan.

feb.

már

c.áp

r.m

áj.

jún.

júl.

aug.

szep

t.ok

t.no

v.de

c.20

11.

jan.

feb.

már

c.áp

r.m

áj.

jún.

júl.

aug.

szep

t.ok

t.no

v.de

c.20

12.

jan.

feb.

már

c.áp

r.m

áj.

jún.

júl.

aug.

szep

t.ok

t.no

v.de

c.

%

75

80

85

90

95

100

105

110

115

120%

BG PL CZ HU RO SK Baltic states Eurozone

Source: Simor András: Stabilitás, kiszámíthatóság, bizalom, Hitelintézeti Szemle, 2013/12-1.

1. Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments

2. Broader outlook: Business contexts home and abroad, the pull of the german economy

3. Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries

Table of contents

Source: IMD World Competitiveness Yearbook rankings

Competitiveness reflects social performances, governmental efficiency is low in the CEE countries

Competitiveness (place)Competitiveness (place) Governmental efficiency (place)Governmental efficiency (place)

Growth and countercyclical fiscal policy

Source: European Committee, 2012 autumn forecast

Budget balance (as percent of GDP)Budget balance (as percent of GDP) GDP growth (%, year/year)GDP growth (%, year/year)

Potential growth rate currently stagnates or recede. To achive fiscal policy goals, a change in growth patterns is a must

Potential growth (year/year, %)Potential growth (year/year, %)

Source:European Committee, AMECO database

19 April 2023

25

Weaknesses, threads

●Weaknesses Blue collar efficiency increase was lower than

expected Praxis oriented education is on low level, does

not cope with the requirements of the industry Low level mobility for blue collar workers Suppliers have low level IP contribution to

products, R&D capability is missing Low level of networking on supplier level Other means of transport (waterway, air)

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26

Weaknesses, threads

●Threads Entrepreneurial culture of Hungarian owned

companies (mostly SMEs) will not change as requested

Old hierarchies and traditions in education system will not be overcome

Co-operation among companies and institutions will not develop as required

Source: Prof. Dr. László Palkovics: Hungarian example: Challenges in the subcontracting industry (transport) with special attention to the human relation issues

External capabilites: Links to the world economy, conditions and challenges, effects of the regional

environment average strength links, conformity pressures, dependancy on german economy

Foreign dept countries of the region, but especially Hungary, are vulnerable, dependancy on financial markets

Integration conditions conformity commitment, boundariesInternal attributes:

Inherited attributes of real economy unfavorable, dual economy, structurally weak competitiveness, growing lack of skilled labour

Attributes, interests and values of domestic actors controversial values of the population, troubles in market adaptation, profitability and judging possibilites

Social implementation of the governmental management varyingTrust of economic actors With the exception of Poland, Czech Republic and

Slovakia, to a varying degree, but mostly weakDifferentiated positions of multinational companies and domestic suppliers

In financial sector, services investment willingness was damaged, occasional non-neutral sectoral taxes and subsidization

Public finance not stable everywhere, but with losses in growth

A change in growth patterns is hard in most of the CEE countries, as the sweep for fiscal policy steps is narrow and burdened with risks

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28

Seek for break-out opportunities for economic growth (cont’ed)

Employment decreased by 2%

Weak financial position of firms

Slow industrial growth recovery (0,5-1,0 % in 2013)

Low performance of the small and medium-sized enterprises

● Consequently, in parallel with the development of the small and medim sizeed enterprises need for further integration of foreign companies to Hungarian economy.

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29

Important aims of Hungarian economic policy

●Financial and fiscal stability

●Reducing public debt

●To increase the level of labour market participation and employment

●Structural reforms (pension system, public transport, higher education, state and municipal financing etc)

Enhancing stability and predictability, careful and sensitive harmoniaztion and bargaining,

strengthening the ability to attract foreign capital inflows, without it there can be no real improvement in competitiveness, sustainable growth,

improving the friendliness of taxation, ensuring that different sector taxes are consistent with growth interests,

reducing the reflexivity of chosen correction measures, better assessment of spill-over effects,

we need to convince our partners, that our actions are defined not by tactical impulses but with the intention of long-term cooperation

The essential tool to the success of reaching a virtous circle is the restoration of confidence

The condition for success is a strict and strong growth-friendly fiscal policy, because only then can a sustainable decline in the public debt occur

strict fiscal policy aimed at reducing public debt is important because the aging of european societies as well,

pensions and other social transfers must be consistent with the economic performance,

the health and education systems, as well as the public finances have to be cost-effective, as this can contribute greatly to economic

in case of harmonized growth and stability interests the real economy results can compensate the adverse effects of restrictions on the population and on the institutions in the region

THANK YOU FOR YOUR ATTENTION!