Economy 10 May 2021, 2:30pm

"If we want to overtake on the bend, we have to step on the gas harder" - Hungary's Finance Minister

Portfolio

Hungary needs an assisting, stimulating, and supportive fiscal policy up to 2023, stressed Finance Minister Mihály Varga in an interview with Portfolio. 2022 will be a year of restarting the economy therefore the reduction of the budget deficit will be slower than what the Fiscal Council would see advisable, he added. The ministry has not identified problems that would require measures in 2022 to cool off an overheated economy, he said, adding that the 2019 growth level would be reached in the second quarter of next year. In the interview we also addressed the future of the loan repayment moratorium, the longevity of fiscal rules, the government’s decision in respect of the EU’s Recovery and Resilience Fund (RRF) and chances of Hungary adopting the euro.

Varga said the budget “weathered the storm better and the economy proved to be more resilient” during the coronavirus pandemic than in the 2008 financial crisis. He noted that the rate of the economic downturn had surprised everyone and that is why resources much greater than what had been planned in the budget had been required.

When asked if this was how the general government deficit ended up at 8% of GDP versus the original goal of 1%, Varga once again highlighted the economic impact of the pandemic.

I agree with those that said the downturn was reminiscent of the 1929 economic crisis

, said Varga.

Asked about priorities, and if there was some fiscal elbowroom it would be used to lower public debt or to stimulate the economy more, Varga replied:

We are aiming for balance, but 2022 will still be a year of a moderate deficit reduction.

Responding to criticism that Hungary – exploiting that the EU allowed member states to post budget deficits in excess of 3% of GDP – focused on measures supporting investments and creating the foundation of long-term growth, instead of U.S.-type helicopter money or “decisions overemphasising Kurzarbeit”, Varga said:

The answer is simple: Besides economic protection the emphasis needs to be on measures improving competitiveness that have a long-term impact. The next two years could prove us right.

Citing a recent report by the German-Hungarian Chamber of Industry and Commerce (DUIHK), Varga said the share of German businesses saying they had made the right choice when opting for Hungary has never been this high.

“The priority is more investments, capacity expansion and the creation of jobs. As regards the latter, we have returned rapidly to the 2019 situation: we’re close to full employment, there’s increasingly a shortage of skilled labour, and without training programmes and the transformation of the system we no longer have large labour reserves.”

Asked about the current dispute between the government and the Fiscal Council in respect of the 2022 budget, Varga said “the council thinks that there would be a greater room for the reduction of the deficit

while we say we need an assisting, stimulating and supportive fiscal approach up to 2023.

He added that both fiscal and monetary policies should be stimulating to make sure disappearing capacities and jobs are replaced quickly.

We agree about the reduction of [public] debt, but 2022 will still be a year of reboot therefore the reduction of the shortfall is slower. This is where the government and the FC disagrees.

The Council argues that with economic growth of over 5.0% in 2022 the 3% deficit target could be reached sooner, while the cabinet claims Hungary will be in the middle of a three-year process next year, as the economic consequences of the crisis that started in 2020 cannot be remedied in one or two years.

I don’t find it realistic that 2022 should be about austerity measures.

Compared to its end-December 2020 projections, the Finance Ministry has kept raising its deficit estimates by a full percentage point for the next three to four years and expects a high shortfall of 3.0% even for 2024.

When asked about the key events behinds this loosening the minister replied that the unexpected resurgence of COVID-19 cases made the government rethink the possible scenarios, on the belief that it would take longer for capacities to recover. Varga said he hoped the budget would need to be revised again on the back of a sharp economic rebound.

If we want to overtake on the bend, we have to step on the gas harder.

Varga said the ministry is not concerned that the economy will be overheated, “but we are constantly monitoring inflation, the forint exchange rate, the deficit and debt indices.”

We have not identified any problem that would require cooling the economy against overheating and carrying out a sharper spending reduction already in 2022.

Varga projected at Portfolio’s Budapest Economic Forum conference last year that the Hungarian economy would be free of restrictions implemented in relation to the coronavirus pandemic in the second quarter of 2021. When asked about the risks and the current expectations, Varga replied that

We are opening and so are the restricted sectors. We expect an extremely strong rebound in the second quarter.

Quantifying his expectations, Varga said there will be an annual growth of 12 to 14% in Q2 and GDP growth will exceed 4.0% this year. The pre-crisis (2019) level is expected to be reached by the second quarter of 2022, he added.

Asked about the future of the repayment moratorium that ends on 30 June, Varga said there are talks with the Banking Association and the central bank (MNB), adding that there’s still time to take a decision in this respect. He stressed that banks would need to remain able to lend and meet all borrowing demand.

When asked about the debt rule, Varga reminded that the debt-to-GDP ratio would be lowered from 80.3% at the end of last year to 79.9% this year and to 79.3% by end-2022. When he was confronted with the fact that this is not exactly a robust reduction of debt, and that the debt rule is the only effective curb that prevents the budget deficit from running away, the minister replied that the debt rule would remain in effect also in 2022.

At the end of last month Hungary decided at the last minute not to take any loans under the EU's Recovery and Resilience Facility (RRF). Hungary will avail itself of the full amount of grant money available to the country in the framework of the RRF, but would draw the RRF credit line only for project-based financing on a case-by-case basis, cabinet chief Gergely Gulyás said in a weekly press briefing on 29 April.

Under the RRF, Hungary could receive HUF 2.5 trillion (€ 6.9 bn) in grants and HUF 3.4 trillion (€ 9.4 bn) in loans.

Varga said it was a “huge dilemma” for the cabinet to contribute to this package and if it should avail either of the grant or the loan.

The RRF loan may be requested at any time before the end of 2023, and the cabinet will consider borrowing for specific defined projects if necessary.

Varga reminded that so far only nine member states have indicated their need for the RRF loan and only three of them would draw the entire amount available.

When we pointed out to Varga that this would not be an additional loan, rather than an alternative financing of existing projects, not to mention that this would be the cheapest financing for a host of state developments in the pipeline, Varga replied that “this loan needs to be repaid, even if the repayment deadline is put off. Secondly,

this loan is tied to conditions by the European Union.

He mentioned as examples that the EU refused a request for RRF funding for irrigation developments in agriculture, and a similar request was rejected in relation to the abolishment of gratuity payments in health care. This funding is also unavailable for road constructions, he said. There are a lot restricting conditions that do not make it optimal for the economy to use certain grants for other purposes, he said. Varga also noted that the pricings of the RRF loan facility and that of Hungary’s 2.5 billion Eurobond issuance last year are not that different.

When asked about his ministry’s stance on euro adoption, Varga replied that

the adoption of the euro is not a condition but a consequence.

To become more competitive Hungary does not need the euro, it needs to be more competitive to be able to join the euro area, he said.

being a member of the euro area did not prevent any euro area economy from a serious financial crisis.

Hungary is a lot closer to adopting the euro now than it was in the years after the 2008 crisis, added the minister.

I’d like to make sure we reach a situation via the improvement of our competitiveness when it is no longer a question if Hungary is ready for euro adoption or not. I don’t think we should put the cart before the horse.