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Hungary’s external balance position remained favourable in 2016


Budapest, 6 April 2017 –The external vulnerability of the Hungarian economy continued to decline in 2016. The current account surplus increased to a historic high of nearly 5 per cent of the GDP, while net lending fell due to the temporary drop in EU transfers. However, Hungary’s external savings position remains strong, which in addition to the larger-than-usual net inflow of direct investments supported a considerable decline in external debt ratios in 2016 as well.

Developments in the real economy moved on a dual trend, as the current account surplus continued to increase, while net lending declined. In addition to the trade surplus and the favourable changes in the income balance deficit, the transfer surplus fell temporarily with the closing of the EU’s previous budgetary cycle. Advancing to a historically high level, the goods and services surplus rose to over 10 per cent of GDP, which can be attributed to lower imports due to the decline in public investment, a high services balance, as well as the improvement in the terms of trade, while the export market share of the Hungarian economy continued to grow.

According to financing processes, the lower outflow of funds resulted from the continued significant decline in net external debt amounting to EUR 7 billion, while the net FDI inflow of EUR 3 billion considerably exceeded the previous year’s value. The net external debt of banks and companies also fell in 2016, but unlike in previous years, the net external debt of the government increased, due in part to the decline in EU transfers and in part to the foreign exchange liquidity provided for the forint conversion of foreign currency loans. However, it is important to highlight that – due to maturing foreign currency bonds and the sale of government bonds by non-residents – the downward trend in the government’s gross external debt seen since 2011 continued in 2016. The decline in non-resident holdings of government bonds is accompanied by strong domestic demand of households and banks, supported by the self-financing programme.

The adjustment of external debt ratios also continued in 2016, in line with a high level of net lending. The net external debt-to-GDP ratio fell to 18 per cent of GDP, and the gross ratio declined to below 69 per cent. Due to the continuing deleveraging of balance sheets in certain sectors, the net external debt of the private sector declined further, mainly due to the banking system. This latter process primarily reflected the increase in banks’ foreign assets, the volume of which already exceeds their external debt. The downward trend in public debt relative to GDP and, within that, the foreign currency ratio, as well was the proportion of foreign ownership within public debt observed since 2011 continued in 2016, which played a key role in the improvement in Hungary’s credit rating. The reduction in the country’s external vulnerability was also supported by the further decline in short-term external debt based on residual maturity. The level of foreign currency reserves continues to substantially exceed the level expected by investors, despite the downward trend stemming mainly from the forint conversion and the self-financing programme.