In parallel with a slow economic recovery, financial stability risks have diminished recently. However, the high government debt and the large amount of household sector foreign currency debt still make the Hungarian economy vulnerable. The Government has recently implemented a comprehensive fiscal consolidation programme, and the net financing capacity of the private sector has improved. All this has contributed to an improvement in external balance and a reduction in vulnerability. However, the country’s external and government debt is likely to fall only slowly from its current high levels, due to the current economic downturn and the expected slow and protracted recovery of the economy. In consequence, funding risks are likely to fall only gradually. For this reason, it is particularly important to maintain a disciplined fiscal policy.

Forint loans account for an increasing share of new lending to households. However, households’ high foreign currency debt is expected to decline only gradually, due mainly to the long remaining maturities of mortgage loans outstanding. The new government decree aimed at promoting prudent lending practices, proposed by the Magyar Nemzeti Bank, may prevent the risks related to reacceleration in foreign currency lending.

In the financial sector, three main factors should be highlighted from the perspective of economic growth: household propensity to save, corporate lending and banks’ pricing behavior.

In Hungary, the previous economic growth model of relying mainly on foreign funding is no longer sustainable. Economic growth should be financed from domestic savings to an increasing extent.

Subdued credit supply and weak loan demand have both contributed to the contraction in bank lending to the corporate sector. Two main factors make it more difficult for borrowers to access credit. Companies’ creditworthiness is deteriorating because of the crisis and, due to banks’ high risk aversion, only borrowers with better-than-earlier credit rating have access to funding, amplifying the effects of the former.

In order to maintain their profitability, banks are reducing interest rates charged on loans to their existing household customers slowly and partially, despite the fall in the cost of foreign funding. This pricing behavior strengthens banks’ balance sheets, but reduces household disposable income and consumption.

If the insufficiency of domestic savings, constraints on the credit supply to the corporate sector and banks’ current pricing practices remain, it would impede the economic recovery and may lead to a weakening in long-term growth.

Monetary Council