1 July, 2014 - In 2014 Q1, the four-quarter surplus of Hungary’s current account rose to a historical peak and exceeded EUR 3.5 billion. The surplus, which amounts to 3.6 per cent of GDP, is considered extremely high by regional standards; indeed, based on data available until the end of 2013, the 2 per cent surplus of Slovakia was recorded in the context of a declining trend, while the Czech Republic and Poland continued to report current account deficits.
From the side of the real economy, the substantial net lending reflected the growth in the trade surplus and the transfer balance which, surpassing the level recorded a year earlier, is still considered high. In addition to the upswing in external demand and automotive manufacturing, the growth rate of exports remains high, while the expansion in imports remained dynamic in the context of increasing consumption and investment. On the whole, despite steadily growing domestic use, net exports continue to boost economic growth.
Following an improvement in the past quarter, the terms of trade also contributed to the upturn in the balance of goods. The decline in the four-quarter value of the income balance was supported by the moderation of interest payable on foreign loans outstanding. The absorption of EU transfers remained significant in 2014 Q1.
According to the financing approach, in line with the trend observed in previous quarters, the contraction of external debt continued; amid outstanding net lending and the inflow of foreign direct investment, Hungary reduced its net external debt further, which may contribute to the stability of the Hungarian economy and financial system. The decline in net external debt primarily reflected the general government’s substantial reduction of its net external debt, mainly as a result of the increase in foreign exchange reserves owing to the inflow of EU transfers. As opposed to previous trends, however, the external debt of the banking sector increased somewhat, possibly related to the fact that, in the context of low deposit interest rates, households have increasingly shifted their focus from deposits to government securities and mutual fund shares/units. Accordingly, households increasingly participate in the funding of the general government, thereby contributing to the reduction of the state’s reliance on foreign financing.
The high net lending recorded for Q1 contributes to the reduction of Hungary’s external debt, which continued to decline at the beginning of 2014, dropping below 35 per cent of GDP. These developments indicate that Hungary relies less and less on external funding, and the self-financing capacity of the economy is strengthening. The decline in the debt ratio is the net result of opposing effects: the net outflow of debt liabilities and the growth in nominal GDP were partly offset by the depreciation of the forint exchange rate. To a large degree, the fact that the gross external debt of Hungary still slightly exceeded 90 per cent of GDP can be attributed to this and to foreign currency bonds issued for the financing of later maturities. In Q1, short-term external debt based on residual maturity stood close to the level prevailing in the previous quarter, i.e. around EUR 28 billion. In other words, despite a considerable net lending position, Hungary’s gross external borrowing remains relatively high. All of this provides justification for the MNB’s self-financing concept, which is intended to reduce gross external debt further and to increase the internal financing of the state.
Analysing the external balance from the aspect of the savings of individual sectors, it is evident that the net lending of the private sector was increased by rising wages in the household sector and presumably reduced by recovering investment on the side of corporations, while net borrowing by the state remained subdued.
As a special topic, we are presenting the developments of FDI (foreign direct investment) in Hungary based on various aspects. Broadly speaking, net FDI slowed — similarly to the countries in the region — in the years following the onset of the crisis. Recently, significant one-off items — capital injections owing to banks’ losses or decreasing FDI due to government acquisitions, for instance — have shaped the level of net FDI inflows. Overall, data adjusted for one-off impacts still reflect continuous net FDI inflows. Ultimately, besides the high net lending value, which is outstanding even by regional standards, FDI inflows enable Hungary to reduce its external debt continuously and to reach the values prevailing in the region shortly.