1

Economic
Outlook
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www.kbc.be/economicoutlook/ or
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E-mail: economic.research@kbc.be
This publication is jointly produced by KBCs economists in Belgium and Central Europe. Neither the degree to which
the hypotheses, risks and forecasts contained in this report reflect market expectations, nor their effective chances
of realisation can be guaranteed. The forecasts are indicative. The information contained in this publication is gen-
eral in nature and for information purposes only. It may not be considered as investment advice according to the Act
of 6 April 1995 on the secondary markets, the legal status and supervision of investment companies, intermediaries
and investment advisers. KBC cannot be held responsible for the accuracy or completeness of this information. All
historical rates/prices, statistics and graphs are up to date, up to and including 3 July 2014, unless otherwise stated.
The views and forecasts provided are those prevailing on 7 July 2014.
Central Europe
Moderate EU enthusiasm despite clearing economic skies
Czech economy is gaining momentum
Hungary: Central bank continues easing cycle
Solid Polish economy
Slovakia no longer a fiscal sinner
Bulgaria: Economy with two faces
In the spotlight: What to expect from Orban II?
Real GDP growth Inflation
2014 2015 2014 2015
Poland 3.4 3.7 0.7 1.7
Czech Republic 2.2 2.5 0.8 2.0
Hungary 2.5 2.3 0.3 2.8
Slovakia 2.0 3.0 0.3 1.5
Bulgaria 1.7 2.5 -0.8 1.2
Russia 0.5 1.0 6.9 6.2
Turkey 2.0 3.5 8.3 7.0
Policy rates
03-07-2014 +3m +6m +12m
Poland 2.50 2.50 2.50 2.50
Czech Republic 0.05 0.05 0.05 0.05
Hungary 2.30 2.20 2.20 2.20
Slovakia (ECB)
0.15 0.15 0.15 0.15
Romania 3.50 3.50 3.50 3.50
Bulgaria
- - - -
Russia 7.50 7.50 7.25 7.00
Turkey 8.75 9.50 9.50 9.50
Exchange rates
03-07-2014 +3m +6m +12m
PLN per EUR 4.15 4.12 4.10 4.05
CZK per EUR 27.44 27.20 27.20 27.00
HUF per EUR 311.89 305.00 300.00 300.00
RON per EUR 4.39 4.40 4.40 4.40
BGN per EUR 1.96 1.96 1.96 1.96
RUB per EUR 46.75 45.90 43.55 41.25
TRY per EUR 2.91 2.85 2.80 2.80
10-year rates
03-07-2014 +3m +6m +12m
Poland 3.49 3.40 3.50 3.80
Czech Republic 1.55 1.70 2.00 2.30
Hungary 4.35 4.70 4.90 5.20
Slovakia 2.04 2.30 2.50 2.80
Romania
- - - -
Bulgaria 3.33 3.20 3.35 3.70
Russia 8.53 8.50 8.50 8.25
Turkey 8.79 8.90 9.00 9.00
July 2014
2
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
Euro area Bulgaria Hungary Poland Slovakia Czech Rep.
K4 2013 K1 2014
Disinflationary trend even more pronounced
than in the euro area
(y-o-y change in consumer prices in %)
Central European growth dynamic stronger
than in the euro area
(real GDP growth, quarter-on-quarter in %)
-3
-2
-1
0
1
2
3
4
5
6
7
2010 11 12 13 14
eurozone Bulgarije Hongarije Polen Slowakije Tsjechi
Q4 2013
Q1 2014
Euro area Poland
Bulgaria Slovakia
Hungary Czech Republic
Economic Outlook Central Europe
General perspective
Moderate EU enthusiasm despite clearing
economic skies
1 May marked the tenth anniversary of
the biggest enlargement in the history
of the European Union. At that point
eight Central European countries were
added to the EU (the Czech Republic,
Slovakia, Hungary, Slovenia, Poland,
Estonia, Latvia and Lithuania). Bulgaria
and Romania followed in 2007, whereas
Croatia joined only last year.
The first decade of EU membership
represented a turbulent period for the
Central European economies. The period
may broadly be divided into two parts,
separated by the collapse of the US bank
Lehman Brothers in September 2008.
The first of these periods saw flourish-
ing economic activity. Central Europe
integrated itself into West European
production chains, with an important
role for the car industry. With the aid of
EU funds, progress was made towards
closing the gap in the field of infrastruc-
ture. Rapid strides were taken towards
improving institutional quality. The
financial ties with Western Europe also
grew ever closer.
As from September 2008, the closer
European integration had its flipside.
Together with Western Europe the coun-
tries of Central Europe slipped into a
deep recession. Since then the story
in the region has largely been one of
muddling along, with a similar com-
bination to that in Western Europe of
slack economic activity and a particu-
larly weak inflation dynamic. Against
this background it comes as no surprise
that enthusiasm for the European Union
has faded in many of these new mem-
ber states. This was also reflected in
the recent European elections. Although
the turnout in the European Union as a
whole was on the lean side, that was
even more the case in Central Europe.
Just a quarter of Central European voters
could be bothered to make their way to
the polling station.
It may therefore be that the present
economic revival could generate a more
positive attitude towards the European
Union. In the wake of the gradual eco-
nomic recovery in the euro area, the
economic skies in Central Europe are
also clearing. As many countries in this
region have small and open economies,
they are benefiting more than propor-
tionally from the recovery. Whereas real
GDP in the euro area grew in the first
quarter of 2014 by just 0.2% (quarter-
on-quarter), growth in Central Europe
was a good deal higher. Positive outper-
formers in this regard were Hungary and
Poland, both of which recorded quar-
terly growth of 1.1%. The 0.8% growth
in the Czech Republic in that quarter fol-
lowed the exceptionally strong growth
in the fourth quarter of 2013 (+1.5%
quarter-on-quarter). The fact that the
economy continued to grow in the first
quarter is an encouraging economic
sign.
It is striking that the economic recovery
has also been accompanied in Central
Europe with strong disinflationary pres-
sure, on perhaps an even stronger scale
than in the euro area. In May, inflation in
Hungary and Slovakia was 0% and even
negative in Bulgaria (-1.8%), while in
Poland (+0.3%) and the Czech Republic
(+0.5%) it was not much above 0%.
This illustrates that (i) even a deflation-
ary environment need not by definition
impede economic growth, and (ii) this
also gives the regional central banks
additional room to ease their policies.
The exchange rate policy of the Czech
National Bank provides one example
of this, as do the further interest-rate
reductions that the National Bank of
Hungary is expected to make.
Dieter Guffens and Dieter Franceus
dieter.guffens@kbc.be, dieter.franceus@kbc.be
3
Year-on-year (in %)
Quarter-on-quarter (in %)

-6
-4
-2
0
2
4
6
2008 09 10 11 12 13 14
quarter-on-quarter (in %) year-on-year (in %)
Fabourable real GDP growth dynamics

Public balance (left-hand scale)
Public debt (right-hand scale)
Healthy fiscal position
(% of GDP)
Economic Outlook Central Europe
Czech Republic
Economy is gaining momentum
Petr Dufek (pdufek@csob.cz)
CSOB Czech Republic
The Czech economy went through two
significant recessions in the last five
years. The first one in 2009 involved
a huge economic downturn, caused
by the slowdown of European eco-
nomic growth, while the second one
which lasted for a record-long period
(2012-2013) was primarily caused by
domestic factors curbing consumer and
investment demand. However, since the
second quarter of 2013, the Czech econ-
omy has been growing again, driven
by exports in particular. It is not only
exports that are showing evident signs
of recovery; consumption and invest-
ment, which have been affected by sig-
nificantly curbed public orders thus far,
are also slowly gaining momentum. The
Czech economy continued to develop
favourably in the first quarter of this
year. Real GDP grew by 0.8% quarter-
on-quarter.
Economy growth is being primarily driv-
en by the manufacturing industry spe-
cifically car production with carmakers
riding the wave of Europes recover-
ing automotive market and increasing
their market shares. The presence of
the largest Czech carmaker in China
is also successful, and China has thus
become the key market. Car production
is heading towards a new record this
year. Moreover, the construction sector,
which has been strongly curbed in the
last six years, is also rebounding slowly.
There is still a lack of new orders, nota-
bly from the public sector and housing
construction, with the latter even being
at half the level of the strongest years.
However, at least the first signs of stabi-
lisation of new orders, and consequently
of the termination of their long-term
fall, are evident. The service sector as a
whole has not significantly contributed
to growth thus far, except for finan-
cial institutions, trade, and transport.
Nevertheless, the renewed increase in
domestic demand should also help other
services, which are still close to their bot-
tom, to grow again soon.
Renewed growth of the economy and
domestic demand has not yet had a
visible effect on inflation, which cur-
rently stands close to zero. Januarys
reduction in electricity and natural gas
prices for households has contributed
strongly to this low inflationary environ-
ment. Moreover, stiff competition in the
telecommunications market which has
been liberalized recently has led to a
significant decline in the prices of those
services for households as well as busi-
nesses. Although the Czech National
Bank still forecasts that it will not leave
its current exchange rate regime before
early 2015, when it also anticipates a
significant rise in policy interest rates, we
do not endorse this scenario. We believe
that the exchange rate targeting will be
abandoned much later (not before the
second half of 2015), and that the move
will certainly not be accompanied by a
rise in policy rates, as suggested by the
official forecast. The reason is that the
inflation threat continues to be virtual,
and thus the central bank will have to
revise its inflation outlooks downwards.
Meanwhile the fiscal position has turned
healthier. In 2013 the government defi-
cit was cut by a third compared to
2012. The fiscal deficit fell to 1.4% of
GDP, leading to a significant decelera-
tion of the rise in the overall public debt
to 47.2% of GDP. Hence the Czech
Republic continues to be one of the least
indebted EU countries.
0
5
10
15
20
25
30
35
40
45
50
-7
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-5
-4
-3
-2
-1
0
2004 05 06 07 08 09 10 11 12 13
Public debt (% of GDP, right) Public balance (% of GDP, lef)
4
Economic Outlook Central Europe
Hungary
Central bank continues easing cycle
Inflation trending lower
(year-on-year, in %)
Breakdown of real GDP growth
(selected sectors)
GDP growth (year-on-year, in %) Construction
Agriculture Services
Industry
Headline CPI Inflation target
Core CPI
David Nemeth (david2.nemeth@kh.hu)
K&H Bank ZRT
In April Hungarian inflation was nega-
tive for the first time since 1968 (-0.2%
year-on-year in April 2014), after which
it returned to 0% in May. Headline
inflation started its downward trend in
September 2012 (6.4% year-on-year)
and the disinflationary process has been
faster than expected. Several factors
were driving this disinflationary trend:
last years good harvest, the still rela-
tively subdued domestic consumption
growth and the governments frequent
utility cost reductions. Inflation expec-
tations also gradually trended down to
around 3% in the first quarter versus still
4-6% the year before.
However, we see no risk of outright
deflation as core inflation is still above
1.1% year-on-year and headline infla-
tion will rise as a result of, among
other things, the expected acceleration
of domestic consumption. A lot will
depend on the further inflation evolu-
tion in the rest of the European Union.
For 2014 we expect the average inflation
rate to be 0.3% and for 2015 2.8%,
close to the central banks inflation tar-
get of 3%.
Economic growth accelerated further
in the last months and was among the
highest in the European Union. Real
GDP grew by 3.5% year-on-year in the
first quarter, the highest year-on-year
real GDP growth rate in seven years. The
main growth contributions came from
industrial production and construction.
The favourable European business cycle,
especially in Germany, along with the
expansion in vehicle production capac-
ity triggered industrial growth, while
public investments and the usage of
EU funds drove growth in construction.
Investments increased 22.6% year-on-
year in the first quarter.
Despite the recent, modest pickup in
private consumption and investment
Hungarys external position remains
comfortable. Domestic demand weak-
ness has led Hungarys current account
surplus to widen from EUR 0.8bn EUR in
2012 to EUR 2.9bn EUR in 2013.
The low interest rate environment and
the ongoing NBHs funding for lending
program should support investments in
the coming quarters, although credit
demand remains quite subdued. With
only local municipality elections on the
short horizon, public sector investments
will most likely be lower in the quar-
ters ahead. Therefore, the recent solid
growth performance may not continue
at the same pace in the quarters to
come. Private sector demand has to
grow stronger in the coming quarters
to be able to counterbalance the lower
state investment demand. On balance,
we expect real GDP growth to reach
2.5% in 2014.
Given the low inflationary environment,
monetary policy will remain highly
accommodative. In June, the National
Bank of Hungary continued its gradual
and cautious easing cycle, cutting its
policy rate for a 23th time in a row to
2.3%. We do not believe this to be the
end of the easing cycle and expect one
additional rate cut of 10 basis points.
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-6
-4
-2
0
2
4
6
2006 07 08 09 10 11 12 13 14
Agriculture Industry
Constructon Services
GDP growth (year-on-year , in %)
-2
0
2
4
6
8
10
2006 07 08 09 10 11 12 13 14
Headline CPI (year-on-year, in %) Core CPI (year-on-year, in %)
Inaton target
5
Economic Outlook Central Europe
Poland
Solid economy
Real GDP growth Investments
Private consumption Net exports
Public consumption Inventory
Solid growth recovery
(year-on-year, in %)
CPI PPI
Core CPI

Very low inflation
(year-on-year, in %)
Jaroslaw Antonik (jaroslaw.antonik@kbctfi.pl)
KBC Towarzystwo Fund. Inwest. A.S.
Macroeconomic data published in the
first quarter of 2014 indicate that the
Polish economy is performing well. Real
GDP growth accelerated to 3.4% year-
on-year in the first quarter of 2014 from
2.7% year-on-year in the last quarter of
2013. Consumption growth accelerated
to 2.6% year-on-year and investments
grew 10.7% year-on-year in the first
quarter of 2014. The contribution of net
exports to real GDP growth was 0.5%.
However, the most recent economic
data disappointed somewhat with pro-
ducer confidence dropping slightly,
probably affected by the conflict in
Ukraine. Industrial production dynamics
also weakened somewhat. Retail sales
growth, however, remains at a decent
level.
As a result, the positive picture of the
Polish economy remains intact. In the
coming quarters, consumption should
be supported by real wage growth,
improving employment growth, stronger
consumer confidence and a substantially
lower cost of credit. Also, investment
growth potential is substantial. In recent
quarters, entrepreneurs have restrained
their investments as a result of the eco-
nomic slowdown. Currently, the improv-
ing economic conditions both on the
domestic market and in the euro area,
Polands main trading partner, should
translate into a higher willingness to
investment. Additionally, the effect of
the transfers from the new EU budget
should become visible in the near future.
A risk factor remains the political insta-
bility and recession in Ukraine and the
economic slowdown in Russia. However,
as a result of the limited trade relations
with these two countries, this should
have only a moderate impact on the
Polish economy.
The economic recovery takes place in
a low inflation environment. In May
consumer price inflation was only 0.3%
year-on-year. Inflation will probably turn
negative during the summer and infla-
tion will remain below the central banks
inflation target of 2.5% at least until
the end of 2015. Nevertheless the cen-
tral bank left its policy rate unchanged
at 2.5%. Governor Marek Belka made
it clear that the monetary policy com-
mittee (MPC) considered an imminent
rate cut unlikely although the MPC did
not exclude this possibility. Although
low inflation and the ongoing non-
conventional ECB easing measures have
increased the possibility of an additional
rate cut, real GDP growth is too strong
to make it the most likely scenario.
Public finances appear healthy and the
ministry of finance has already covered
90% of its borrowing needs for 2014.
Positive economic growth, accommoda-
tive monetary policy and healthy public
finances should support the fixed income
market. The Polish currency proved to be
resistant against the Ukraine turmoil and
will probably appreciate again versus the
euro on the back of strong economic
fundamentals and the improvement of
the current account balance.
-4
-2
0
2
4
6
8
10
12
2007 08 09 10 11 12 13 14
CPI core CPI PPI
-6
-4
-2
0
2
4
6
8
10
12
2005 06 07 08 09 10 11 12 13 14
Private consumpton Public consumpton Investments
Net exports Inventories Real GDP growth
6
Economic Outlook Central Europe
Slovakia
No longer a fiscal sinner
Public debt on a rising trajectory
(public debt, % of GDP)
Slovakia leaves the European Commissions EDP
(fiscal balance, % of GDP)

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-1
0
2001 03 05 07 09 11 13 15
Marek Gabris (mgabris@csob.sk)
CSOB Slovakia
In the first quarter of 2014 Slovakian
economic growth in Slovakia acceler-
ated further to 2.4% year-on-year from
1.5% year-on-year in the fourth quarter
of 2013. What is especially encouraging
is the composition of economic growth
as the economy is no longer solely driven
by foreign demand. In recent quarters,
net export growth helped Slovakia to
avoid a deeper economic downturn.
More recently, growth became more
broadly based. Although export of prod-
ucts and services increased by 9.6%
year-on-year in the first quarter of this
year, import growth also accelerated and
even outpaced export dynamics (+10.8%
year-on-year). This was supported by
the revival of household consumption,
growing 3.4% year-on-year after a mod-
est 0.4% year-on-year growth in the
fourth quarter of 2013.
The rise of household consumption is
driven by higher real wages. Moreover,
the unemployment rate has been declin-
ing slowly but gradually and consumer
confidence is on the rise. Government
consumption accelerated from 2.5%
year-on-year in the fourth quarter of
2013 to 4.4% year-on-year in the first
quarter of this year. This is interesting as
Slovakia has to keep its public finances
under control as it exited the exces-
sive deficit procedure only weeks ago,
after reducing its deficit from -4.5%
to -2.8% of GDP. The biggest surprise
came from the investment component,
which increased by 3.6% year-on-year,
illustrating the renewed business confi-
dence.

In Slovakia the disinflationary trend start-
ed in November 2011 and continued
throughout 2013 and 2014. For example,
headline CPI inflation gradually fell from
2.5% year-on-year in January 2013 to
0% in May 2014. Falling food prices
and base effects were the main reason.
However, the absence of demand-led
price pressures played a significant role
too. Core inflation was only 0.4% year-
on-year at the end of 2013 and reached
1.5% year-on-year on average. The very
low inflation will probably persist in the
second half of 2014 and only very gradu-
ally and mildly rise to slightly above 1%
year-on-year in December 2014.
Employment started to increase again at
the end of 2013 after several quarters of
labour shedding. In the first quarter of
2014, employment growth accelerated
to 0.2% year-on-year. The (harmonised)
unemployment rate has been stable at
a high level for the last several quarters
and only very mildly declined to 13.9%
in May 2014. The improved outlook for
economic growth will probably also be
favourable for the outlook for the labour
market. However, the latest drop of the
registered unemployment rate is partly
due to higher employment as a result
of additional government spending of
EU social funds. While the sustainability
of the unemployment drop is far from
clear, the underlying trend remains posi-
tive and the start of new construction
projects could further support it.
According to Eurostat, the public deficit
dropped from 4.5% of GDP in 2012 to
2.8% in 2013. Therefore the European
Commission decided that Slovakia is
no longer subject to special supervision
under the Excessive Deficit Procedure.
However, the debt ratio has already
breached the 55% threshold set by
Slovakias Budget Responsibility Act.
This breach triggers the freezing of
certain spending items already in 2014.
Therefore, the expected acceleration of
GDP growth in 2014 and 2015 is very
welcome as higher nominal GDP growth
would facilitate the consolidation efforts
of public finances.
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30
40
50
60
70
1995 97 99 2001 03 05 07 09 11 13 15
7
Economic Outlook
Bulgaria
Economy with two faces
Risk premium Bulgarian government rising
(10 year bond yield spread with Germany, in percentage points)
Bulgarian economic growth consistently outperforming
euro area
(real GDP growth, quarter-on-quarter in %)
Bulgaria
Euro area

-0.6
-0.4
-0.2
0
0.2
0.4
0.6
Q3 2011 2012 2013 2014
Bulgaria
Euro Area
Fundamentally sound
economy (for the time being)
The Bulgarian economy has two distinct
faces. On the one hand, the macro-eco-
nomic fundamentals are relatively healthy,
particularly when compared to the Euro
Area. Real GDP growth (+0.3% quarter-
on-quarter in Q1 2014) was stronger
than in the Euro Area (0.2%). Moreover
it is worth noting that during the second
phase of the European recession (from
Q4 2011 onwards), the Bulgarian econ-
omy had only one quarter of very mild
contraction (-0.1% in Q3 2012). This is in
sharp contrast with six consecutive quar-
ters of negative growth in the Euro Area.
The long phase of deflation Bulgaria has
been going through has clearly not caused
too much damage to the real economy.
From August 2013 on, headline inflation
has been negative. With the exception of
Greece, the Bulgarian deflation in May
2014 (-1.8% year-on-year) was the deep-
est in Europe. The persistent price fall has
mainly been the result of administrated
price cuts in the energy sector, nega-
tive import price inflation and significant
slack on the labour market. However, the
unemployment rate is gradually falling
in line with the moderate growth cycle.
Compared to its peak of 13% in October
2013, the Bulgarian unemployment rate
has fallen by 1.1 percentage points in May
2014. This is almost four times faster than
the fall of only 0.3 percentage points in
the Euro Area in the same period.
but increasing political and
institutional instability
This relatively favourable economic
analysis was shared by the latest IMF
staff report in mid-June. Related to the
Bulgarian banking sector in particular, the
IMF considered [...] the system stable and
liquid, with banks non-performing loans
buffered by provisions and significant cap-
ital, as well as a positive net foreign asset
position. Ironically, a little more than a
week later, two bank-runs occurred (on
June 20th and June 27th), two banks had
to be taken over by the Bulgarian National
Bank (BNB) and be recapitalised by the
state-owned Bank for Development
and Deposit Guarantee Fund. President
Plevneliev announced that he will dissolve
parliament on August 6th and call elec-
tions for October 5th. A caretaker govern-
ment will be appointed in early August.
These events illustrate the inability of
Bulgarias political and financial authori-
ties to supervise a fundamentally healthy
financial sector. While the orchestration
of the two bank runs illustrates the deeply
rooted corruption and crime in Bulgarian
business, the need to seize and recapi-
talise a bank with public funds is the
result of an inadequate liquidity provision
by the BNB. It is true that the currency
board arrangement poses a restriction on
such liquidity provision, but the request
by the BNB for liquidity assistance from
the European Commission (made and
approved on June 29th) came too late to
prevent the banking crisis.
Currency board only source of
stability for the moment
The damaged confidence in the govern-
ment has already led to a rising spread
between Bulgarian and German govern-
ment bonds. The credibility of the currency
board is the only stabilising factor for the
economy at a moment without a func-
tioning government. The inherent stability
of a currency board and the fact that no
rational policy maker would want to go
back to the times before the currency
board was introduced in July 1997 (with
inflation reaching 1061% in that year),
feed the hope that a negative spill-over
from political chaos to the real economy
can still be contained.
1.6
1.7
1.8
1.9
2.0
2.1
Mrch-2014 Apr-14 May-14 June-14 July-14
Central Europe
Dieter Guffens (dieter.guffens@kbc.be)
KBC Group
8
In the spotlight
What to expect from Orban II
Economic Outlook Central Europe
Growth contributions to potential output
(in %)
Short-term external debt on a downward trajectory
(bn EUR)

As expected, Fidesz comfortably won the
parliamentary elections held on April 6th.
With 133 out of 199 seats in parliament
they just retained a two-third major-
ity. Prime Minister Viktor Orban was
relatively vague with respect to economic
policy in the next four years. Taking into
account some targets set by Fidesz in
the previous years, we can make some
preliminary conclusions of what Fidesz
policy will look like in the next four years.
The relatively tight fiscal policy will most
likely be continued, especially since the
primary budget balance has been dete-
riorating in the last two years. Interest
spending has been decreasing while there
was no improvement in the general fis-
cal balance. Meanwhile Fidesz will most
likely continue to maintain a supportive
environment for the domestic companies
and sectors. The nationalization of foreign
owned companies will continue, although
this highly depends on the international
market sentiment as the government has
to issue bonds to be able to finance these
purchases. If market sentiment deterio-
rates or budget balance slippage were to
occur, the government may increase the
tax wedge of multinational companies.
For example, Parliament already approved
a new, extremely progressive tax on adver-
tisement revenues, which will result in HUF
6-10bn income to the budget. Although
Fidesz previously has promised that chang-
es to the legislation will be slower, more
predictable and more transparent, so far
this has not been the case under Orban II.
Regarding the banking sector, the govern-
ment and the National Bank of Hungary
would like to radically decrease the level
of non-performing loans (NPLs). They con-
sider it to be the main reason why lending
activity remains so weak. According to
unofficial plans, banks have to raise their
provision levels for NPLs from the cur-
rent level of around 60%. Additionally,
it is also quite likely that the government
comes up with a solution for the foreign
currency denominated mortgage loans
problem. The banks association would
like to see a program similar to the current
existing one, namely a program in which
monthly instalments are calculated at a
fixed exchange rate which is well below
the market price, and the loss is divided
evenly between the state and the banks. It
would allow a gradual write-down of the
foreign currency denominated mortgage
loans and wouldnt create huge immedi-
ate losses for the banking sector. The
decision is expected around September.
What is also in the cards is a further
centralization of policy. The Debt
Management Agency might be integrat-
ed in the National Bank of Hungary (NBH).
The cooperation between these two
independent institutions is already sub-
stantial. For example, the NBH introduced
new tools to encourage the banking sec-
tors to buy more Hungarian government
bonds. It is also clear that the Hungarian
government is making an effort to return
to an investment grade rating for its debt.
For this to be achieved, the Hungarian
government will need a reduction in
gross external debt, especially short-term
external debt and a reduction of foreign
holdings of this debt.
Unfortunately, what is missing (again)
so far are measures to boost Hungarys
potential GDP growth. Government poli-
cy doesnt appear to be more transparent
and predictable so far. For steady conver-
gence to materialize, policy changes in
education, innovation and productivity
are required. The Hungarian government
and the NBH expect additional economic
growth to come from an acceleration in
lending and from a further depreciating
currency. It is likely that, as before the
financial crisis, potential real GDP growth
will remain in the vicinity of 2%.
Potential output growth Average working hours
Capital accumulation Productivity
Employment
Foreign exchange reserves Credit institutions
General government Corporations
David Nemeth (david2.nemeth@kh.hu)
K&H Bank ZRT
0
5
10
15
20
25
30
35
40
45
2008 09 10 11 12 13 14
General government Credit institutions
Corporations Foreign exchange reserves
-2
-1
0
1
2
3
4
5
2000 02 04 06 08 10 12
Capital accumulaton Employment
Average working hours Productvity
Potental output growth