PROFESOR ÁRPÁD KOVÁCS UNIVERSITY OF SZEGED FISCAL COUNCIL HUNGARIAN ECONOMISTS ASSOCIATION

1. PROFESOR ÁRPÁD KOVÁCS UNIVERSITY OF SZEGED FISCAL COUNCIL HUNGARIAN ECONOMISTS ASSOCIATION Economic performance of GermanyCentral and Eastern European countries closing the gap The Hungarian Viewpoint 2013 spring

2. Table of contents • Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments • Broader outlook: Business contexts home and abroad, the pull of the german economy • Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries

3. Table of contents • Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments • 2. Broader outlook: Business contexts home and abroad, the pull of the german economy • Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries.

4. Growth can become stronger Exportdynamics can speed up significantly According to the European Council, the CEE countries look forward to a better year Inflation rates can sink But unemployment rates can stay relatively high Source: European Commission (EC), *: EC Winter 2013 macroeconomic forecast (February 2013); annual average changes, %; except unemployment (%)

5. Change in growth forecasts (year/year, %) Fiscal forecasts (as a % of GDP) Since the autumn forecast of the EU, growth outlooks have worsened, so the fiscal plans look less bright as well Source: European Commission (EC), Autumn 2012 forecast – November 2012; Winter 2013 forecast – February 2013

6. A welcome sight, that due to the low international rates, investors are looking for government bonds with relatively high rates… Yields of long term government bonds in the EU27 countries, 2012 december, % 1,60 1,51 3,24 4,00 1,07 1,60 4,67 3,88 1,56 1,30 2,10 2,12 3,92 1,43 1,77 6,44 2,01 5,33 6,65 3,44 4,54 7,25 5,34 13,33 Source: EUROSTAT

7. CDS spreads (basepoint) Yields of 10 year government bonds (%) … thus the CDS spreads could decrease. It also warns us that the attention of the investors can quickly change Source: ÁKK, REUTERS

8. Table of contents Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments Broader outlook: Business contexts home and abroad, the pull of the german economy Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries

9. Hungary’s foreign trade with Germany and Austria (EUR bn) (bázispont) Export ranking (2012): Germany – 1st Romania – 2nd Slovakia– 3rd Austria – 4th Import ranking (2012): Germany – 1st Russia – 2nd Austria – 3rd Foreign Trade between Hungary and Germany, Austria; investments from said countries to Hungary Foreign direct investment in Hungary (EUR bn) Invesments ranking (2012): Germany – 1st The Netherlands – 2nd Austria – 3rd Source: MNB, KSH

10. Source:EUROSTAT

11. Source:EUROSTAT

12. Source:Bundesbank

13. The main issue is that due to structural problems, Hungary is still considered the last of its peers in the region Expected economic growth (Focus Economics, 2013. february; %) Forrás: Focus Economics, CEE :V4+Romania+Bulgary

14. Structural issues (1): investment rates are the lowest in the region Investments as a percent of GDP Source: Eurostat, CEE : V4+Romania+Bulgary

15. Structural issues (2): lending activity is the lowest in Hungary in the region Bank sector’s lending to private sector (seasonally adjusted, as % of GDP) Source: National Banks, CEE=V4+Romania+Bulgary

16. Structural issue (3): Fiscal expenditures are very high in Hungary, compared to the region Total expenditures of the consolidated bugdet (as a % of GDP) Source: Eurostat, European Commission Winter 2013 forecast

17. Structural issues (4): Hungary is the only country in its region with a debt level similar to the developed countries, which increases its vulnerability Consolidated debt (as a % of GDP) Source: Eurostat, European Commission Winter 2013 forecast

18. Naturally, not only structural issues, but specific events and the fiscal policy itself also change how a country is viewed from abroad CDS spreads of the CEE region and the specific positions of the countries Source: REUTERS, CEE avg. is the average of the countries, the individual lines represent the derivation from the average

19. Source: Simor András: Stabilitás, kiszámíthatóság, bizalom, Hitelintézeti Szemle, 2013/12-1.

20. Source: Simor András: Stabilitás, kiszámíthatóság, bizalom, Hitelintézeti Szemle, 2013/12-1.

21. Table of contents • Snapshot: Economic forecasts of 2013 in Hungary and the surrounding countries, fiscal environments • Broader outlook: Business contexts home and abroad, the pull of the german economy • Hopes and chances: The possibility of a virtous circle, conditions of stability and growth in Hungary and surrounding countries

22. Competitiveness reflects social performances, governmental efficiency is low in the CEE countries Competitiveness (place) Governmental efficiency (place) Source: IMD World Competitiveness Yearbook rankings

23. Growth and countercyclical fiscal policy Budget balance (as percent of GDP) GDP growth (%, year/year) Source: European Committee, 2012 autumn forecast

24. Potential growth rate currently stagnates or recede. To achive fiscal policy goals, a change in growth patterns is a must Potential growth (year/year, %) Source:European Committee, AMECO database

25. Weaknesses, threads • Weaknesses • Blue collar efficiency increase was lower than expected • Praxis oriented education ison low level, does not cope with the requirements of the industry • Low level mobility for blue collar workers • Suppliers have low level IP contribution to products, R&D capability is missing • Low level of networking on supplier level • Other means of transport (waterway, air)

26. Weaknesses, threads • Threads • Entrepreneurial culture of Hungarian owned companies (mostly SMEs) will not change as requested • Old hierarchies and traditions in education system will not be overcome • Co-operation among companies and institutions will not develop as required Source: Prof. Dr. László Palkovics: Hungarian example: Challenges in the subcontracting industry (transport) with special attention to the human relation issues

27. A change in growth patterns is hard in most of the CEE countries, as the sweep for fiscal policy steps is narrow and burdened with risks • External capabilites: • Links to the world economy, conditions and challenges, effects of the regional environment average strength links, conformity pressures, dependancy on german economy • Foreign dept countries of the region, but especially Hungary, are vulnerable, dependancy on financial markets • Integration conditions conformity commitment, boundaries Internal attributes: • Inherited attributes of real economy unfavorable, dual economy, structurally weak competitiveness, growing lack of skilled labour • Attributes, interests and values of domestic actors controversial values of the population, troubles in market adaptation, profitability and judging possibilites • Social implementation of the governmental management varying • Trust of economic actors With the exception of Poland, Czech Republic and Slovakia, to a varying degree, but mostly weak • Differentiated positions of multinational companies and domestic suppliers In financial sector, services investment willingness was damaged, occasional non-neutral sectoral taxes and subsidization • Public finance not stable everywhere, but with losses in growth

28. Seek for break-out opportunities for economic growth (cont’ed) • Employment decreased by 2% • Weak financial position of firms • Slow industrial growth recovery (0,5-1,0 % in 2013) • Low performance of the smalland medium-sizedenterprises • Consequently, in parallel with the development of the small and medimsizeedenterprisesneed for further integration of foreign companies to Hungarian economy.

29. Important aims of Hungarian economic policy • Financial and fiscal stability • Reducing public debt • To increase the level of labour market participation and employment • Structural reforms (pension system, public transport, higher education, state and municipal financing etc)

30. The essential tool to the success of reaching a virtous circle is the restoration of confidence • Enhancing stability and predictability, careful and sensitive harmoniaztion and bargaining, • strengthening the ability to attract foreign capital inflows, without it there can be no real improvement in competitiveness, sustainable growth, • improving the friendliness of taxation, ensuring that different sector taxes are consistent with growth interests, • reducing the reflexivity of chosen correction measures, better assessment of spill-over effects, • we need to convince our partners, that our actions are defined not by tactical impulses but with the intention of long-term cooperation

31. The condition for success is a strict and strong growth-friendly fiscal policy, because only then can a sustainable decline in the public debt occur • strict fiscal policy aimed at reducing public debt is important because the aging of european societies as well, • pensions and other social transfers must be consistent with the economic performance, • the health and education systems, as well as the public finances have to be cost-effective, as this can contribute greatly to economic • in case of harmonized growth and stability interests the real economy results can compensate the adverse effects of restrictions on the population and on the institutions in the region

32. THANK YOU FOR YOUR ATTENTION!