Economic policy and macroeconomic developments in Hungary The recent past and factors affecting medium-term prospects

Transcription

1 mbank CASE Seminar Warsaw March 17, 2016 Economic policy and macroeconomic developments in Hungary The recent past and factors affecting medium-term prospects Gábor Oblath Institute of Economics Centre for Economic and Regional Studies Hungarian Academy of Sciences and KOPINT-TÁRKI, Budapest

2 Outline Points of departure the scope of the presentation and its background: a short and longer-term comparison between HU and PL A checklist regarding Hungary s recent macroeconomic performance and effects of exogenous factors and government policy Some key issues: GDP-growth, employment, household income, EU-transfers, macroeconomic balance, investments and institutional decay Medium-term prospects Summing up (the key role of institutions)

3 I. Points of departure Main purpose: try to present an objective review (both positive and negative aspects) Scope: selective overview of macroeconomic developments and economic policy since 2010 No discussion of politics No discussion of social conditions, education and health though very important Focus on facts/statistics (sources: Eurostat, EU Commission, HSO, NBH, international surveys) Begin with A short-term issue: yields on long-term government bonds A longer term issue: economic convergence

4 2009M M M M M M M M M M M M M M M M M M M M M M M M M M M M M01 10-year government bond yields above Germany s in the V4: a riskiness indicator CZ HU PL SK HU: large improvement since 2012, but still 3pp above CZ and SK HU: little change since 2015 PL: large increase since 2015 autumn PL-HU difference: 1pp in 2015; 0,3 in 2016M2

5 Longer-term real convergence to the EU15 GDP/capita growth in EU26 comparison Comparison between HU and PL ( ) At current PPP (At constant PPP -> Appendix)

6 HU s and PL s per capita real GDP growth as a function of initial income in the EU26 context: (22 years) 6% 5% 4% 3% 2% 1% GDP/cap volume change 1993_2015 RO LV EE BU LT PL SK y = -0,0219x + 0,2276 R² = 0,689 HU SICZ PT MT IE ES CY EL FI SE UK NL BE DK DE AU FR 0% ln(pps_gdp/cap_1993) 8,0 8,5 9,0 9,5 10,0 Observations: - Clear sign of beta convergence in the EU (negative relationship between initial income - and growth) - HU clearly underperformed - PL over performed IT

7 GDP/capita: Hungary s and Poland s convergence at current PPPs to the EU15 (cross section comparisons) In 1991: PL 70%; in % of HU s level Hungary (EU15=100) Poland (EU15=100) PL/HU Between 2000 and 2005: HU s rapid convergence But unsustainable increase in public and private debt 2017: EU Commission forecast

8 II. Characteristics and drivers of HU s economic performance since 2010 (and 2014) not exhaustive A checklist: the bright and the gloomy side Drivers (from the point of view of economic policy pursued since 2010) Exogenous Endogenous Mixed Briefly on Hungary s non-orthodox economic policy

9 Some features of Hungary s recent economic performance Bright side GDP and employment growth ( Fiscal balance, fall in debt/gdp ratio External surplus, fall in net foreign liabilities Increase in real household income and consumption Investment growth Low inflation and interest rates Reverse side EU-funds, public works, low productivity Special taxes; nationalization of private pensions High saving/low investment of corporations 2 years; increasing inequality Mainly public investment Mainly external factors (+PU)

10 Exogenous (non-policy related) Negative Inherited private and public debt deleveraging (balance sheet adjustment) Positive By 2010 the bulk of stabilization was over EU-transfers: a radical increase - to the highest in CEEU Inherited agreements on FDI International capital markets: favorable environment (low interest rates, liquidity) Significant terms-of trade gains ( )

11 Positive: Endogenous (policy related) (I) Decreasing public deficit, but: procyclical policy in 2012 (difference in ) Converting FX-denominated household debt to forints (negative for banks, mainly positive for households) Cutting interest rates, when possible NBH: Credit for growth though limited effect

12 Endogenous (policy related) (II) Negative: Flat tax, removal of tax credits for low wage earners Special taxes on the financial sector and other services ( sectoral taxes ) Deterioration in the institutional environment, examples: undermining property rights; retroactive legislation, policy instability and uncertainty, significant increase in perceived corruption Freedom-fight against the IMF + Bruxelles; Easternopening

13 Mixed/dubious Public works Absorption of private pension funds Self-financing promoting larger holding of government-bonds by commercial banks Exchange rate policy (continuous depreciation of the forint, in spite of huge/increasing external surplus)

14 On Hungary s unorthodox economic policy and the underlying ideology Communication: Hungary is a European success story, due to its unorthodox economic policy posters: Actual policy: rather orthodox (flat tax, the smallest possible fiscal deficit, the strictest regulation of unemployment benefits in the EU etc.) Ideology (1): services are unproductive (see Karl Marx)-> Sectoral taxes on services Activity: Nationalization Redistribution of properties and markets corruption Ideology (2): What is perceived as corruption by the public, serves a majestic goal (A. Lánczi, head of the think-tank of the government) Increase the capital stock under national ownership (establish a new elite, devoted to the present government)

15 Government information Text: Hungary performs better Price of public utilities : -20% Debt to the IMF= 0 Earnings: +4,6%

16 An other information by the government: Hungary s reforms WORK! Our economy s growth is higher than the EU s! Hungary s reforms WORK!

17 EL CY ES HR PT IT SI NL DK HU CZ FI BU EU28 RO IE BE FR AU UK DE LV SE SK PL MT LT EE EL CY HR PT IT ES FI SI NL DK FR EU28 BU AU BE HU CZ RO DE UK LV SE IE SK PL LT EE MT CY IT FI HR FR AU EL PT NL DK BE EU28 ES BU DE CZ SE LV SK UK EE RO LT SI PL HU MT IE The slogan is based on the performance of a single year: 2014 (GDP volume growth in the EU-countries) % 5% 4% 3% 2% 1% 0% -1% -2% -3% 6% 4% 2% 0% -2% -4% -6% -8% ,0% 3,0% 2,0% 1,0% 0,0% -1,0% -2,0% -3,0% -4,0% -5,0%

18 III. Some key issues/aspects of Hungary s recent macroeconomic performance Expectations/forecasts of the FIDESZ-government in 2010 vs. realizations GDP-growth in international comparison EU-transfers in international comparison Employment Household income Growth of GDP vs. domestic uses of GDP Investments Macroeconomic balance (briefly; details in the Appendix) Fiscal External Institutions in international comparison

19 III/1. Government expectations in 2010 and realizations by 2014 The medium-term forecast of the budget for 2011 (expected effects of the flat tax + other elements of non-orthodox policy and realizations 2010=100, left axis; deviations in %-points, right axis ) GDP cumulative deviation (%-points, right axis) GDP actual GDP 2010 forecast GDP Household consumption expenditure HCE cumulative deviation (%-points, right axis) HCE actual HCE 2010 forecast Gross fixed capital formation GCF cumulative deviation (%-points, right axis) GFCF actual GFCF 2010 forecast

20 Public debt projections in successive convergence programs (CPs; % of GDP) CP2012 CP2015 CP2011

21 III/2 GDP growth in the V4-countries (2008=100) Factors behind the recent acceleration: - EU-transfers - Close in the output gap The chart is taken from the recent (2016 February) country report of the EU Commission

22 III/3. Net EU-transfers in % of GNI 6% 5% 4% 3% CZ HU PL SK 2% 1% 0% Average Average ,0% 5,0% 4,5% 4,5% 4,0% 4,0% 3,5% 3,5% 3,0% 3,0% 2,5% 2,5% 2,0% 2,0% 1,5% 1,5% 1,0% 1,0% 0,5% 0,5% 0,0% LT EE LV HU EL PL BG PT SK RO CZ SI MT IE ES HR 0,0% HU LT LV EE BG PL EL PT RO CZ SK SI MT ES HR IE CY

23 Hungary: net EU-transfers and the nominal change in GDP (in million Eur) Net EU-transfers Nominal increment in GDP Between 2010 and 2015 (QI-III) Cumulative gross EU-transfers: 32,5 bn EUR Cumulative net EU-transfers: 26,6 bn EUR Nominal increment in GDP: 15,2 bn EUR Increment in GDP in % of cumulative net EU transfers: 57%

24 Cumulative EU transfers and cumulative change in GNI: comparisons between HU, PL and SK */ HU PL SK Net EU transfers (Bn EUR) 21 57,4 6,4 dgni (Bn EUR) 11,6 92,2 10,4 Cum EU transfers/dgni 181% 62% 62% Average transfer/average GNI 4,4% 3,1% 1,8% */ Source: EU expenditure and revenue

25 III/4. Employment (LFS) Increase from 3,7 to 4,1 (+0,4 million, 11%) between 2010 and 2015 Almost half of the increase: persons working abroad + public work schemes 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Contributions to change in empolyment between 2010 and 2015 (%) 2% 3% Abroad Public work In HU (excl publc work) 6% Contributions to change The problem with public works - lower wages than the minimum wage; - very low exit to the actual labor market The problem with increasing employment abroad: the most talented and motivated part of the labor force is involved

26 Balance of payments statistics: Labor income gross and net transfers from abroad (% of GDP) 3,0% 2,5% 2,0% Labor income, net Labor income, gross 1,5% 1,0% 0,5% 0,0%

27 III/5. Household real income growth: mean, lowest and highest decile: divergence Mean Lowest 10% Highest 10% Flat tax + removal of tax credit for low wages

28 III/6. GDP vs. domestic demand (volume change) The V4 and the EU15 average (2005=100) CZ PL EU15 HU SK GDP CZ PL EU15 Domestic demand HU SK NX Household consumption expenditure Total investment CZ PL EU15 HU SK CZ PL EU15 HU SK

29 III/7. Investments Investment rate (lhs) and growth in public vs. private investments (rhs) EU-transfers

30 III/8. Macroeconomic balance: strong external adjustment; slow decline in public debt External Stocks Flows Fiscal Stocks Flows

31 III/8.1. Stocks: net foreign liabilities, net foreign debt, gross foreign debt in the V4 countries in 2004, 2009, 2012 and 2015 HU: significant adjustment (deleveraging)

32 III/8.2 Components of the external position: flows Current account and net lending in % of GDP (The difference: EU capital transfers) Gap between CA and net Lending (CA+KA): capital transfers from EU-funds 5,5%

33 Net lending from the domestic side (S-I balance corrected for net capital transfers) That is the problem

34 2000Q1 2000Q3 2001Q1 2001Q3 2002Q1 2002Q3 2003Q1 2003Q3 2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q1 2012Q3 2013Q1 2013Q3 2014Q1 2014Q3 2015Q1 2015Q3 III/8.3. Public debt: slow decline (in spite of the seizure of private pension savings) CZ HU PL SK

35 III/8.4. Internal (fiscal) balance: government net lending HU PL

36 The dependence of the budget on special/sectoral (= unorthodox ) taxes

37 III/9. Institutions The original sin : the new Constitution ( Fundamental Law 2010) states: the Constitutional Court cannot judge economic issues unless the debt/gdp ratio reaches 50% never in my lifetime Quality of institutions: examples/illustrations

38 Quality of institutions: examples/illustrations Transparency International: corruption perception index: score ( ) Economic freedom index: protection of property rights: score ( ) World Economic Forum: Global Competitiveness Index ; institutions and some of its subcomponents: rank (2010 vs. 2015)

39 Transparency international: score of corruption perception index (the higher, the better) CZ HU PL SK

40 Protection of property rights ( ) (Economic freedom index: the higher, the better) 6,0 5,8 5,6 5,4 5,2 5,0 4,8 4,6 4,4 4,2 4,0 CZ HU PL RO SK

41 WEF-GCI: overall rank, the rank in institutions and some important components: Hungary and Poland in 2010 (among 139) and in 2015 (among 140 countries) (The lower, the better) HU2010 HU2015 PL2010 PL GCI total Institutions Property rights Diversion of public funds Judicial independence Favouritism in gov. decisions Transparency of gov. policymaking Regarding institutional quality: Hungary does not perform better In this respect: Hungary s reforms do not work consequence

42 5 year credit default swap (CDS) in Hungary and regional peers (between mid 2014 and early 2016 in basis points) In spite of declining public deficit and debt-ratio, HU s government bonds are considered significantly riskier than those of the V3. The reason: uncertainty regarding policies and declining quality of institutions.

43 IV. Prospects EU Commission forecast TFP-growth - small Employment- small Capital - small Potential growth: comparison with PL No policy change: very slow convergence to the EU15 average

44 Potential growth the EU Commission s view

45 V. Summing up and conclusions (I) Following a prolonged period of economic decline and stagnation, Hungary s GDP-growth accelerated to 3.7% in 2014 and was close to 3% in The reasons for the country s economic performance over the last six years are only partly related to economic policies pursued since Deleveraging (the decrease in excessive debt both at the macroeconomic and microeconomic level) had a strong negative impact on Hungary s growth performance. But strongly negative: flat tax, special taxes, etc.

46 Summing up and conclusions (II) However, the acceleration in 2014 is also mainly due to exogenous factors, in particular the closing of the output gap (Appendix) the exceptionally large transfers from EU-funds (additions to aggregate demand) which have nothing to do with the government s so called unorthodox economic policy. The deteriorating institutional environment of the economy, in turn, is a direct consequence of this policy Low investment rate Outflow of labor and capital Low TFP-growth

47 Summing up and conclusions (III) Without fundamental improvements in the institutional environment and the stability/predictability of economic policy, (and other aspects: in particular, education) the country s growth potential is expected to be rather low accompanied with continuing net outflow of labor and capital implying very slow convergence to the more affluent nations of the European Union

48 Thank you for your attention!

49 Appendix: complementary issues Comparison of HU s and PL s convergence dynamics (at constant PPPs) Output gap in HU (EU Commission estimates) FDI: reinvested earnings and FDI flows vs. stockchanges No. of employees in the business sector The dependence of the budget on sectoral taxes in % of GDP The contribution of gross exports to GDP growth Decline in net foreign debt (two interpretations)

50 Comparison over time: GDP/capita convergence to the EU15 At constant PPPs and prices of 2010 (PL/HU: 60% change) HU/EU15 PL/EU15 PL/HU Between 2005 and 2013: HU vs. PL Huge increase in public and private indebtedness

51 Actual and potential GDP (Bn 2010 HUF) and the output gap (actual in % of potential, left axis) HU_act_GDP (Bn 2010 HUF) HU_pot_GDP Bn 2010 HUF) Output gap (right axis) % 4% 3% 2% 1% 0% -1% -2% -3% -4% -5%

52 Net FDI: flows and changes in stocks a large inflow accompanied by a cumulative decline in net stocks (Eur BN) Eur Bn NFDI_flow_cum dnfdi_stock_cum Cum diff (d_stock minus flow)

53 After tax profits minus dividends vs. reinvested earnings in BOP-statistics: gross and net (The fundamental effect of statistical corrections) Gross (in HU) million EUR Net (in HU minus abroad), million EUR After tax profit minus dividends reported (gross, to Hungary) After tax profit minus dividends reported (net, to Hungary) Gross reinvested earnings to Hungary (BOP) Gross reinvested earnings to Hungary unadjusted for superdivideds (BOP) Net reinvested earnings to Hungary (BOP) Net reinvested earnings to Hungary unadjusted for superdivideds (BOP)

54 No. of employees in the business sector: rapid growth in 2014 and 2015, but still below the level of 2008 No. of employees in the business sector; 1000 persons

55 The dependence of the budget on special/sectoral (= unorthodox ) taxes

56 Annual contributions to GDP-growth: domestic demand (DD), net exports (NX) and the partial effect of gross export-growth Hungary Poland 14% NX_contr DD_contr GDP X_contr % NX_contr DD_contr GDP X_contr

57 Net foreign debt in % of GDP Two interpretations for HU PL SK HU HU_less FDI debt