MAGYAR NEMZETI BANK surplus would decline again in the middle-income trap scenario, possibly resulting in a current account deficit within some years, and imbalances may evolve again in the economy. Chart 3-20: Current account balance-to-GDP ratio (average of periods) 8
as a percentage of GDP
as a percentage of GDP
8
6
6
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6 Middle-income trap Transfer balance Balance of goods and services
Reform path Income balance Current account balance
Note: Average values on the horizon of the projection period. Source: MNB.
temporarily abroad further impairs the balance through the decline in earned incomes from abroad. At the same time, there are feasible competitiveness reforms that contribute to the country’s sustainable convergence and the reduction of its imbalances by lowering the deficit on the income balance. These steps support a positive change in the income of equities through, inter alia, an increase in Hungarian companies’ FDI abroad. It is worth considering that the significant wage convergence resulting from the reforms may stop or even reverse the migration of labour from Hungary typical of the past years. As a result, in nominal terms the rising trend of the earned incomes of those working temporarily abroad may come to a halt. However, the nominal change is offset by the increase in GDP, thus significantly reducing the negative impact on the current account balance. With competitiveness reforms in place, within the items of the income balance the declining interest balance of foreign loans also contributes to sustainable convergence. Rising household savings, corporate productivity and improvement in the efficiency of the state improve the net lending of these sectors, and thus reduce their net borrowing. As a result, the continued decline in net external debt contributes to the decrease in interest expenditures on foreign loans. These aspects are described in more detail in the following subchapters.
Maintaining a significant trade surplus is indispensable to preserving and expanding the current account surplus; to this end, the reforms increase Hungary’s export market share and reduce its dependence upon imports by making Hungarian exports more competitive. In the years to come, as a result of an upturn in import-intensive investment and an expansion in household consumption, a moderate trade surplus is expected. In parallel with that, deterioration in the terms of trade related to rising oil prices will also impair the balance, the effect of which may roughly be offset until 2020 by the positive effect on exports of investment projects slated for completion. In order to prevent the foreign trade developments from resulting in a current account deficit over the long run, measures that improve the value-generating ability of the Hungarian economy must be imple- The sustained net lending of the economy is also reflected mented. The coordination of industrial, export, energy and in the reforms’ positive effect on savings and thus in SME strategies and their implementation may result in an strengthening financing from domestic sources. The increase in Hungary’s export market share and reduce its competitiveness reforms to be implemented in the coming dependence on imports by making Hungary’s exports more years contribute to households’ net lending remaining at a competitive, thus contributing to the evolution of a sustai- persistently high level. With the reforms, the fiscal deficit nable, stable trade surplus. also remains steadily low. Moreover, by the end of the projection horizon it may turn into surplus. In addition, Implementing competitiveness reforms also plays an competitiveness reforms result in lower net borrowing important role in reducing the deficit on the income thanks to companies’ higher profitability. On the whole, if balance. Without such reforms in the middle-income trap the reforms are implemented, the expansion in domestic scenario, the deficit would presumably increase in the funds results in a persistently positive net lending of the second half of the projection period. In the absence of economy, while in the middle-income trap scenario the competitiveness reforms, the deficit on the income balance economy would increasingly rely upon external funds is expected to rise over the long run, mainly as a result of (Chart 3-21). increases in foreign companies’ profits. In addition, the permanent emigration of Hungarian employees working
3.6 Financial savings of individual sectors
64
GROWTH REPORT • 2018
