MAGYAR NEMZETI BANK
5 Pre- and post-crisis scenarios of finance-neutral economic growth EXECUTIVE SUMMARY In Hungary, following the crisis, there was a substantial decline in the private sector's loans outstanding even in an international comparison, while the disorders in the financial sector were mostly reflected by the fall in corporate lending. In the decade before the crisis, Hungary experienced excessive, unsustainable credit outflow to the private sector, and this debt-creating development carried major risks not only in terms of its extent, but also its structure. On the one hand, the prevalence of household foreign currency loans, and on the other hand, the corporate project financing also resulted in vulnerability and a substantial increase in non-performing loans outstanding in the post-crisis years. Taken together, the excessive, unsustainable pre-crisis lending, and the post-crisis “syndromes” are clear signs of a structural imbalance. Lending developments may considerably intensify business cycles, both in their boom and bust phases, and thus the GDP observed may materially differ from the economy's actual growth capacity. However, this accelerator effect is not necessarily symmetric: the economic downturn or the deleveraging phase may exceed the economic surplus “won” in the rising phase. Thus, on the whole, the financial cycles may have significant economic cost. The realisation of the risks had a significant impact on the long-term trend of domestic economic performance. In this analysis, we examine how sustainable indebtedness can be identified in different scenarios, and how the effect of the thus presumed financial cycle on economic growth can be measured using various methodologies. The period 2002–2015 is of suitable length and allows us to evaluate the pre-crisis and post-crisis economic impacts of the excessive lending using different methodologies. We identified unsustainable indebtedness in five different scenarios, where we examined the indebtedness of the private sector. Based on the results, it can be seen that the excessive outflow of credit generated a significant asymmetry in Hungary during the almost one and a half decades under review. As a result of financial imbalances, the domestic economy expanded on average by 0.4–0.8 per cent faster between 2002 and 2008, but after the crisis, during the same timeframe, it lost on average growth of 1.1–1.4 per cent annually due to economic agents' deleveraging. Thus, in the pre-crisis years economic growth was faster as a result of the outflow of credits, but after the crisis the domestic economy lost considerable growth potential. On the whole, the balance is negative. That is, as a result of the financial cycle, by the end of 2015 the volume of domestic GDP was 4-5 per cent lower than it could have been in the case lending practices with sound growth and structure. As regards the interpretation of the results, it should be noted that the above follows from the private sector's indebtedness, and thus the total effect on the economy, also considering public debt developments, may well be greater.
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GROWTH REPORT • 2016
