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 Cbank President András Simor
According
to an IMF statement, the credit line is designed to facilitate the rapid
reduction of financial market stress in Hungary, while supporting the
country's long-term economic goals by creating the conditions necessary to
facilitate appropriate reforms in government finances and the banking sector.
Stabilising effect
The IMF
programme is based on two objectives: to ensure that government debt financing
needs decline, and to maintain adequate liquidity and strong levels of capital
in the banking system.
The recent
international financial turmoil has increased the rollover risk of Hungary's
external debt. The IMF's financial support, combined with commitments from the
European Union (EUR 6.5 billion) and the World Bank (EUR 1 billion), will provide
Hungary with the amount of reserves that will be sufficient to meet its
external obligations, even in extreme market circumstances, the statement said.
Following
the executive board’s discussion on Hungary, acting chairman John
Lipsky said that reducing financial market stress will require both a high
degree of policy discipline and large external financing. “These measures
address Hungary’s
major vulnerabilities and should therefore underpin an improvement in investor
confidence. Most importantly, the combination of accelerated fiscal adjustment
and the introduction of a rules-based fiscal framework will help to persuade
investors that the government’s short- and medium-term financing needs are
being addressed”, Lipsky said of the board’s decision.
Expectations for Hungary
In a
summary about the country’s economic future the IMF said it expected GDP to
contract by 1% in 2009. Already weak private consumption and investment will be
negatively affected by a sharp reduction in new bank lending. Inflation, which
peaked at nine per cent in early 2007, is projected to continue a downward
trend and reach four per cent by the end of 2009.
In a
difficult global environment combined with low domestic demand, the economy is
projected to recover only gradually. This is mostly due to the fact that the
slowdown is simultaneously occurring in Hungary’s
main trading partners and the global deleveraging process that will leave less
foreign capital available to quickly return to Hungary. Growth is not expected to
reach its estimated potential of three per cent until after 2011, the statement
adds.
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