Barnabás Virág: Recovery may begin in the next quarter

Several factors determine how successfully a country can manage a crisis, the most important of which is the starting position of the economy at the onset of the crisis: the Hungarian economy has been steadily moving on a convergence path since 2013, with the rate of GDP growth exceeding the EU average by 2-3 percentage points, said Barnabás Virág, candidate for Vice-President of the Hungarian National Bank at an Economic Committee hearing.

He emphasized that the Hungarian economy was moving on a growth trajectory until the outbreak of the coronavirus pandemic, and it even grew by 2% in the first quarter, in contrast to the crisis of 2008 when the economy was in a much more vulnerable state.

As for the economically important aspects in crisis management, he mentioned the macroeconomic balance, the current account, the state budget balance and the development of inflation, adding that since 2017 the Hungarian inflation rate has been steadily around the central bank inflation target except for a few months. Inflation data show a steady decline, with the latest rate in May being 2.2 percent.

Mr Virág pointed out that Hungary’s management of the pandemic was successful but the impacts have already appeared in the economic indicators. These include the collapse of tourism and the decline in industrial production, reaching the lowest point in April. We may see a noticeable improvement in June, and recovery can begin in the third quarter.

The Hungarian economic policy responded quickly and efficiently to the challenges, one of its most important measures being the introduction of the repayment moratorium, which currently means postponing the payment of 2000 billion forints. He added that this amount can be used to keep jobs and increase consumption later on.

The central bank has stabilized the turbulent environment since the middle of March and has taken measures such as the Loans for Growth Program ‘Hajrá’, which is a cheap and predictable source of credit, especially for small and medium-sized businesses.

Mr Virág also said that the pandemic is expected to affect a longer period than just a few quarters, so we need to be prepared for the crisis to set new standards.

We saw this already in 2008, and it will be particularly true of the current situation. Digital and green solutions are becoming more important, and economies on a convergence path need to pay special attention to this, said Mr Virág, and mentioned the introduction of the instant payment system and the green bond of the Central Bank, as examples.

In his replies to questions he explained that a technological change is taking place in the world at the same time, so attracting new technologies is very important for the country as it can also ensure a catch-up trajectory. He emphasized that the credit to GDP ratio was lower than the regional average, and so far the Hungarian economy has been characterized by a strong growth in demand.

Regarding the outlook for this year's growth he said that there is a lot of uncertainty in the forecasts, and the European Central Bank projection for this year’s decline is somewhere between 5.5 and 12 percent.

A modest increase can already be expected in Hungary in the second half of the year if public investment plans are implemented.

Regarding the Ministry of Finance he noted that there has been coherence between the fiscal and the monetary policy so far, and this will continue to be the case, however, there is room for professional debates based on arguments.

He responded to questions related to the forint exchange rate, saying that the exchange rate must be in line with the National Bank’s inflation target.
With regard to loan instalments, he emphasized that they must not increase after the end of the moratorium.

The nomination of Barnabás Virág was supported by the committee by a vote of 10 to 4, with 3 abstentions.