In Hungary, disposable income is much less than we produce. This means that the gap between GDP and GNI is negative. Interest expenditure decreasing since the 2008 financial crisis has improved the situation; a new comprehensive strategy for outward foreign direct investment (including the keeping of technology-intensive foreign capital) is, however, required to strengthen the positive trends in the long run.
Why cannot we spend as much as we produce?
Similarly to other emerging economies, disposable income of Hungarian economic agents (GNI) is significantly lower than the value generated in the country (GDP). This is because the economic developments between the political transition in 1989-1990 and the 2008 financial crisis – first foreign direct investments in the undercapitalised Hungarian economy, then foreign indebtedness from the early 2000s – resulted in the income generated in Hungary being transferred abroad. The actually disposable income of Hungarian economic agents is considerably reduced by incomes of foreign-owned corporations and interest expenditure incurred due to foreign debts; it is, however, increased by compensation of employees working abroad and a part of EU funds.
The turnaround following the 2008 financial crisis and self-financing improved the situation
Before the financial crisis, the difference between produced and disposable income in Hungary was typically around 5-6 percent as a percentage of GDP (which is high by international standards), then it dropped to 3-4 percent following the crisis. This reduction basically has two underlying factors:
- On the one hand, the previously considerable current account deficit turned into a surplus while government debt was decreasing, and – combined with the high household saving ratio – self-financing increased, meaning that the financing model of the economy shifted to domestic financing. The self-financing programme of MNB, through government bond purchases by banks, also contributed greatly to this trend. All this reduced Hungary’s external debt indicators – more specifically, the net external debt-to-GDP ratio dropped from its peak of 60 percent to 10 percent by the end of 2018, which (supported by the low interest rate environment) reduced the interest paid abroad to a fraction. The economic policy of recent years has, therefore, successfully managed a channel of income outflow.
- On the other hand, wage income from abroad has increased strongly after the opening of the EU labour market. It should, however, be noted in this regard that temporary employment abroad of Hungarian citizens can improve the Hungarian income situation in the short run; in the long term, however, it runs counter to the growth prospects of the Hungarian economy.
We should also see that, in addition to the positive changes in the above-described two factors, the difference between disposable and the produced income is still large, which is explained by the internationally outstanding profitability of foreign-owned companies in Hungary. A cardinal economic policy issue in the coming years is, therefore, how this balance can be improved.
Chart 1: The difference between produced and disposable income in Hungary and its underlying factors (as a share of GDP)
*Estimate based on available data.
Let’s strengthen Hungarian ownership and let’s export capital instead of credit!
The post-crisis adjustment by households contributed to the considerable increase in financial savings as well as accumulated financial wealth. Our forecasts show that this trend will continue into the future. Accordingly, the Hungarian economy will be in a net lending position from 2021. This means that Hungarian economic agents will have more financial receivables from foreigners than we will owe to them. We should still think it out how this accumulated wealth should be allocated to various assets. This is necessary because, in the current low interest rate environment, we cannot expect that the interest we earn from lending to foreigners will generate such an extra income that would meaningfully improve the income balance of the country.
Hungarian businesses could, however, help to improve the profit balance more significantly by investing a considerable part of these funds into real economy projects or increasing Hungarian ownership. If this improves the profit prospects of Hungarian businesses, then the disposable income of Hungarian economic agents could increase meaningfully, the difference between the produced and disposable income could fall, and these could positively affect the current account balance as well. The profit balance of Hungarian businesses could, therefore, be improved in two ways.
- Strengthening Hungarian ownership. Keeping foreign businesses that generate high value added and are indispensable for economic growth and technology transfer is key. The goal should, therefore, be to encourage the reinvestment of their incomes at the highest possible rate. However, in certain sectors (where monopolies need to be eliminated or where the primary goal was to acquire new markets and where a business has become mature and primarily focuses on taking out the income as dividend) repurchasing foreign-owned businesses could be a logical option if Hungarian businesses have the required knowledge and capital.
- Increasing foreign investments by Hungarian businesses. Recent years saw a meaningful decline in the economy’s external debt. Corresponding to the current account surplus, Hungarian banks and businesses have considerably increased their foreign assets (by HUF 15 billion), which should be invested wisely. Given the current low interest rate environment, acquiring foreign property that promises higher returns than borrowing might be a reasonable alternative. International examples show that it is worth developing a new strategy for outward foreign direct investment to support the increase in foreign investment by Hungarian businesses.
More outward foreign direct investments and stronger Hungarian ownership would increase the disposable income of Hungarian economic agents, and this could halve the difference between GDP and GNI in the next six years, supporting Hungary’s convergence to the developed economies.
