Hungary, Headed for the EU

By McCrary, Ernest S. | Global Finance, March 2002 | Go to article overview

Hungary, Headed for the EU


McCrary, Ernest S., Global Finance


HUNGARY

SPECIAL REPORT

A decade of solid reforms has given Hungary one of the most open free-market economies in

central and eastern Europe, surpassing even some EU member nations in liberalization.

Now the EU membership process enters the home stretch.

Over the past decade Hungary has completed one of the most profound and orderly shifts to a market economy in central and eastern Europe. Now it is poised to move toward the next stage of development, including full membership in the European Union.

Among the 11 countries slated to enter the EU-with a target date of 2004-Hungary is the most advanced in terms of fulfilling membership requirements. Technically, Hungary may have complied with all the conditions of membership by the end of 2002, but the overall enlargement process may slow somewhat as other nations get to the stage of agreeing on final details concerning thorny issues such as support programs for farmers and tax breaks for investors (see EU Enlargement Index, opposite).

Thus, even the 2004 date may be a bit optimistic if the EU opts for simultaneous accession of several or all the candidates, but Hungary will retain its leading position based on relatively strong economic performance and political stability. "Hungary already has gone further with its structural reforms than some countries that are now in the EU," says a London-based Merrill Lynch analyst.

"The most important thing is that the privatization process already has been completed here;' says Vilmos Skulteti, CEO of Hungary's Investment and Trade Development agency ITDH. More than 85% of Hungary's GDP now is in the hands of the private sector. "We've cleared the legal hurdles, and the macroeconomic situation is good," Skulteti says. "In recent years our GDP has been growing around 5% a year, about twice the rate of the EU average. Even with a slowdown due to global conditions this year, we are growing at a faster pace than the region."

Analysts at OTP Bank in Budapest say growth in 2001 may have slipped to 4%, but strong performance by the export sector-up 100/-and some revival in consumer demand have helped avert a true slowdown. Unemployment fell to 5.7% last year.

Other key highlights noted by OTP's economists include:

-real wages grew by 6% last year;

-the current account deficit dropped from 3.2% to 1.2% of GDP;

-inflation dropped in the second half of 2001, to 6.8% for the year;

-credit growth has been high, fueled mainly by a 45% increase in consumer borrowing;

-key changes in monetary policy were approved, along with a medium-term growth plan;

-interest rates were cut several times during the year, to 9. …

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