BUDAPEST- The Organization for Economic Co-operation and Development stressed in its statement on Friday on the importance of Hungary to cut down its budget deficit below the current levels, as well as to reduce public spending to shrink its public depts.
OECD’s report marks the expectation of the economic growth to slow this year to 2.5 percent from 2.9 last year, as the European Union makes less funding available for public investment. On the other hand, gross domestic product is predicted to increase around 3 percent next year.
The report also highlighted the improvement of Hungary’s current account and international investment position.
According to the OECD, the shortfall will come in at 1.9% this year however to rise upto 2.5% next year, before the 2018 parliamentary elections.
OECD welcomed the government’s commitment to progressively reduce the debt-GDP ratio and added that Hungary had made duller progress in reducing non-performing loans in the country’s banks. The latter added “Particular concerns in these areas are the high level of non-performing loans, which rose sharply in the wake of the global crisis, and low productivity.”
Banks have improved their capital adequacy ratio to more than 20 percent and the loan-to-deposit ratio has dropped. But the ratio of non-performing loans still represents “a significant risk to the financial system,” the OECD said.
Household non-performing loans stood at 18.4 percent, according to an August 2015 central bank report. The OECD also warned that Hungary’s productivity growth has decelerated. Faster growth requires more investment in business and better-trained workers, it said.
Foreign direct investment is concentrated in a few sectors, especially in building cars, the OECD said. To increase investment, Hungary needs to improve policy stability the report said.
It also said the underdeveloped Hungarian capital market did not provide financing to complement bank lending. The National Bank of Hungary bought a majority stake in the Budapest stock exchange last year. Since the central bank is also the financial market regulator, the OECD said, the purchase might “raise a perception of a conflict of interest.
“Thus, the ownership of the stock exchange should be temporary and the stock exchange should return to private ownership over the medium term,” it said.