Hungary special report 2015: György Matolcsy – Architect of resurgence

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As economy minister and central bank governor, György Matolcsy has been one of the leaders of Hungary’s unconventional drive to economic recovery

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When György Matolcsy was nominated to the post of governor of the Hungarian National Bank (MNB) in March 2013 by premier Viktor Orbán, the country’s finances remained in a fragile state. Hungary had emerged from the global financial crisis intact, but confidence remained at a low ebb. The national stock of debt remained at perilous levels. Banks were lending too little, particularly to smaller and medium-sized companies. A pre-crisis growth model based on consumption and leverage, having vanished, was still to be replaced.

Orbán’s decision to promote his economy minister to run the central bank was not without its critics. Matolcsy was viewed by some, particularly in consensus-seeking Brussels, as unorthodox, a non-conformist. In a continent clinging (mostly unsuccessfully) to the strictures of austerity, his adherence to Keynesian growth principles swam against the tide.

Yet the appointment proved inspired, showing that bold decisions can pay off. After shrinking in the first three months of 2013, Hungary’s economy returned to growth the following quarter and has never looked back. Gross domestic product is on track to have grown by around 3% in 2014, and by 2% and 2.5% respectively in 2015 and 2016, according to London-based Capital Economics.

New levies on the financial services sector irked some foreign lenders, but allowed the government to cut income and corporate tax rates, underpinning growth, slashing debt and building renewed national confidence and stability. In the third quarter of 2014, the government deficit fell to HUF109 billion ($405 million) or 1.4% of GDP, according to the Central Statistical Office, a level bettered only twice in the past 15 years.

Tough decisions

Matolcsy, who is rarely interviewed by the international media, made time in December to talk to Euromoney at the MNB’s headquarters in Budapest. The engaging and driven central bank chief, widely seen as one of the primary architects of Hungary’s financial resurgence, is nonetheless keen to highlight the continuing importance of tough decisions made in the early days of the Orbán administration.

In the months following the 2010 general election, the government made a conscious decision to blaze its own trail, Matolcsy says, launching "a series of statutory reforms, without which we couldn’t have turned the economy around, returned to growth and, crucially, cut the deficit". Under Orbán, the government "flatly rejected the official orthodox and conventional economic policy mix of the European Commission", abandoning austerity in favour of a series of structural reforms, resulting in a "stronger economy and political stability".

While the second of those points may be debatable depending on the definition of political stability (the government has survived the past five years intact, though its popularity has waned, leading to periodic marches across the capital, Budapest) there is little doubting the truth of the former. Or, indeed, the success of the unorthodox measures used to embed growth in a once embattled economy. 

Central Bank Gov
 The blend of policies and measures turned out to be very successful, creating room for an unconstrained, independent monetary policy 

György Matolcsy, MNB

Tax shake-up

Hungary has in recent years shaken up its tax system, slashing taxes levied on households and corporates in a push to accelerate growth, while balancing the books by imposing new or raising existing taxes on industries ranging from banks to mining to telecommunications. Lenders bore the brunt of the changes, hit by a direct tax on profits and a broader financial transactions levy that raised the tax on wire transfers and cash withdrawals. Banks grumbled at the time, but few now doubt the success of this radical (at least in modern European terms) attempt to generate growth while balancing the books. Total net external debt, which peaked at 120% of GDP in 2009, dipped below 70% at end-2014 for the first time since 2006, and continues to fall.

For his part, Matolcsy sees the reforms, designed to create, for the first time in decades, a well-balanced economy with low unemployment and a high rate of economic productivity, as a "successful blend of conventional and unconventional economic policy. On the one hand, we cut both the budget deficit and taxes on labour – both can be regarded as conventional measures," the central bank chief notes. "On the other hand, we also introduced unconventional measures, such as the bank levy. That blend of policies and measures turned out to be very successful, creating room for an unconstrained, independent monetary policy."

Another vital facet of the country’s resurgence has been its Funding for Growth (FGS) plan, a low-interest funding scheme based on the Bank of England’s Funding for Lending approach and aimed at boosting lending to local small- and medium-sized enterprises. Despite being the lifeblood of Hungary’s economy, SMEs were suffering from a serious credit crunch by the spring of 2013. Matolcsy remembers bumping into European Central Bank president Mario Draghi in the early days of his job. "He said to me: 'Oh, you’re the guy from the country with the credit crunch’. The situation was dangerous, critical even."