Hungary’s external liabilities in international comparison

Hungary’s net external liabilities have increased significantly in recent years and its external liabilities-to-GDP ratio currently stands at a very high level by international standards. As the credit market crisis emanating from the Unites States has put renewed emphasis on the vulnerability of emerging economies, it may be useful to look more closely at the factors shaping developments in a country’s external liabilities in general, and those specific for the Hungarian economy in particular. A review of the academic literature sheds light on the fact that in emerging economies the increase in external debt due mainly to the gradual easing in liquidity constraints and increasing financial integration is a natural process. International comparisons appear to reinforce this view. Accordingly, similar developments have taken place in recent years in each of the newly joined EU Member States and Hungary. However, these comparisons also reveal that Hungary’s external liabilities are higher than those of countries at a comparable stage of economic development. It is also important to note that the stock of external liabilities was higher in Hungary than in other countries even in the period prior to EU accession. This implies that the outflow of income related to a country’s high external debt can by itself keep debt at a high level. Consequently, further substantial improvement in external balance and faster economic growth are required in order to reduce the external liabilities-to-GDP ratio.