Developments in external borrowing by individual sectors

This article examines trends and developments in the external financing of the Hungarian economy from the perspective of external borrowing by individual sectors. In the pre-crisis period, economic agents’ spending exceeded their revenues, as a result of which the country had to rely on foreign borrowing. In addition to direct external borrowing by the government and companies, the banking system also relied on external borrowing to a large extent in relation to its lending to companies and households. This was also reflected in a rise in the country’s external debt indicators, which added to the vulnerability of the Hungarian economy. During the crisis, domestic demand fell and the previous high deficit on the balance of payments turned into surplus. This also means that, due to a rise in the savings of economic agents, the country no longer has to rely on external borrowing and net repayment of loans taken out earlier is underway, i.e. earlier borrowing is being followed by an outflow of funds. Repayment of external funds is not occurring in each sector. On the one hand, the repayment of loans granted to the private sector triggered a sizeable outflow of funds from the banking system, while on the other hand, there was hardly any change in net external funds granted to the corporate sector; at the same time, the consolidated general government continues to borrow. The adjustment process, which started after the crisis, is likely to continue in the years to come, and this may lead to a further increase in the external surplus of the economy and an acceleration of outflows of foreign funds. Our forecast for the period to 2013 implies a slower decrease in external funds granted to banks, but on the other hand, in contrast to earlier years, a net outflow of funds is likely to materialise at the level of public finances as well. As regards debt indicators, the repayment of foreign funds is not yet fully reflected in lower external debt ratios, due to the depreciation of the forint. With a more marked outflow of funds, a quick fall in external debt ratios is also expected to materialise.