In 1998 considerable problems came only from the external financial and economic recession affecting unfavorably companies producing to the Russian market (mainly sub branches of machinery and food industry).

The transformation of the world economic environment was basically characterized by local crises isolated in time and space. These crises usually broke out in finances whereas production relations and capacities have been affected by the crisis only slightly. Because of the rapid lending of international financial circles crisis phenomena having started by the Asian financial crisis remained within manageable and controllable limits.

The most critical link of the process called as stealthy crisis was Russia. The social and economic transformation of the past decade was so slow and contradictory here that the central power was not able to complete any successful program in the meantime. The crisis of financial nature spread over the real sphere as well. Considering the situation, the solution is supposed to take long years.

As being induced mainly by the extraordinary speculative capital, the chain reaction was to be expected to continue in the course of preparing our previous report and to affect primarily the very countries being financially weak and running into debt. A prominent example is Brazil having also been forced to devaluate her currency at the end of the year.

Financial crises spreading over, the deceleration of economic development, the decline of raw material prices did not considerably affect economies of developed countries in Europe and North America. However, the risk of developing and financially unbalanced countries increased. Neither economic experts nor researchers believe that the trends mentioned above should expand to a world economic recession (or crisis). However, the situation of certain countries (including even Hungary) is expected to become more difficult than before.

In the midst of crisis waves characterizing developing markets, 1998 was a rather favorable year for Hungary’s economy. The reliable and well balanced development having started two years before continued. Based on the latest figures available the growth of the economy is expected to amount to 4.8-5.3 percent. The accumulation rate of the economy increases furthermore considerably. The 13-14 percent growth of the accumulation of fixed assets is expected to be accompanied by a 3 percent increase of consumption.

It is favorable that inflation was reduced significantly. The dynamics of consumer price inflation decreased from month to month in 1998 and exceeded the figure of past December by 10.3 percent only at the end of the year. The annual average rate of growth amounted to 14.3 percent indicating a 4 percentage point improvement in comparison to past year’s figure. The moderation of price increase rates was propelled by the decline of world market oil prices as well as the restrictive domestic monetary and fiscal policy. A slight price increase has been observed because of that in other products and fuels accounting for much (17.1 percent) in the consumer price index.

Together with the favorable results of growth and inflation, the external balance of the economy deteriorated slightly because of the growth rates of imports exceeding that of exports and the deterioration of the balance of tourism. The deficit of the foreign trade balance is expected to amount to USD 2.7-2.8 billion exceeding projections by half a billion dollars. It is favorable however, that the solvency of Hungary was not shocked by the panic following the Russian crisis. Although the central bank had to intervene significantly in August and September, the Hungarian currency stabilized soon and its exchange rate approached the strong part of the intervention band as foreign investors returned at the end of the year.

Economic growth was mainly propelled by industry. The performance of the branch is expected to exceed past year’s figure by 12.6 percent in 1998. The past four years’ trend of the dynamic increment of exports inducing growth, continued. The exports of 1998 exceeded past year’s figure by 30-31 percent in volume terms. Domestic sales of industry increased only minimally. However, the about 2 percent growth can be regarded as a change of trend in contrary to the past three years’ decline.

The dynamic growth of exports was furthermore mainly propelled by the performances of several great multinational firms having settled down in customs free zones. Firms of customs free zones as a whole increased their exports by 70 percent. Excluding this figure, industrial exports grew by 5 percent only. About two thirds of the increment of the GDP produced by the corporate sector of almost total foreign participation derive from foreign income owners. This phenomenon and the significant foreign participation of other companies imply that dividends transferred abroad totaled USD 800 million, i.e. 1.8 percent of the annual GDP in 1998. This figure determines the 1998 increment of the gross national income representing the expendable income of Hungary growing thus by 3.0-3.5 percent only.

As regards the perspectives of industry in 1999, domestic sales and exports are expected to increase by 2-3 percent and 10-15 percent respectively involving thus a 7-8 percent increase of industrial production.

The recovery of construction having been observed since 1996 continued past year as well. In the first ten months of the year building installation and completion exceeded the figure of the same period of the past year by 14.6 percent. The annual rate of increase is expected to amount to 14-15 percent. The production level of the period before the change of the political regime has been approached in construction. The upswing of the branch is related primarily to the recovery of investment activities. This boom is expected to continue in 1999 as well. Building installation and completion is projected thus to increase by 8-10 percent in volume terms together with the further dynamic growth of accumulation.

Profits of agriculture in 1998 were similar to the level of past year. Unfavorable sales possibilities of the year’s end hindered food industry’s net profits to exceed the figures of the base year. Considering the continuation of sales difficulties and the fact that soil cultivation works have not been completed yet due to the bad weather, no considerable improvement can be expected for 1999. Based on the most favorable assumptions, growth is expected to total 2-3 percent.

The ten years’ decreasing trend of retail trade turnover changed in 1998. Dynamic increase was observed especially in the first half of the year. The turnover of the first ten months exceeded that of the past year by 6.8 percent. However, growth was observed basically in one commodity group, the trade of road motor vehicles and components namely. Excluding this commodity group, retail trade turnover stagnated. The dynamic increase of road motor vehicle sales derives from the growing purchasing of a relatively narrow stratum of high incomes. This is also reflected by the figures of motor vehicles imported in the first ten months of the year, exceeding past year’s results by 31 percent in number and 48 percent in USD value. The turnover of road motor vehicles reaches higher and higher values namely.

The most important change of domestic trade structure was the more and more dynamic development of malls and shopping centers. Their share in retail trade amounted to 5 percent turnover in 1998. This figure is expected to grow double by the end of the millennium.

The considerable decline of profits in traffic has stopped. Sustainable growth was observed in 1998 in accordance with the dynamic development of industry and construction. The growth of profits of the transportation of goods amounted to thus 14 percent in 1998. The turnover of local passenger transportation stagnated whereas long distance passenger transportation indicated a 1.4 percent increase of the number of passengers. Travel distances increased in both areas.

Profits of telecommunication developed furthermore dynamically. The number of main lines connected amounted to nearly 3.4 million at the end of December indicating a 260 thousand growth of capacity compared to 31 December 1997. The number of ISDN main lines totaled 51 thousand at the end of the year exceeding thus past year’s capacity level by 33 percent. The number of mobile phone service subscribers amounted to 852 thousand at the year’s end reflecting 20 percent incline in six months.

Foreign trade turnover increased dynamically even in 1998. Because of the first eleven months, the annual growth of exports is expected to amount to 23-24 percent in volume terms whereas the concomitant figure of imports is projected to total 25-26 percent. The deficit of the foreign trade balance is expected to account to USD 2.7-2.8 billion exceeding past year’s figure by USD 0.7 billion.

The deterioration of the trade balance is related to two contradictory trends. In customs free zones exports increased significantly in certain areas of machinery (manufacture of motors, computational instruments, communication equipment). However, the balance of trade of customs free zones reflected considerable deterioration. As regards the items increasing the deficit we have to mention that the rate of increase of imports of passenger cars and pharmaceuticals amounted to 50 percent and 20 percent respectively, and the dynamic growth of imports of material intensive products such as iron, steel, certain metal structures, raw materials of chemistry and textile industry was considerable as well. It can be stated on the whole that the deterioration of the balance was usually propelled by the dynamic increase of imports, apart from meat and meat products (the growth of deficit derived from the contraction of exports in this area).

The deficit of the current balance of payments amounted to USD 1609 million prior to November 1998 exceeding past year’s figure by USD 1 billion. The growth of the current deficit was mainly propelled by the deterioration of the balance of trade and that of business and technical services (e.g. license, franchise fee). The income transfer increased slightly in volume terms, its internal pattern, however, has changed significantly. Interests paid on credits having been an important item earlier were followed by the remittance of profits made in direct and portfolio investments.

The effect of the foreign money market difficulties on Hungary was considerably moderated by the resolute and consistent monetary policy in 1998. The improving macroeconomic situation of Hungary, the growing stock exchange index drew significant foreign capital into the country. The high HUF demand caused the exchange rate to stay on the strong side of the band. This involved the intervention of the central bank changing USD 3.3 billion to HUF. A considerable part of this sum has been sterilized in order to filter out inflationary effects.

The August crash of the Moscow Stock Exchange and the crisis spreading over to Latin America involved the change of the above trend resulting in considerable withdrawal of capital. The pressure on HUF necessitated the intervention of the central bank having bought HUF in the value of USD 2.2 billion in September. As a result of these transactions the exchange rate remained within the intervention band. Interest rates were also increased in September in order to impede further capital outflow and to support the exchange rate. As a consequence of the resolute monetary policy and favorable macroeconomic indicators of Hungary, foreign investors’ confidence has strengthened again since October causing HUF to approach the strong side of the intervention band at the end of the year.

The inflation rate decelerating more intensively than expected enabled the decrease of the scrawl peg devaluation. The monthly devaluation dropped to 0.7 percent by the end of the year. The further moderation of 1 January 1999 amounted to 0.1 percentage point.

The deficit of the government budget compared to the GDP totaled 4.6 percent in 1998. This figure is by 0.3 percentage points more favorable than determined by the budgetary law. The improving balance can be the performance of the upswing of economy causing the rate of growth of tax payments of both economic organizations and private persons to exceed projections. Restrictive budgetary policy involved 3 percentage points decline of the rate of state budget expenses compared to GDP (income redistribution namely) in 1998 similarly to previous years. As regards international comparisons, this figure is extremely high.

Following the most successful period of 1996 and 1997, the Budapest Stock Exchange remained below the early expectations of experts in 1998. The final value of the BUX share index (6304 points in 1998) remained below that of 1997 (7999 points) by 21 percent. Following the Asian currency crisis of 1997 the market has calmed down by early 1998 and growth was constant. The uncertainty caused by the Hungarian elections in May and the Russian financial crisis of August involved tremendous contractions at the stock exchange similarly to the events of Brazil of this January. The Budapest Stock Exchange seems to be one of the most sensible stock exchanges of the world where similar situations result in the hectic movement of stock prices.

In 1999 the growth of BUX is not expected to exceed 20-30 percent since world economic development is slowing down and the panic of stock exchanges affected deeply both foreign and domestic investors. Speculative capital transactions having strengthened at stock exchanges of developing markets in the past months are going to involve rather fluctuating prices on the Hungarian stock exchange even in 1999.

As regards social processes, earlier trends continued usually in 1998 as well. The past 17 years’ drop observed in the number of the population continued and accelerated slightly. The number of population amounted to 10 million 98 thousand persons at the end of November 1998. Deceleration is mainly related to the deteriorating figures of live births. The decrease of the number of live births having started in 1980 is of accelerating character. It is disquieting however that the 13.9 per mill figure of 1980 dropped to 9.7 per mill by 1998.

The drastic decline of the number of employed persons having been observed in the first half of the nineties was followed by a stagnation period in 1997 whereas in 1998 there started a slight acceleration. The about 7 percent rate of unemployment seems to stagnate.

Real earnings increased in 1998 similarly to 1997 although the 3.9 percent growth remained below the concomitant 5 percent figure of past year. Real earnings of intellectual workers indicated the highest increase. In 1997 the improvement of net salaries exceeded significantly that of gross earnings in contrary to 1998 when the measure of change was similar in both categories. Taxation bands having remained unchanged increased tax burdens since the growth of nominal incomes caused a lot of people to step over to a higher taxation band.

There are great differences in the level and dynamics of net earnings. Scissors between the highest and lowest salaries opened wider. The highest increase of earnings was observed in the very branches (real estate affairs and financial activities) where incomes are high anyway. The lowest growth has been registered in mining and quarrying and wood industry.

The scope of social tasks has been definitely restricted by the government. Social benefits reflect a decreasing trend in volume terms. Within this, obligatory, non fund-like and other social security-like benefits have dropped. There was a slight increase observed in the social benefits of the non-profit sector. Social payments such as taxes, social security contribution and employees’ contribution declined similarly to disbursements.

The 1998 increase and the earlier long lasting decline of real incomes resulted in a considerable modification of the consumption pattern. The ratio of fixed demands such as nourishment, the maintenance of homes has grown. This was also propelled by the prices of the area having increased more intensively than others in the past decade. E.g. nourishment expenses of 1997 totaled 53.6 percent of private incomes in contrary to the 40.7 percent figure of 1987.

The number of dwellings achieved the bottom level of several decades by the middle of the nineties. In 1987 there were 57 thousand homes built, the figure of 1997 amounted to 27 thousand and the available data of the first eleven months indicate further slight contraction for 1998 compared to past year. There are not any homes built by the state. In spite of the drop of dwellings the number of flats is increasing, the infrastructural supply of the stock of flats is improving regarding especially phone, pipe water and gas supply. The ratio of great, well-appointed flats is also growing whereas the density of inhabitants is dropping. The cease of state home buildings impeded the possibilities of young people to get own homes.

As regards future prospects recession and further uncertainty is expected in our economic environment for 1999. The growth rate of Western Europe counting for much in the respect of Hungary’s economic relations is projected to moderate. The situation of Eastern European partners is not reassuring either. In spite of this the external uncertainty derives mainly from financial crises observed in the developing regions of the world economy since they could cause significant capital movements requiring great sacrifices.

Regarding internal conditions, economic development is primarily limited by past year’s upswing having been accompanied by the definite deterioration of the foreign trade balance. However, there is no unambiguous relationship between growth and the deterioration of the balance since the latter is not a general phenomenon, it is related to certain consumption strata and commodity groups (extreme imports of pharmaceuticals and passenger cars) and related rather to the loss of external and internal markets (e.g. the contraction of meat exports) than to growth.

Profit repatriations and other income withdrawals involve even lower incline of GNI (growth national income). As regards consumption 2.5-3.0 percent growth is expected to be possible. Because of further foreign investments accumulation is believed to remain dynamic (8-9 percent).

Economic growth is furthermore mainly propelled by the development of industrial exports although its rate of growth is expected to decelerate even in this field. Previous years’ dynamics of exports amounted to about 30 percent in industry. However, the increment is expected to total 10-12 percent in 1999 merely because of the projected decline of the dynamics of exports in the customs free zones. As regards domestic sales, the recent increase of 2-3 percent is supposed to continue. Industrial production is projected to be up by 6-8 percent because of the growth of exports and domestic sales.

In accordance to the dynamic increase of investments the development of construction is expected to grow by 8-10 percent. As regards agriculture, projections are rather uncertain at the moment because of considerable sale problems and delays observed at soil-preparation works. Growth is not expected to exceed 2-3 percent.

The performance of infrastructural branches related to production are supposed to develop at the average of economic growth, by 3.5-4.5 percent namely.

The formation and financing of the balance of payments is thought to be the most critical factor of economic development in 1999. The deficit of the balance of payments depends decisively on the account of the foreign trade turnover of the customs free zones which increased from USD 2.5 billion to USD 4.5 billion between 1996 and 1998. However, the deficit of 1999 is not expected to exceed USD 5 billion.

Considering the expected growth of the positive balance in the customs free zones and assuming the stagnation of recent trends of several items in the balance of payments, the deficit of the balance of payments is projected to amount to USD 2.5-2.7 billion. This deficit can be financed by the inflow of foreign direct investments valued at USD 1.5 billion and portfolio investments (or loans) projected to total USD 1 billion. It has to be stated however, that this growth path cannot be assured on the long term. A basic condition of maintaining growth is the considerable moderation of foreign trade deficit of firms located in the customs area requiring the regaining of domestic and foreign markets. Occasional recurrence of regional financial crises accompanied by the considerable deficit of the foreign trade balance may cause serious problems.

Inflation is expected to decrease somewhat in 1999, considering that several factors (the drop of world market oil prices, price decrease of foodstuffs in the summer, the prolongation of the energy price increase) had a single decreasing effect in 1998 whereas even opposite changes can be supposed for 1999. Taking into account the expected formation of certain items of the consumer price index, the annual average inflation rate is projected to amount to 10-11 percent.