(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R000501300001-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 9
• Document Creation Date: January 12, 2017
• Document Release Date: June 30, 2011
• Sequence Number: 1
• Publication Date: May 11, 1983
• Content Type: MEMO

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Central Intelligence Agency
WaAngton, D. C 20505
DIRECTORATE OF INTELLIGENCE
11 MAY 1983
HUNGARY's FINANCIAL PROSPECTS
The loans provided by the Bank for
International Settlements (BIS) and the
International Monetary Fund (IMF) in 1982 stanched
the hemorrhaging of Hungary's hard currency
reserves and forestalled the need for a
rescheduling. This help gave the regime time to
take remedial action but did not correct
fundamental weaknesses in Hungary's balance of
payments. With a growing level of debt repayments
through 1985 and only modest gains in Hungary's
financial position expected this year, Budapest
will remain on a financial tightrope. To restore
its financial health, Hungary must:
-- regain the confidence of Western bankers by
achieving a sizable current account surplus
in 1983;
-- restructure its debt and build up reserves
in order to reduce its vulnerability to the
withdrawal of short-term credits; and
-- implement reforms to improve efficiency and
export competitiveness.
This memorandum was prepared byl (East European 25X1
Division, Office of European Analysis. It was requested by Mr.
William Milam, Director, Office of Monetary Affairs, US
Department of State. Comments and questions are welcome and 25X1
should be directed to Chief, East European
Division, Office of European Analysis 25X1
cWM 1(3-- /o i.3'1
/3d
1 25X1
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Hungary's Financial Goals for 1983
The IMF stabilization program approved last December
projects that Hungary will rebuild its reserves by $500 million
in 1983 with the help of a $600 million current account surplus
and $366 million in IMF credits to offset a roughly $400 million
decline in commercial debt. The Hungarians hope to move their
current account into surplus from last year's $160 million
deficit (see Table) by raising exports from $4.9 billion to $5.3
billion, holding imports at the 1982 level, and benefitting from
a $400 million decline in net interest costs. Budapest has
projected its medium and long-term borrowing requirements at $945
million, roughly equal to repayments on medium and long-term
debt. In addition to IMF credits, the Hungarians plan to cover
their needs by $250-300 million in trade credits, many of which
would be government-backed; $60-70*million in drawings on World
Bank development loans; and $200-260 million in untied commercial
bank loans. Short-term commercial borrowings are projected to be
$250 million higher than last year, but total short-term debt
would fall slightly through repayment of the $300 million due to
the BIS. Although the IMF credits carry a 6 year term, the
Hungarians do not envision a significant lengthening of their
debt's maturity structure because Western banks remain reluctant
to extend medium-term credits. Nonetheless, the Hungarians hope
to reduce their vulnerability to a quick reduction in short-
- 2 -
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term credit lines by use of more medium-term trade credits in
place of borrowing Eurodollar deposits.
Adjustment Policies and Reform
The need to produce a current account surplus has forced
Budapest to tighten its external adjustment policies. Beginning
in 1979, Budapest shifted economic priorities from promotion of
growth to gradual reduction in the country's current account
deficit. The growth of demand was dampened mainly by sharp
reductions in investment. Although increases in consumption
slowed, the regime tried to maintain living standards. IMF
statistics show that between 1979 and 1982 investment fell by
more than 3 percent annually while consumption rose by 1.6
percent annually. The need to accelerate the adjustment process
in 1983 has forced Budapest to place a greater burden on the
consumer. Hungary's targets for 1983 envision a 3-4 percent
decline in real domestic demand to be accomplished by a 1.5-2.0
percent reduction in consumption, a 6.5-7.5 percent fall in
investment, and a 3.5-5.5 percent reduction in government
outlays. The Hungarians hope to hold real GDP at the 1982 level
by growth in net exports.
Hungarian economists have told the US Embassy in Budapest
that the IMF would likely press harder for more structural
reforms--probably a more comprehensive policy on wage
differentiation--if Hungary requests a second standby program
later this year. While the current program focuses on demand
restraint policies to address the immediate balance of payments
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problem, a sustainable improvement will require more efforts to
strengthen the efficiency and competitiveness of the Hungarian
economy. The regime has already pushed ahead this year with
additional reforms, which link wage incentives more closely with
enterprise profitability, encourage the elimination of excess
labor, and reduce subsidies to inefficient producers.
Prospects for 1983
Current Account The adjustment measures now being
implemented should continue last year's improvement in the
current account, but we doubt that Hungary will attain the
projected $760 million gain. We estimate that the 1983 trade
surplus will reach only $940 million--instead of the $1.1 billion
target--and the current account surplus will reach only $400
million. The shortfall will result from poorer than expected
growth in exports despite Budapest's commitment to gradual
devaluations of the forint. Hungarian officials recently told
the US Embassy in Budapest that growth in key West European
markets is lagging behind their initial projections. Prospects
for increased hard currency exports to developing countries and
socialist countries (notably Yugoslavia and the USSR), which
account for nearly half of Hungary's sales, are not encouraging
either. Financial constraints are forcing the LDCs and
Yugoslavia to curb imports; moreover, the Hungarians have been
complaining in press articles about delayed payments from these
countries. Because of shrinking hard currency earnings, the USSR
may become less willing to buy Hungarian goods for hard currency
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and may insist instead on more hard good deliveries in ruble
trade.1 For these reasons, we estimate that Hungary's hard
currency exports will grow by only 3 percent instead of the
projected 7 percent increase. The Hungarians probably cannot cut
imports further without disrupting industrial production and
consumer supply.
Borrowing Hungary is making progress toward covering its
borrowing needs, but success is uncertain. In April, Budapest
received a $200 million syndicated loan with 3-year maturity from
Western commercial banks. The Hungarians appear to be in
compliance with the IMF program targets, which will ensure
continued drawdown of standby credits.
the Hungarians have stepped up use of
guaranteed trade credits, particularly from West Germany, France,
and Japan, and have a substantial reserve of undrawn
commitments. The US Embassy in Budapest reports that the World
Bank will probably approve $200-250 million in project credits
which the Hungarians may begin to draw by the fourth quarter of
this year.
the Hungarians
have also been lining up short to medium-term trade financing
1 Although most of Hungary's trade with CEMA countries is
conducted on a clearing account basis, approximately 15-20
percent of imports and exports involve hard currency transactions
or exchanges of goods otherwise salable in Western markets (so-
called hard goods). Most of this trade is with the USSR and,
mainly involves the exchange of
Hungarian grain, meat, and other agricultural products for Soviet
oil outside planned soft currency deliveries.
Budapest and the IMF
include these surpluses in Hun ary's overall hard currency
balance of payments.
25X1
25X1
25X1
25X1
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from commercial banks, particularly in the form of bankers
acceptances.
arrange over $500 million in medium-term loans apart from the IMF
credits may be too ambitious in the current lending climate.
Indeed the failure of attempts to expand the $200 million
syndicated loan indicates many banks remain nervous about medium-
term lending to Hungary. Furthermore, some bankers are concerned
that Hungary is still losing short-term deposits.
Reserves
The likely shortfall in the current account
surplus and continuing uncertainties surrounding Hungary's
borrowing prospects make a $500 million buildup of reserves
appear unlikely. In early 1983, when efforts to complete the
$200 million syndication were faring poorly, senior Hungarian
bankers broached the possibility of extending the $300 million
BIS loan to preclude a renewed drawdown of reserves. Completion
of the syndication, however, made a rollover of the entire credit
less necessary. Nonetheless, according to press reports,
Hungary's low level of reserves induced Western central banks to
grant a 2-month loan for $100 million to be used for repaying the
BIS. The loan from the central banks is to be repaid out of IMF
credits scheduled to be disbursed in June. Because of continuing
liquidity problems, Budapest may need a second IMF standby
program in late 1983. or early 1984 to obtain additional medium-
term credits to reinforce its reserves. Indeed, the Hungarians
indicated the possibility of another $500 million standby credit
in documentation given to banks participating in last year's club
loan.
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Outlook Through 1985 Hungary must address its fundamental
balance of payments problems more effectively because the country
needs a growing hard currency trade surplus to cover rising debt
service payments. According to IMF estimates, repayments on
medium and long-term debt and gross interest payments will rise
above $2 billion in both 1984 and 1985 compared with $1.7 billion
this year. Hungary will also have to roll over at least $2
billion in short-term credits each year. Since banks will likely
remain reluctant to extend new medium-term credits, the
Hungarians will continue to face the problem of bunched up
maturities for the next several years.
Structural reforms, while necessary, will not be sufficient
to ensure improved balance of payments performance. Hungary also
needs a continued fall in international interest rates and
sustained growth in its major Western markets. But even
projected current account surpluses will leave Hungary far short
of covering its financing requirements over the next several
years. Thus the Hungarians will remain dependent on large
borrowings from Western banks to meet all their obligacions.
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HUNGARY: FINANCING REQUIREMENTS
1982-83
Hungarian
Projection
CIA
Projection
1982
1983
1983
Financing Requirement
4,250
2,424
2,624
Current account balance
-160
600
400
Trade balance
777
1,142
940
Exports
4,885
5,252
5
050
Imports
4,108
4,110
,
4
110
Net interest
-951
-580
,
-580
Other
14
38
40
Repayments of medium and
long-term debt
-878
-936
-936
Repayments of short-term debt
-2,849
-1,724
-1
724
Repayment of BIS credits
-210
-300
,
-300
Export credits, net
-153
-64
-64
Borrowing Sources
3,364
2,924
2,616
Medium and long-term credits
893
579
450
Short-term credits
1,724
1,979
1
800
IMF credits
237
366
,
366
BIS credits
510
-
-
Change in reserves
-886
+500
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Distrubution List for Hungary's Financial Prospects
1 D/EURA
1 C/EURA/EE
1 DC/EURA/EE
1 C/EURA/EE/CE
1 C/EURA/EE/EW
1 Mr. Wm. Malin State
1 Mr. Tim Houser State
1 Mr. John Davis State
1 Mr. Steve Canner Treasury
EURA/EE/EW Chrono/ 11 May 1983
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