Which conditions are necessary for sustainable growth?

Trade magazin and Chain Bridge Club’s first Business Dinner of the year was organised on 29 May. This time the guests were Márton Nagy, managing director of the Central Bank of Hungary (MNB), Gergő Soltész, CEO of FHB Bank and Péter Ákos Bod, institute director at the Corvinus University of Budapest, and the topic of the event was ‘Which conditions are necessary for sustainable growth?’

Participants agreed that without a healthy bank sector there is little chance for sustainable growth and the sector can only be healthy if it can grant lots of loans. Unfortunately, the irresponsible lending policy practiced during the boom before the recession still has its effect felt for banks in the form of bad portfolios. Mr Nagy told that MNB aims at intensifying lending in the corporate sector and creating debt brakes in the private customers segment. He added that not consumption-based but an investment-based growth model is needed in Hungary’s economy. Mr Bod added that looking at Hungary’s GDP-proportionate investment rate we can see that we are far behind our neighbours. He thinks that entrepreneurs won’t take out loans even if there is zero interest rate if they can’t see their markets expanding. Mr Soltész opined that companies only start investing when they are sure that they can sell the products they make or when they can realise efficiency improving investments. Since managers are worried about constantly changing business conditions, they only make investments that return in 3 years and don’t risk 5-10-year returns. This is the reason why demand was more modest in the second phase of the Lending for Growth Programme (NHP). Mr Nagy reacted to this by saying that the second phase of NHP only seems less successful because MNB limited the loans’ areas of use. When asked about the level of economic growth they expect in the near future, Mr Nagy answered that MNB calculates with 2.5-3 percent this year and 3-4 percent next year. In his view exporting can bring expansion that can be backed by a competitive Hungarian-owned SME sector. He was sorry that Hungary only produces 40-50 percent of added value (first imported and then exported goods in the production cycle of multinational companies), while this ratio is 70 percent in Poland. Mr Bod pointed out that both the European Commission and the IMF forecast smaller growth for 2014-2015 in Hungary. He currently sees no potential for growth as capital influx, trained labour force and predictable institutional background all show signs of weakness at the moment. Mr Soltész reckoned that Hungary needs to be fundamentally strong if it wants to grow sustainably, but as regards education, innovation and investment we are worse off than 10-15 years ago. In his view it is also problematic that the average wage per capita is way behind the EU average. There is no use in the GDP gaining momentum if only few new jobs are created as a result. GDP growth in itself isn’t indicative of the wellbeing of citizens. The CEO thinks Hungary’s economy would look better if the effects of fiscal (or balance) adaptation – which is high even at regional level – would be cleared off. Péter Ákos Bod also told that the low level of inflation might cause problems in the budget. Márton Nagy shared his view that European Union funding is distributed badly because the system isn’t transparent and offers too many ‘products’; he thinks three types of financing (1. non-repayable, 2. repayable, 3. some kind of combination of the two) would be enough. Gergő Soltész said that mezzanine financing (a hybrid of capital injection and loans) would be a better solution in strengthening SMEs than traditional lending.