candidates of DK, HSP, LMP, Momentum and Párbeszéd won 14 positions; and
independent representatives won two positions. Of the nine seats from the compensatory list, Fidesz-CDPP gained six mandates and DK, HSP, LMP, Momentum and Párbeszéd gained three mandates.
The following table sets forth the composition of the Budapest Assembly following the October 2019 local government elections:
Table 6: Composition of Budapest Assembly (October 2019 results)


"":"DK, HSP, LMP, Momentum and Párbeszéd....."
"District Mayors and Lord Mayor":"15"
"Compensatory List":"3"
"Total":"18"


"":"Independent representatives .............................."
"District Mayors and Lord Mayor":"2"
"Compensatory List":"0"
"Total":"2"


"":"Total................................................................"
"District Mayors and Lord Mayor":"24"
"Compensatory List":"9"
"Total":"33"
__________________
Source: NEO
There are 23 mayors of local capital cities in Hungary: 11 mayors were supported by Fidesz-CDPP, one mayor was supported by Fidesz, four mayors were backed by DK, HSP, LMP, Momentum and Párbeszéd and seven mayors were backed by other organizations.


There are 19 counties in Hungary. Fidesz-CDPP obtained at least a simple majority in every county assembly. The total number of representatives in the 19 county assemblies amounts to 381. The total number of representatives supported by Fidesz-CDPP is 245.
The next local government elections are scheduled to be held in late 2024.
(n) European Parliament Elections


The first elections of Hungarian members to the European Parliament were held on 13 June 2004, and the fourth and most recent elections of Hungarian members to the European Parliament were held on 26 May 2019. The following table shows the political affiliations of the Hungarian members of the European Parliament after the fourth elections:
Table 7: Seats in European Parliament of Hungarian Political Parties


[Table 7: Seats in European Parliament of Hungarian Political Parties
__________________ Source: European Parliament]


Hungary has undertaken an active foreign policy designed to further its integration into the world community and to foster regional peace and economic development. Hungary joined the United Nations organization (the “UN”) in 1955 and is a member of many of its specialized agencies, such as UNESCO, FAO, UNIDO, WHO and WTO (as defined below).


In 1996, Hungary became a member of the Organization for Economic Co-operation and Development (the “OECD”), which was a decisive step towards integrating with developed nations and obtaining full EU membership. In 1999, Hungary became a full member of the North Atlantic Treaty Organization (“NATO”). Hungary maintains diplomatic relations with approximately 165 countries and is a member of a number of international organizations in addition to the UN, OECD, NATO and the EU, including the Global Environment Protection Fund, World Trade Organization (“WTO”), the International Bank for Reconstruction and Development (the “IBRD” or the “World Bank”), the Organization for Security and Co-operation in Europe, the IMF, the Council of Europe, the International Finance Corporation (“IFC”), the International Development Agency (“IDA”), the Food and Agriculture Organization (“FAO”), the


World Health Organization (“WHO”), the European Bank for Reconstruction and Development (“EBRD”), the United Nations Educational Scientific and Cultural Organization (“UNESCO”), the United Nations Industrial Development Organization (“UNIDO”), the European Investment Bank (“EIB”) and the Council of Europe Development Bank (“CEB”).


Hungary is also a member of the Central European Initiative, whose membership also consists of Austria, Croatia, the Czech Republic, Italy, Poland, Slovakia and Slovenia. The Central European Initiative mainly addresses issues of regional infrastructure development.


Hungary has been a member of the Organization for Security and Co-operation in Europe (formerly referred to as the Conference on Security and Co-operation in Europe) since its formation in 1975 and was admitted to the Council of Europe in 1990.
(a) Diplomatic Relations between Hungary and the People’s Republic of China


Hungary was among the first countries of the world to recognize the People’s Republic of China, followed by the establishment of diplomatic relations between the two countries on 6 October 1949. The bilateral relations are governed by the Joint Declaration of 2004, in which the two countries established a friendly cooperative partnership, reinforced on the occasion of the visit of Prime Minister Viktor Orbán to China in 2014.


In the framework of its foreign policy and foreign economic strategy of “Eastern Opening” that was launched in 2010, Hungary considers the People’s Republic of China among its most important partners. In order to efficiently develop relations, in 2013, a Government Commissioner for Hungarian-Chinese bilateral relations was appointed.


Following his appointment to Minister of Foreign Affairs and Trade in 2014, Péter Szijjártó continued his mandate as Government Commissioner that also signifies the emphasis that Hungarian diplomacy attaches to ties with China. Since assuming the Ministerial office, Péter Szijjártóvisited China four times.


On the occasion of the visit of Chinese Foreign Minister Wang Yi to Hungary in June 2015, Hungary signed a Memorandum of Understanding with the Chinese Government on cooperation in the framework of the One Belt One Road (OBOR) initiative as the first European country.


Hungary has been the very first country to have participated in an OBOR Working Group Meeting with China on the basis of the above Memorandum of Understanding, on the sidelines of the last round of consultations between the Foreign Ministers, in November 2016 in Beijing. During Prime Minister Viktor Orbán’s state visit to Beijing for the Belt and Road Forum for International Cooperation in May 2017, China and Hungary lifted the bilateral relationship to comprehensive strategic partnership.


The issuance of panda bonds in 2017 made Hungary the first sovereign issuer having issued RMB bonds in Hong Kong (Dim Sum bonds) and the PRC. Hungary’s 2017 RMB Bonds Issuance Program has widened the cooperation in finance and helped both Hungary and China to promote other areas of the OBOR initiative.


Premier Li Keqiang’s meeting with President Janos Ader in Budapest in November 2017 produced new and important consensus on developing bilateral ties and cooperation. The two leaders also exchanged views on climate change and vowed to expand cooperation in environmental protection. On
28 November 2017, China and Hungary signed 11 agreements to promote cooperation in fields such as e-commerce, tourism, education and smart cities.


2019 marked the 70 th anniversary of the establishment of Hungary-China diplomatic relations. Several senior visits and meetings deepened cooperation and further boosted bilateral relations.


During Prime Minister Viktor Orban’s visit to Beijing in April 2019 for the Second Belt and Road Forum for International Cooperation, Premier Li Keqiang commented that the two countries have achieved fruitful cooperation outcomes in traditional economic sectors, and enjoyed broad prospects for cooperation in new forms of industry and new economy. The two leaders witnessed the signing of bilateral cooperation documents.


Trade between Hungary and China remained strong despite the outbreak of COVID-19 in 2020, and China has provided vaccine support to Hungary. In March 2021, President Janos Ader vowed that Hungary and China will continue to strengthen cooperation on anti-pandemic, economy, trade, tourism and military affairs, and to promote the in-depth development of the Hungary-China comprehensive strategic partnership.
(b) European Union


Hungary joined the EU on 1 May 2004. After the EU parliamentary elections in 2019, Hungary delegated 21 representatives to the European Parliament. In July 2019, Lívia Járóka (Fidesz-CDPP) and Klára Dobrev (DK) became vice-presidents of the European Parliament.
By entering the EU, Hungary also became a member of the European Investment Bank.


Hungary plans to become a member of the European Monetary Union in accordance with the Maastricht Treaty. For information about Hungary’s strategy with respect to participation in the Exchange Rate Mechanism and the adoption of the Euro, see “Public Finance – Medium-Term Fiscal Program and the Convergence Program.”


Hungary is entitled to designate one member to the European Commission. The current Hungarian designee to the European Commission is Mr. Olivér Várhelyi, who assumed the position of Commissioner for Neighborhood and Enlargement on 1 December 2019.


Alongside the development of key areas of the economy, Hungary has implemented and intends to continue implementing development programs and structural reforms to accelerate the convergence process with the EU. The financial flows between Hungary and the EU from 2017 to 2019 are discussed under Section 7 “Principal Economic Data of Hungary – Public Finance – EU Net Position”.
(7) European Commission Proceedings


On 26 April 2017, the European Commission (the “Commission”) launched an infringement procedure against Hungary over amendments to the higher education law approved by the Hungarian Parliament in April 2017. Those amendments required foreign colleges and universities to operate in Hungary on the basis of an intergovernmental agreement with, and to have a main campus in, the foreign country in which they are founded.


The Central European University was the primary affected institution, as it had an accreditation both in the United States of America and in Hungary but had no campus in the United States. The Commission’s concerns were that the regulation did not comply with the freedom to provide services and the freedom of establishment, and that it was against the right of academic freedom.


On 11 November 2017, Hungary informed the Commission that the deadline for fulfilling the new requirements under the Higher Education Act had been extended by one year. Foreign higher education institutions would therefore need to meet the conditions by 1 January 2019. On 7 December 2017, the Commission decided to refer Hungary to the Court of Justice of the European Union (the “ECJ”).


The hearing took place on 24 June 2019, during which the Hungarian Government disputed that the legislation was contrary to the freedom to provide services or fundamental freedoms. The opinion of the Advocate General was delivered on 5 March 2020, in which the ECJ concluded that Hungary infringed Article XVII of the General Agreement on Trade in Services, which provides that foreign and domestic service providers must be treated equally.


According to the judgment, the legislation in question was also in breach of the provisions of the Charter of Fundamental Rights of the European Union relating to freedom of academic life, freedom of establishment of higher education institutions and freedom to conduct a business. Hungary amended the Higher Education Act in the summer of 2021 to comply with the judgment.


On 14 June 2017, the Commission announced an infringement procedure against Hungary (as well as the Czech Republic and Poland) for non-compliance with its obligations under the 2015 Council Decisions on relocation, in which Member States committed to relocate persons in need of international protection from Italy and Greece. Hungary had not taken any action (not made pledges and not relocated any person) under the relocation scheme.


Even before the infringement procedure, in 2015, the Hungarian Government had questioned the validity of the Council Decision before the ECJ. When the Commission initiated the infringement procedure, the ECJ case on the validity of the Council Decision was still pending. Though the Court of Justice ruled in September 2017 that the Council Decision was valid, the Hungarian Government disputed the applicability of the Decision. On


7 December 2017, the Commission referred Hungary (as well as the Czech Republic and Poland) to the ECJ for non-compliance with their legal obligations on relocation. The hearing took place on 15 May 2019, and on 2 April 2020, the ECJ delivered its decision, declaring that, by failing to indicate an appropriate number of applicants for international protection at regular intervals who could be


relocated swiftly to their respective territories and by consequently failing to implement their subsequent relocation obligations, Hungary (as well as the Czech Republic and Poland) had failed to fulfill its obligations under European Union law. Because the obligations under the 2015 Council Decisions on relocation expired on 26 September 2017, the judgment does not require enforcement nor additional legislation.


On 13 July 2017, the Commission launched an infringement procedure against Hungary for the new law on foreign funded non-governmental organizations adopted by the Hungarian Parliament on 13 June 2017 (the “NGO Law”). The NGO Law introduced new obligations for certain categories of non-governmental organizations (“NGOs”) receiving annual foreign funding above HUF7.2 million (approx.


EUR23,000): to register and label themselves in all their publications, websites and press material as “organizations supported from abroad”, and to report specific information about the funding they receive from abroad to the Hungarian authorities. These organizations faced sanctions if they failed to comply with the reporting and transparency obligations.


The Commission concluded that these rules breached EU law, in particular the right of freedom of association, the free movement of capital and the right to protection of private life and of personal data. Hungary sent its official response to the Commission on 14 August 2017. The Commission concluded that its concerns had not been addressed and accordingly issued a reasoned opinion on 4 October 2017. On 7 December 2017, the Commission referred Hungary to the ECJ in connection with its NGO Law.


The Hungarian Government disputed that the legislation was contrary to EU law, including the freedom of capital movement or any fundamental freedoms. The Hungarian Government stressed the legitimate aim of the legislation, which was the transparency of foreign donations and organizations funded from abroad, as well as the proportionality of the measures.


In its judgment of 18 June 2020, the ECJ agreed with the Commission’s claims and found that the Hungarian legislation unduly restricted the free movement of capital, while some provisions of the new law also amounted to an unjustified interference with several fundamental rights protected in the Charter of Fundamental Rights of the European Union. To comply with the judgment, the Hungarian Government repealed the law and developed a new regulatory concept.


The Commission has taken note of the adoption of Act XLIX of 2021 on the Transparency of Non-Governmental Organisations (NGOs) engaged in activities that may influence public life and will continue to monitor its implementation.
On 17 May 2018, the Commission sent letters of formal notice to Hungary (as well as eight other EU member states) for failing to correctly transpose into domestic law certain requirements of the Spent Fuel and Radioactive Waste Directive.


In its response to the formal notice, submitted in July 2018, the Hungarian Government argued that the legal provisions challenged by the Commission are understood and were implemented exactly in the same way as in the Spent Fuel and Radioactive Waste Directive.


In the course of the procedure, several discussions were carried out between the Commission’s and the Hungarian Government’s experts over the implementation of the two definitions in question, and the Commission accepted the explanation of the Hungarian authorities. Nevertheless the Government undertook to amend the relevant legislation in order to create a more precise formulation of the definition.


The draft legislation was sent to the Commission for approval, and the Commission closed the case in December 2020.
On 17 May 2018, the Commission sent a reasoned opinion to Hungary for granting an exemption from the public health tax to fruit distillates, such as the national drink ‘pálinka’, as well as to herbal drinks where national production is dominant.


Although the Hungarian Government is of the view that the Hungarian exempting provision is justifiable on the ground of public health, and therefore it should be treated as a non-discriminatory measure, in order to avoid further steps taken by the Commission, the Parliament amended the rules in July 2018. According to the amendment (Act XLI of 2018), ‘pálinka’ will no longer be exempted from the taxation rules. The new provision will be applicable starting 1 January 2019.


On 18 July 2018, the Commission referred Hungary to the ECJ with respect to the non-compliance of Hungary’s asylum and return legislation with EU law. The Commission also sent a letter of formal notice to Hungary concerning new Hungarian legislation which criminalizes activities that support asylum and residence applications and further restricts the right to request asylum. During the infringement procedure, the Hungarian Government defended its legal provisions on asylum procedure


and demonstrated why those provisions should be considered to be in compliance with the applicable Directives. The Commission did not accept these justifications and decided to refer the case to the ECJ 2
. The ECJ delivered its judgment in case C-808/18 on 17 December 2020, in which it declared that Hungary failed to fulfil several obligations under EU law.


On 24 January 2019, the Commission also sent a reasoned opinion to Hungary concerning legislation that criminalizes activities that support asylum and residence applications and further restricts the right to request asylum. Hungary sent its official response (supported by two decisions of the Hungarian Constitutional Court) to the Commission, maintaining its position that EU law had not been breached.


On 25 July 2019, the Commission referred Hungary to the ECJ with respect to the non-compliance of its asylum and return legislation with EU law. After the hearing, the Advocate General delivered his opinion on 25 February 2021.


According to the Advocate General, by imposing criminal penalties on organizing activities intended to enable persons to initiate the international protection procedure who do not fulfil the national criteria for the grant of that protection, Hungary has failed to fulfill its obligations under EU law and the criminalization of those activities violated the exercise of the rights guaranteed by the EU. The judgment in the case is expected to be delivered within the second half of 2021.


On 25 July 2019, the Commission also sent a letter of formal notice to Hungary concerning the situation of persons in the Hungarian transit zones at the border with Serbia. On 10 October 2019, the Commission sent a reasoned opinion maintaining its allegations. The Hungarian Government, relying on the Judgment of the ECHR in case ‘Ilias and Ahmed’, in its reply argued that the situation in the transit zones cannot be considered “detention”.


On 14 May 2020, the Court of Justice of the EU ruled that keeping asylum seekers in the transit zone constitutes “detention”. The Hungarian Government closed down its transit zones on the Hungarian-Serbian border; therefore, this case was discontinued by the Commission.


On 25 July 2019, the Commission referred Hungary to the ECJ for excluding non-EU nationals with long-term resident status from exercising the veterinary profession. On 14 April 2020, the Hungarian Government submitted an amendment to the Parliament in order to allow third country nationals with long-term resident status to be members of the Chamber of Veterinaries. Due to the adoption of the amendment, the Commission closed the case.
(8) Legal Proceedings


On 22 July 2019, the SEC issued an order instituting cease-and-desist proceedings against certain subsidiaries of Microsoft Corporation, including its subsidiary in Hungary, for violations of the books and records and internal accounting controls provisions of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 the Foreign Corrupt Practices Act of 1977 (the “FCPA”).


According to the SEC’s order, Microsoft’s subsidiary in Hungary, among others, provided discounts on software licenses to its resellers, distributors and other third parties. Instead of passing on the discounts to Microsoft’s government customers, the discounts were allegedly used to fund improper payments intended for foreign government officials to secure software license sales for Microsoft.


On 22 July 2019, the Microsoft entities involved reached a resolution of the matter with the SEC and the U.S. Department of Justice. The Hungarian public prosecution service announced on 23 August 2019, the launch of an investigation into allegations of fraud against certain unidentified parties in connection with certain violations under the Foreign Corrupt Practices Act of 1977. The investigation is still ongoing.
2. The Economy
(1) Background


2 There are ongoing discussions in the European Union regarding the rule of law in Hungary, which are of a political nature, and the European Parliament passed a resolution to launch Article 7 procedures under the EU Treaty on 12 September 2018. The Hungarian Government maintains that none of the statements included in the resolution, individually or in their entirety, substantiate that there would be a risk of a breach by Hungary of the values on which the European Union is founded.


Hungary expects that the eventual proceedings would not have any direct impact on the Hungarian economy.
The Hungarian economy has undergone a radical transformation since 1989. The Hungarian economy during the last thirty years can be characterized by economic dislocation at the beginning of the 1990s, with gradual improvement as reforms were implemented. The highlights of these economic reforms and trends include:


(a) An ambitious privatization program – the vast majority of Hungary’s large state-owned enterprises have been privatized. See “Privatization”;
(b) A shift in exports from countries formerly participating in the Council for Mutual Economic
Assistance (“COMECON”) to those of Western Europe and other industrialized countries. Currently, approximately three-quarters of Hungarian exports are to EU markets. See “Balance of Payments and Foreign Trade – Foreign Trade”;


(c) The ratios of gross and net external debt (excluding intercompany loans) to GDP declined in
the second half of the 1990s, but rose steadily from 2002 to 2009 before declining until 2019. In 2020, the gross and net external debt to GDP ratios increased to 59.0% and 8.2%, respectively. Meanwhile, the ratio of public sector debt to GDP decreased from 72% in 1996 to 50.6% in 2001, but has increased since 2001, reaching 76.4% in 2020. See “National Debt”;


(d) GDP grew by 5.4% and 4.6% in 2018 and 2019, respectively. GDP decreased by 4.7% in 2020, contracted by 2.0% in the first quarter of 2021 and increased by 17.8% in the second quarter of 2021. See “Recent Economic Performance – Gross Domestic Product”;
(e) Inflation decreased dramatically from 28.3% at the end of 1995 to 2.3% as of April 2006, partly as a result of the reduction of the VAT rate. Price levels dropped by 0.9% in December


2014 mainly as a result of lower energy and food prices and a significant drop in certain public administered prices. Until December 2019, the inflation rate increased gradually to 4.0%, mainly due to increasing food price inflation and indirect tax hikes. In December 2020, the inflation rate decreased to 2.7%, but increased to 5.3% in June 2021, mainly due to increasing fuel prices. See “Recent Economic Performance – Inflation”;


(f) Foreign direct investment (the total amount of capital invested in Hungary from abroad) has
generally increased since 1995, reaching EUR115.2 billion cumulatively, as of the end of the second quarter of 2021. During the first half of 2021, the balance of net direct investment amounted to a EUR119 million outflow, compared to a EUR1,842 million inflow during the corresponding period of 2020. See “Balance of Payments and Foreign Trade – Foreign Direct Investment”;


(g) The general government deficit (according to ESA methodology) as a percentage of GDP
amounted to 2.1% in 2018, 2.1% in 2019 and increased to 8.0% in 2020; and
(h) The current account had a surplus from 2010 to 2018 and had a deficit in 2019 and 2020. The
surplus amounted to EUR216 million in 2018. The current account had a deficit in the amount of EUR1,017 million in 2019 and EUR2,167 million in 2020.
(2) Recent Economic Performance
(a) Gross Domestic Product


In 2018, the GDP growth rate was 5.4%, reflecting growing consumption and increased investments. In 2019, the GDP growth rate was 4.6%, mainly as a result of a deceleration in investment. In 2020, GDP decreased by 4.7%, mainly as a result of the ongoing COVID-19 pandemic.


In 2020, Hungary’s GDP decreased by 4.7%. Value added by the agricultural industry declined as a result of less favorable weather conditions as compared to 2019, with the sector decreasing by 8.7%. As external demand weakened, value added by the industrial sector (i.e., manufacturing, mining and quarrying and electricity) decreased by 7.0%. Construction decreased by 10.9% as infrastructure investments and home building activities weakened.


The ongoing COVID-19 pandemic and the lockdown measures introduced as a result of the pandemic contributed to the decline of value added in both the industrial and the construction sector. Value added by the services sector fell significantly, the sector’s growth contribution to GDP growth was negative and amounted to 2.0 percentage points.


The COVID-19 pandemic and the resulting lockdown measures affected several service sectors (including accommodation and food service activities and transportation and storage) significantly.


In 2020, domestic use decreased by 2.7%, and consumption decreased by 0.9%. Gross fixed capital formation decreased by 6.9%. Gross capital formation decreased by 7.0%. Positive but declining net exports turned the 2.7% decline of domestic use into a 4.7% decrease of GDP. Exports decreased by 5.9% and imports decreased by 3.5%. Exports decreased to a larger extent compared to imports, indicating a significant deterioration of external demand.


The ongoing COVID-19 pandemic significantly weakened both external and internal demand.


In the first quarter of 2021, Hungary’s GDP decreased by 2.0%. Value added by the agricultural sector increased because weather conditions were more favorable compared to the corresponding period of the previous year, with the sector growing by 2.6%. Value added by the industrial sector (i.e., manufacturing, mining and quarrying and electricity) increased by 3.4% indicating an improving external demand. Construction decreased by 6.3%. The value added by the service sector decreased by 3.0%.


The still ongoing pandemic significantly weakened both external and internal demand.
In the first quarter of 2021, domestic use decreased by 4.7%, and consumption decreased by 2.6%. Gross fixed capital formation increased by 3.0%. Gross capital formation decreased by 11.6% mainly as a result of changes in inventories. Net exports dampened the 4.7% decrease of domestic demand to a moderate 2.0% decrease of GDP. Growth in exports amounted to 3.4%, significantly exceeding growth in imports of 0.5%.


Consequently, the growth contribution of the export sector was significant as net exports increased relative to the corresponding period of 2020.


In the second quarter of 2021, Hungary’s GDP increased by 17.8% relative to the corresponding period of the previous year. Value added by the agricultural sector increased because weather conditions were more favorable compared to the corresponding period of the previous year, with the sector growing by 1.3%. Value added by the industrial sector (i.e., manufacturing, mining and quarrying and electricity) increased by 36.6% indicating an improving internal demand. Construction increased by 18.


4%. The value added of the services sector increased by 12.6%. The ongoing pandemic significantly weakened both external and internal demand in the corresponding period of 2020 resulting in a low base.


In the second quarter of 2021, domestic use increased by 11.1%, and consumption increased by 7.0% relative to the corresponding period of the previous year. Gross fixed capital formation increased by 11.7%. Gross capital formation increased by 22.5% partly as a result of changes in inventories. Net exports increased the 11.1% increase of domestic demand to a 17.8% increase of GDP. Growth in exports amounted to 34.2%, significantly exceeding growth in imports of 24.3%.


Consequently, the growth contribution of the export sector was significant as net exports increased relative to the corresponding period of 2020.
(b) Inflation


Deregulation since 1990 has led to a high rate of inflation in Hungary. The inflation rate was relatively high in the 1990s compared to rates in Western Europe due to the general phasing out of price supports and the high public sector deficit. However, the inflation rate has generally declined since the change in monetary regime in May 2001.


In December 2018, the CPI inflation rate increased to 2.7% mainly as a result of increasing food prices and indirect tax increases imposed on alcohol and tobacco products. In December 2019, the CPI inflation rate increased to 4.0% mainly as a result of increasing food prices and indirect tax increases imposed on alcohol and tobacco products. In December 2020, the CPI inflation rate decreased to 2.7% mainly as a result of weak demand due to the ongoing COVID-19 pandemic.
(c) Price Regulation


As of the end of 2020, approximately 86% of all prices in Hungary were unregulated. The main categories of products and services that continue to have regulated prices are: electricity, gas, purchased heating, various pharmaceutical products, meals at schools, kindergartens and nurseries, the state lottery, local and long-distance passenger transport, state-owned housing rent, various household utilities (including water and sewage charges and refuse collection services) and postal services.


(d) Wages
In 2018, net real wages grew by 8.3% mainly as a result of rising nominal gross wages. In 2019, net real wages grew by 7.7% mainly as a result of rising nominal gross wages. In 2020, net real wages grew by 6.2% mainly as a result of rising nominal gross wages. In the first seven months of 2021, net real wages grew by 4.0% mainly as a result of rising nominal gross wages as CPI inflation was 4.2% in the first seven months of 2021.


As with GDP growth, nominal and real wage changes have not been consistent across Hungary. Relatively stronger overall economic growth in western Hungary and a generally immobile labor force (due to a general reluctance to relocate to other parts of the country) have led to a substantial decrease in unemployment in western Hungary and disproportionately higher wage increases compared to the rest of Hungary.


Hungary’s incentive policies (mainly consisting of the promotion of investment in less developed regions and the development of transportation infrastructure and human resources) and utilization of the Structural and Cohesion Funds of the EU are in part designed to increase employment levels in the eastern parts of the country.


In 2018, the minimum wage and the guaranteed minimum wage increased by 8% and 12%, respectively, while employer contributions were reduced by 2%. In 2018, contributions were cut by another 0.5%. See “Public Finance – Health Care System.”
(e) Employment


In addition to improving economic performance, government measures aimed at reducing unemployment played a significant role in reducing the unemployment rate. In 2018, the unemployment rate was 3.6%. In 2019, the unemployment rate fell to 3.3%. The unemployment rate increased to 4.1% in 2020 mainly as a result of the COVID-19 pandemic. The unemployment rate increased to 4.5% in the first quarter of 2021, but decreased to 4.1% in the second quarter of 2021.


As of 26 February 2021, CSO started publishing labor force survey data according to a new, internationally harmonized methodology. Certain categories of economic activity are classified differently by the new methodology: in addition to active workers receiving childcare benefits, those who worked before parental leave, receive job-related income and are guaranteed to return to their previous job are also considered employed due to the new EU regulations.


In Hungary, this change in methodology resulted in an increase in the employment count by approximately 120,000–150,000 workers, especially impacting female activity rates. Furthermore, students, unpaid family workers, and seasonal workers are also counted differently without significantly changing their status under the new methodology.


Increasing the participation rate has been an important policy goal of the Government. The Government has also taken a number of steps to reduce the unemployment rate. Laws were passed, which took effect as of 1 August 2005, making it easier to employ part-time employees. Furthermore, the Government introduced several initiatives aimed at helping currently unemployed workers find employment, including job search assistance programs and adult vocational training programs.


Lastly, the Government initiated the “START” program, which is aimed at helping first-time employees find employment. The START program provides, among other things, employer contribution discounts to employers hiring graduates under a certain age and certain other first-time employees.


On 1 January 2012, a public work program called the Start Work Program (Start Munkaprogram) was introduced. The Start Work Program is based on three pillars: (1) a national public work program; (2) local government public work programs; and (3) micro-regional pilot projects.
On 1 July 2012, the New Labor Code of Hungary went into effect, which contains the fundamental regulation of employment and provides a more flexible legal relationship between employers and employees.


(3) Principal Sectors of the Economy
(a) Industry
According to volume indices compiled by CSO, industrial gross production (excluding water and


waste management) decreased by 5.7%, and total sales declined by 4.9%, in 2020. Between 2018 and 2020, industrial export sales amounted to more than 60% of the total sales of the sector. In 2020, export sales decreased by 5.3%, and domestic sales declined by 4.1%. In the first seven months of 2021, export sales increased by 18.0%, while domestic sales grew by 12.6%. As a result, total sales increased by 16.2%, and gross production grew by 17.1% in the seven-month period ended 31 July 2021.


In 2020, 95.6% of total industrial production was attributable to manufacturing. The value of mining and quarrying production amounted to 0.4% of total industrial production, and the value of electricity, gas, steam and air conditioning supply production amounted to 4.0% of total industrial production.
(b) Manufacturing


In 2020, gross production in the manufacturing sector decreased by 5.8% and total manufacturing sales decreased by 5.8%. In 2020, export sales in manufacturing decreased by 5.1%, while domestic sales decreased by 7.7%. In the first seven months of 2021, export sales in manufacturing increased by 16.6%, and domestic sales increased by 13.4%. As a result, total manufacturing sales increased by 15.8%, and gross production increased by 17.5% in the first seven months of 2021.


In 2020, approximately half of manufacturing production was attributable to three subsectors: the manufacture of transport equipment; the manufacture of computer, electronic and optical products; and the manufacture of food products, beverages and tobacco products.
(c) Manufacture of Food Products, Beverages and Tobacco Products


In 2020, gross production in the manufacture of food products, beverages and tobacco products subsector grew by 0.6%, and total sales increased by 0.9%. In 2020, export sales in this subsector increased by 3.2%, and domestic sales declined by 0.7%. In the first seven months of 2021, export sales grew by 5.7%, and domestic sales increased by 5.0%. As a result, in the first seven months of 2021, total sales grew by 5.3%, and gross production increased by 5.2%.


(d) Manufacture of Computer, Electronic and Optical Products


In 2020, gross production in the manufacture of computer, electronic and optical products subsector increased by 1.1%, and total sales grew by 1.1%. In 2020, export sales in this subsector increased by 1.3%, and domestic sales decreased by 3.7%. In the first seven months of 2021, export sales grew by 13.9%, and domestic sales increased by 35.0%. As a result, in the first seven months of 2021, total sales grew by 14.7%, and gross production increased by 14.6%.


(e) Manufacture of Transport Equipment
In 2020, gross production in the manufacture of transport equipment subsector decreased by 11.1%, and total sales decreased by 11.5%. In 2020, export sales in this subsector decreased by 11.1%, while domestic sales decreased by 15.8%. In the first seven months of 2021, export sales grew by 17.9%, and domestic sales increased by 21.7%. As a result, in the first seven months of 2021, total sales grew by 18.3%, and gross production increased by 19.7%.


(f) Energy
In 2020, total primary energy consumption amounted to 1,103.1 petajoules, a 2.2% decrease compared to 2019. The two most important energy products in Hungary are oil and gas, which accounted for 61.6% of energy consumption in 2020.


Hungary’s primary external source of energy is gas and oil imported from Russia. In 2009, disputes between Russia and Ukraine over the pricing of natural gas supplies and transit fees from Russia resulted in Russia’s cessation of natural gas deliveries to European Union countries, including Hungary, for approximately two weeks.


Although Hungary compensated for the energy shortage primarily through its gas reserves, the service interruption had some adverse impact on certain sectors, including industry.
Hungary has taken measures to reduce the impact of possible future disruptions in its energy supply by diversifying its external and internal energy sources and routes of delivery and by accumulating further gas reserves.


Hungary currently maintains a reserve of at least a 12-week supply of oil, in compliance with OECD requirements. A construction project (Turk stream 2) that is currently underway would provide a direct gas pipeline from Russia to Hungary. In addition, the European Union is negotiating the construction of a gas pipeline from the Caspian region, the Middle East and Egypt that, if completed, would provide a direct gas supply to Hungary.


Also, Hungary operates a nuclear power plant and has some capability to generate renewable energy, such as the ability to produce geothermal, wind and solar energy, energy from biomass as well as hydropower, albeit limited due to the geographic properties of Hungary. In an effort to reduce Europe’s dependence on imported energy sources, the European Commission has set target levels and dates for EU members to attain renewable energy sources, including a target for Hungary for 13.


0% of its energy use to come from renewable energy sources by 2020.
On 14 January 2014, Prime Minister Viktor Orbán announced that Hungary would construct two new nuclear plant blocks at Paks. According to the announcement, the Government of the Russian Federation was expected to cooperate in the construction and financing of the blocks and to provide a loan to Hungary of EUR10 billion, which would cover 80% of construction costs.


Hungary was expected to begin repaying the loan, over a period of 21 years, after the project is completed and once the plant is operating. The international treaty between the Government of Hungary and the Government of the Russian Federation relating to the nuclear plant project was approved by the Hungarian Parliament on 6 February 2014. Drawdowns on the loan began in 2017.


Currently, the project is approaching the end of the pre-construction phase, with some preparatory works completed, and with all major required licenses expected to be obtained in 2021. Once all licenses are issued, the construction phase of the new plant blocks is expected to begin.


On 9 February 2018, the MNE announced that Hungary would pre-pay EUR78.2 million, the amount the country had drawn from the credit line provided by Russia for the construction of the Paks nuclear reactor units. On 30 April 2021, the Government announced that under a new modification to the financing contract for the upgrade of the Paks nuclear power plant, Hungary would start repaying the Russian loan for the project in 2031 rather than from 2026 as originally planned.


The amendment of the financing contract was approved by the Hungarian Parliament in June 2021, and the ratification process in the Parliament of the Russian Federation is expected to take place later in 2021.


The Ministry of Transport, Telecommunication and Energy is also aiming to create and maintain a competitive electricity market and to fully liberalize the sector in accordance with EU Directives. All of Hungary’s natural gas distribution companies, six electricity distribution companies and all but two of its power generation companies have been privatized.


According to data compiled by the Hungarian Energy Office, in 2020, 43.4% of Hungary’s total energy demand was supplied by domestic energy sources, and 56.6% was supplied by imported energy sources. Of the total energy consumed, 6.4% was produced from coal, 61.6% was produced from hydrocarbons (imported primarily from Russia) and 32.0% was produced from other resources.
(g) Construction


In 2020, the output of the construction sector decreased by 9.7% compared to 2019. In 2020, the construction of buildings declined by 6.2% compared to 2019. In 2020, civil engineering works decreased by 13.9%. Output of the construction sector increased by 9.8% in the seven-month period ended 31 July 2021, compared to the same period in 2020. Civil engineering construction increased by 5.5% in the seven-month period ended 31 July 2021, compared to the same period in 2020.


Building construction increased by 13.2% in the seven-month period ended 31 July 2021, compared to the corresponding period in 2020.
(h) Service Industries


In 2020, seven out of fourteen subsectors decreased and seven subsectors increased. The seven subsectors that decreased were (i) transportation and storage, (ii) accommodation and food service activities, (iii) administrative and support service activities, (iv) human health and social work activities, (v) art, entertainment and recreation, (vi) other service activities and (vii) activities of households, decreasing by 10.5%, 42.5%, 14.3%, 15.5%, 11.8%, 16.6% and 5.8%, respectively. The


seven subsectors that increased were (i) wholesale and retail trade, repair of motor vehicles and motorcycles, (ii) information and communication, (iii) financial insurance activities, (iv) real estate activities, (v) professional, scientific and technical activities, (vi) public administration and defense, compulsory social security and (vii) education increasing by 0.9%, 5.0%, 4.1%, 0.9%, 0.1%, 1.6% and 1.1%, respectively.


In the three-month period ended 31 March 2021, five out of eight service subsectors decreased, and three service subsectors increased. The five service subsectors that decreased were (i) wholesale and retail trade; repair of motor vehicles and motorcycles; accommodation and food service activities; (ii) transportation and storage; (iii) real estate activities; (iv) professional, scientific and technical activities; administrative and support service activities;


and (v) arts, entertainment and recreation; repair of household goods and other services, decreasing by 7.6%, 11.0%, 3.5%, 5.1% and 10.8%, respectively. The subsectors of (i) information and communication; (ii) financial and insurance activities (iii) and public administration and defense; compulsory social security; education; human health and social work activities increased by 1.8%, 3.4% and 1.9%, respectively.


In the three-month period ended 30 June 2021, all eight service subsectors increased, and no service subsectors decreased. The eight service subsectors that increased were (i) wholesale and retail trade; repair of motor vehicles and motorcycles; accommodation and food service activities; (ii) transportation and storage; (iii) information and communication ; (iv) financial and insurance activities;


(v) real estate activities; (vi) professional, scientific and technical activities; administrative and support service activities; (vii) public administration and defense; compulsory social security; education; human health and social work activities; and (viii) arts, entertainment and recreation; repair of household goods and other services, increasing by 20.7%, 15.5%, 16.9%, 3.6%, 5.3%, 17.2%, 8.7% and 17.5%, respectively.
(i) Agriculture


In 2020, production of wheat, maize and barley amounted to 5.1 million tons, 8.4 million tons and 1.5 million tons, respectively. Production of wheat decreased by 4.8%, while production of maize and barley increased by 1.6% and 7.3%, respectively, compared to the previous year. In the cases of wheat and maize, average yield increased by 3.4% and 6.5%, respectively, compared to 2019. In the case of barley, average yield grew by 1.6% compared to 2019.


In 2020, the production of sunflower seed, sugar beet and rape seed amounted to 1.7 million tons, 0.8 million tons and 0.9 million tons, respectively. In 2020, the production of sunflower seed, sugar beet and rape seed decreased by 0.5%, 5.2% and 3.9%, respectively.
(j) Infrastructure


Hungary is a landlocked country and is located at the crossroads of several important transport corridors for the region. Three main roadways (forming part of the Trans-European Network), three corridor branches and various railways and waterways cross Hungary. With Budapest as a hub, several corridors connect Hungary to the Trans-European Network.


Hungary plays a central role in international transport connections for Central and Eastern Europe and for Southeastern Europe towards the West and the East. However, compared to Western European countries, the transportation network in Hungary is less developed, suffering from a shortage of bridges, a lack of transversal connections, poor quality in infrastructure and a low proportion of expressways.


Since 2007, the development of the road network has been a state task, and the Government has financed construction from the central budget. Infrastructure projects are managed by the National Infrastructure Developing Private Company Limited (Nemzeti Infrastruktúra Fejlesztő Zrt.) (the “NIF Zrt.”), while the maintenance of motorways is the responsibility of the State Highway Management Company Limited by Shares (Állami Autópálya Kezelő Zrt.).


The length of national public roads amounted to 32,070 kilometers in 2018. In 2019, the length of national public roads increased by 134 kilometers and reached a total of 32,204 kilometers.
Hungary has one international airport (Liszt Ferenc International Airport in Budapest), which currently meets the majority of the air traffic needs of the country. Since May 2006, several transportation companies have been providing air transportation services between European cities and


airports at Sármellék, Debrecen, Győr-Pér and Pécs-Pogány. In line with international trends, the traffic at Liszt Ferenc International Airport has steadily increased over the last several years.
Navigation is possible along approximately 1,600 kilometers of the rivers in Hungary. There is commercial navigation on the Danube River and, to a very limited extent, on the Tisza River.


The telecommunications sector’s level of development, in both wired and wireless communication, approaches the average level of other EU members. In 2020, Hungary had 12.7 million mobile phone subscriptions. By the end of 2020, the number of internet subscriptions amounted to 10.4 million.
3. Privatization
(1) Status of Privatization Efforts


Since 1990, Hungary has privatized nearly 1,300 enterprises out of the 1,860 enterprises previously owned by the state. The Hungarian Privatization and State Holding Company (Állami Privatizációs és Vagyonkezelő Zrt.) (“ÁPV Zrt.”) manages these sales.


Most of the larger companies involved in the privatization program have already been partially or fully privatized. Permanent government control is anticipated for 36 companies. The property that is required to remain state-owned in the long-term is defined by law as follows:
(1) national public utility service providers;
(2) property or companies of strategic importance for the national economy; and


(3) property or companies that accomplish tasks or fulfill objectives for national defense or other special purposes.
See also “Monetary and Financial System – Capital Markets – Stock Exchange.”
(2) Methods of Privatization Used


Hungary is unique among Central European countries in that a large majority of its privatizations were conducted through public tenders, with sales for cash consideration. These outright sales, often to strategic long-term investors, were successful in bringing new management and knowledge to many Hungarian enterprises. Public offerings played an important and successful role in the privatization process.


On 1 January 2012, the Act on National Assets went into effect, which provides for the protection of certain assets such as rivers, streams, channels, natural lakes, airspace above Hungary, emission reduction units, archeological finds, financial assets owned by the government or a local municipality (including corporate shares, e.g.


, shares of public transportation companies, forestry companies, and companies established by law for public interest), national data assets owned by the state or local governments or their public or private organizations. The Act determines the scope and rules of management of national assets and limitations related to selling, lending and utilization of national assets, in order to ensure that such assets are utilized in a way that serves the public interest.


4. Balance of Payments and Foreign Trade
(1) Balance of Payments
The current account deficit amounted to EUR2,167 million in 2020, mainly due to a large deficit in primary and secondary income offsetting the surplus in goods and services. During 2020, net direct investment posted an inflow, reaching EUR2,189 million compared to a net inflow of EUR772 million in 2019.
(2) Foreign Trade


Hungary’s foreign trade in goods with industrialized countries (in particular, EU countries) has increased in recent years. EU countries accounted for 77% of Hungary’s exports and 71% of imports in 2020. During the first seven months of 2021 EU countries accounted for 77% of Hungary’s exports and 72% of imports.
China is Hungary’s largest trade partner outside the EU, with imports from China worth HUF2,778.7
billion and exports to China worth HUF635.8 billion in 2020.


(a) Economic Relations between Hungary and the People’s Republic of China
China is the number one trade partner of Hungary among the non-European countries in terms of foreign external trade turnover, which amounted to HUF3,415 billion in 2020. Relative to 2019, imports increased by 34.1% and reached HUF2,778.7 billion while exports increased by 32.0% reaching HUF635.8 billion. Chinese FDI stock in Hungary reached EUR341 million in 2020, the stock doubled since 2016.


Economic relations between Hungary and China have gained new impetus with the announcement of the “Opening to the East” policy of Hungary, and the past few years have been marked by countless results. Central banks of the two countries signed a currency swap agreement, while the two export-import banks also inked a credit line agreement.


One of the most important infrastructure development project of the Central and Eastern European region, the modernization of the Budapest-Belgrade railway line would be realized mainly with Chinese financial assistance. Another major development was the re-opening of the Budapest-Beijing direct flight in 2015 May, which helped to achieve a nearly 40% increase in the number of Chinese visitors to Hungary in 2015.


Chinese investments in Hungary have also shown steady growth recently. Bank of China, one of China’s biggest commercial bank, established its regional center in Budapest, which operates as Europe’s fifth Renminbi clearing center as well. Leading chemical industry company Borsodchem’s acquisition by Wanhua Industrial Group created the third biggest isocyanate-producer of the world, and the largest TDI manufacturer of Europe.


Huawei set both its European supply center and its logistic center in Hungary, the latter responsible for the whole European and Middle Eastern region. The world’s largest manufacturer of tire mold, Himile established its European manufacturing base near Székesfehérvár, and both leading telecommunication equipment producer Lenovo and automotive interior manufacturer Yanfeng expanded their production capacities.


It is also important to mention the projects of China BBCA Group Corporation’s citric-acid plant in Szolnok and BYD’s first European electric bus factory in Komárom.


In recent years, the National Bank of Hungary has opened towards the Chinese market through a structured approach, thus now it has extensive relationships and results. In 2013, the National Bank of Hungary was the first in the Continental Europe to conclude a bilateral currency swap framework agreement with the People’s Bank of China, the Chinese central bank, to support trade and investment relations.


The agreement was renewed in 2016, then it was extended for another 3 years with an increased principal amount in 2019. Foreign exchange swap agreements are now part of the central bank toolkits, as a means of ensuring stability of financial and real economy markets.


In 2015, the National Bank of Hungary announced a comprehensive Renminbi Programme with the aim of facilitating the establishment of new Chinese-Hungarian relations and the development and deepening of existing relations with the means at its disposal.


The programme includes objectives such as the construction of the renminbi foreign exchange reserve portfolio, the provision of a central bank renminbi liquidity facility in case of market disturbances, the development of the renminbi clearing and settlement infrastructure, the enforcement of financial stability and regulatory aspects, as well as research and academic cooperation.
(b) Trade Policy


Hungary has taken a number of steps since the beginning of the 1990s to integrate its economy into the global trading system, including the adoption of EU policies and the entering into trade agreements.
(c) European Union


Upon accession to the EU, Hungary adopted all aspects of the Common Commercial Policy of the EU. This includes the application of the Common External Tariff, EU preferential trade agreements and regimes, WTO commitments and trade defense measures. The overall effect of these changes is that the trade regime of Hungary has become more open and transparent (for example, the average level of customs duties decreased by about 50% following Hungary’s accession to the EU, and, within the framework of the WTO, the country became a party to the Agreement on Government Procurement,


the Agreement on Trade in Civil Aircraft and the Information Technology Arrangement). Further, by virtue of Hungary’s membership in the EU, it is also a member of the European Economic Area (“EEA”), along with Norway, Iceland, and Lichtenstein and the other EU-member countries.
(d) Bilateral Trade Agreements


In addition to the multilateral trade agreements discussed above, Hungary has also entered into bilateral trade agreements with several countries, including Slovenia, Romania, Turkey, Israel, Bulgaria, Lithuania, Latvia and Estonia. Hungary has also entered into trade and co-operation agreements with certain Central European countries designed to lower or eliminate trade barriers.
(3) Foreign Direct Investment


In 2018, net FDI inflow was positive and amounted to EUR2,612 million. In 2019, net FDI inflow decreased, reaching EUR772 million. In 2020, net FDI inflow increased reaching EUR2,189 million.
As of 31 December 2020, the cumulative FDI in Hungary amounted to EUR109.4 billion.
During the six-month period ended 30 June 2021, the balance of net direct investment showed an outflow of EUR119 million compared to the EUR1,842 million net inflow during the same period of 2020.


Net foreign direct investment abroad in the six-month period ended 30 June 2021 generated a net outflow of EUR2,796 million, while in the corresponding period of 2020, net foreign direct investment abroad generated a net capital inflow of EUR599 million. In the six-month period ended 30 June 2021, net foreign direct investment abroad in the form of debt instruments amounted to a EUR2,097 million outflow, compared to an inflow of EUR1,770 million during the corresponding period of 2020.


In the six-month period ended 30 June 2021, net foreign direct investment abroad in the form of equity capital (including reinvestment of earnings and equity) amounted to a EUR699 million outflow; during the corresponding period of 2020, net capital outflow amounted to EUR1,171 million. In the six-month period ended 30 June 2021, net foreign direct investment abroad in the form of reinvestment of earnings amounted to a EUR327 million outflow;


during the corresponding period of 2020, net capital outflow amounted to EUR329 million. In the six-month period ended 30 June 2021, net foreign direct investment abroad in the form of equity capital (excluding reinvestment of earnings) amounted to a EUR372 million outflow; during the corresponding period of 2020, net capital outflow amounted to EUR842 million.


Net foreign direct investment in Hungary in the six-month period ended 30 June 2021 generated a net inflow of EUR2,677 million, while in the corresponding period of 2020, net foreign direct investment in Hungary generated a net inflow of EUR1,242 million. In the six-month period ended 30 June 2021, net foreign direct investment in Hungary in the form of debt instruments amounted to a EUR7,565 million inflow;


during the corresponding period of 2020, net capital inflow amounted to EUR2,200 million. In the six-month period ended 30 June 2021, net foreign direct investment in Hungary in the form of equity capital (including reinvestment of earnings and equity) amounted to a EUR4,888 million outflow; during the corresponding period of 2020, net capital outflow amounted to EUR958 million.


In the six-month period ended 30 June 2021, net foreign direct investment in Hungary in the form of reinvestment of earnings amounted to a EUR756 million inflow; during the corresponding period of 2020, net capital inflow amounted to EUR851 million. In the six-month period ended 30 June 2021, net foreign direct investment in Hungary in the form of equity capital (excluding reinvestment of earnings) amounted to a EUR5,644 million outflow;


during the corresponding period of 2020, net capital outflow amounted to EUR1,809 million.


In recent years, reinvested earnings in Hungary and FDI in the form of other capital have been relatively high, amounting to approximately half of the balance of net income on equities. Further, the increasing investment by Hungarian companies in the form of equity capital abroad has primarily been a result of certain Hungarian companies seeking to increase their footprint in the Central-Eastern European region generally.
(4) Foreign Exchange Reserves


On 10 January 2020, the NBH announced that the People’s Bank of China, the central bank of the
People’s Republic of China, and the NBH renewed their bilateral currency swap agreement, first entered into in 2013, for three years and increased the facility from RMB10 billion to RMB20 billion.
On 23 July 2020, the NBH announced that international reserves amounted to EUR30.2 billion at the end of June 2020. This level of reserves significantly exceeds all relevant benchmarks.


In addition, the NBH created an international safety net consisting of bilateral swap and repo agreements, which enables the NBH to increase foreign currency liquidity by up to EUR10 billion within a short time. The components of the safety net are: (i) a repo agreement executed with the European Central Bank (“ECB”), through which the NBH can provide euro liquidity of up to EUR4 billion to Hungarian financial institutions;


(ii) an FX swap agreement concluded with the People’s Bank of China in 2013, which ensures liquidity of approximately EUR2.5 billion; (iii) a repo agreement concluded with the Bank for International Settlements, making available liquidity of EUR2 billion; and (iv) the repo facility announced by the U.S. Federal Reserve, which can provide USD1-2 billion of liquidity for the NBH. The safety net created by these agreements ensures additional foreign currency liquidity over the NBH’s reserves.


By building the safety net, the NBH has significantly increased its room to maneuver and is thereby able to respond efficiently to potential tension emerging in any sub-market maintaining safe levels of international reserves.


On 4 February 2021, the NBH announced the extension of euro liquidity providing repo line with the ECB, extending the agreement, originally with a maturity of June 2021, for additional 9 months, until the end of March 2022. Under the agreement, the NBH will be able to borrow up to EUR4 billion.
5. Monetary and Financial System
(1) The National Bank of Hungary


The National Bank of Hungary (“NBH”) is the central bank of Hungary. The independence of the NBH and the members of its decision-making bodies in carrying out the tasks and meeting their obligations are provided for by Act CXXXIX of 2013 on the National Bank of Hungary (the “National Bank Act”). The NBH’s primary objective is to use monetary instruments to achieve and maintain price stability and, without prejudice to this objective, to support the economic policy of the Government. These instruments include:


(1) setting the central bank base rate (the rate for the NBH’s main policy instrument, the two-week deposit facility and the three-months deposit facility) and the setting of rates for overnight deposit and lending facilities;
(2) establishing the minimum reserve requirements for commercial banks;


(3) conducting open market operations, which include sales and purchases of government securities from commercial banks and engaging in other similar transactions to regulate liquidity within the economy; and
(4) determining and implementing the exchange rate policy in agreement with the Government.


The NBH is a company limited by shares, with a registered capital of HUF10 billion. The NBH is wholly owned by Hungary and is regulated by the National Bank Act. The supreme body of the NBH is the General Assembly, and the Finance Minister (previously the Minister for National Economy) represents Hungary as the sole shareholder. The Monetary Council is the highest monetary policy decision-making body of the NBH.


The Monetary Council holds meetings at least once every month and makes the most important decisions concerning the general activities of the NBH, including the setting of the official interest rate.


Following its election on 6 July 2015, the Supervisory Board of the NBH held its inaugural meeting and began its activities. The Supervisory Board is responsible for the continuous supervision of the NBH on behalf of the owner (Hungary) and controls the internal audit organization with certain restrictions prescribed by the National Bank Act.


On 7 June 2021, a new modification to the National Bank Act was announced in the Hungarian Official Journal. Effective from 2 August 2021, the modification offers a legal basis for aspects of environmental protection and sustainability to have a more significant role in the NBH’s activities


without prejudice to its primary objective of reaching and maintaining price stability. The modification provided that, from 2022, up to 6% of the NBH’s revenues resulting from penalties would be used to neutralize its carbon footprint arising from its operation.


However, the costs to achieve this objective are expected to decline gradually in the future, because the NBH has undertaken to reduce its carbon dioxide emission by 30% within three years relative to the value in 2019, and by 80% until 2025.
(a) Green Program and Environmental Sustainability Mandate


In January 2019, the NBH joined the Central Banks and Supervisors Network for Greening the Financial System (the “NGFS”), which aims to (i) strengthen the global response required to meet the goals of the Paris Agreement, (ii) enhance the role of the financial system to manage risks, and (iii) mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development.


On 25 February 2019, the NBH launched a program to reduce the risks associated with climate change and other environmental problems, to expand green financial services in Hungary, and to contribute towards reducing the ecological footprint of financial institutions (the “Green Program”).


Under the Green Program, the NBH acts as a supervisory authority and conduct impact assessments of the potential effects of climate change on financial markets and of the transition towards a climate-friendly economy. Based on the analyses, the NBH will provide guidance to financial institutions, if necessary, by issuing recommendations in order to reduce existing risks.


The NBH intends to facilitate growth in the domestic financial intermediary system’s support of environmental sustainability through its Green Program. To this end, the NBH established an award for financial institutions promoting green finance, where applicant market participants are reviewed based on actions taken to address environmental issues, the transparency of such actions as well as their own financial products, services or other decisions made to attain green goals.


On 20 June 2019, the NBH announced that a dedicated green bond portfolio within the NBH’s foreign exchange reserves would be created in the near future.


On 18 December 2019, the NBH announced a preferential capital requirement program for credit institutions to support the growth of green financial products and to improve the energy efficiency of the Hungarian building stock. The preferential regulatory treatment will be available for green housing loans granted between 1 January 2020 and 31 December 2023. A consultation with the banking sector will also be launched on the possibilities of introducing green covered bonds in Hungary.


On 14 October 2020, the NBH announced that OTP Bank joined the European platform named the Energy Efficient Mortgages Initiative. The NBH considers it a crucial climate-friendly decision that the first Hungarian commercial bank joined an international initiative that aims to encourage energy efficient real estate purchases and investment in real estate to increase energy efficiency, by extending preferential loans.


On 3 November 2020, the NBH announced that in order to promote long-term sustainability and consistent with the principles of its Green Program, it would further develop its mortgage bond purchase program and would purchase mortgage bonds qualifying for green bond status.


The NBH would consult the market participants involved on the green bond qualification criteria for inclusion in the program and on the details of green mortgage bond purchases, to ensure that green bonds would be issued as soon as possible. The NBH would cease to purchase securities under its mortgage bond purchase scheme on the primary market and would withdraw the opportunity to roll over mortgage bonds until the program for purchases of green mortgage bonds is drawn up.


However, the NBH would continue its purchases in the secondary market to maintain the liquidity of the mortgage bond market.
On 8 December 2020, the NBH announced the introduction of preferential capital requirements for green corporate and municipal funding for a period of 5 years.


Starting with the ICAAP reviews of 2021, the NBH intended to improve the risk profile of the banking sector and encourage green lending through a positive incentive, by releasing a part or all of the capital requirements prescribed in Pillar 2 of capital regulation for environmentally sustainable corporate and municipal exposures that meet the criteria set out in the detailed terms and conditions. The preferential capital requirement program


would initially cover the financing of renewable energy production (as defined by EU Taxonomy), as well as the purchase of green bonds, but this list of eligible exposures would gradually expand.


On 3 March 2021, the NBH published its first Green Finance Report, providing a status report on the environmental sustainability of the Hungarian financial system. The publication aimed to increase transparency, raise market awareness and provide an opportunity for all stakeholders to better understand the financial dimensions of climate change and other environmental challenges.


On 21 April 2021, the NBH published mandatory supervisory guidelines for credit institutions on climate-related and environmental risks. The aim of the guidelines were to raise awareness among Hungarian banks and to improve their preparedness for climate-related and environmental risks. As a first step, the guidelines required credit institutions to draw up a self-assessment and an action plan and to submit them to the NBH by 30 September 2021.


On 1 July 2021, the NBH revised its regulation on the MFAR so that green mortgage-backed funds could be taken into account in the calculation of the ratio with a preferential weighting. Based on the decision of the NBH’s Financial Stability Board (“FSB”), from 1 July 2021, green mortgage-backed funds with an original maturity of more than 5 years may be taken into account with a higher weight of 1.5 when calculating the MFAR.


This could steer issuances towards green mortgage bonds, which also supports the greening of mortgage loan portfolios that serve as cover assets for these. With regard to the labelling of mortgage bonds as green, the NBH requires banks to follow standards that are widely accepted and employed internationally to support banks’ adjustment and investor orientation.


In addition to the preferential treatment of green mortgage-backed funds, the FSB also made changes in the regulation supporting the reduction of the sector-level HUF maturity mismatch: raising the required minimum level of the ratio from 25% to 30%, expecting newly issued mortgage bonds to be listed on a stock exchange, and reintroducing the restrictions on cross-ownership of mortgage bonds by banks suspended because of the COVID-19 pandemic in an amended form, from which a discount may be obtained in the case of ownership for market making purposes


. These changes will take effect on 1 October 2022, in order to ensure adequate preparation time for banks and are not expected to cause significant adjustment difficulties for them, given the preferential weighting of green liabilities.


On 6 July 2021, The Monetary Council reviewed and approved the MNB’s Green Monetary Policy Toolkit Strategy and decided to launch the Green Mortgage Bond Purchase Program. The strategic goal of the Green Mortgage Bond Purchase Program is to contribute to the development of the domestic green mortgage bond market through targeted purchases and, through this, encourage green mortgage loan activities.


This program could indirectly support the construction of energy-efficient real estate, thereby contributing to a healthier housing market, while at the same time this may also shape environmentally conscious consumer behavior. The NBH requires issuers to follow recognized international standards that will help to build a liquid and transparent green mortgage bond market. The program is also in line with the modification of the MFAR;


therefore, the NBH can encourage the issuance of green mortgage bonds on both the demand and supply sides. The NBH will review the program when the HUF200 billion purchase volume has been reached. In addition to the launch of the Green Mortgage Bond Purchase Program, the Monetary Council also decided to re-launch the Mortgage Bond Rollover Facility for mortgage bonds without green rating that would help to preserve market stability.


On 2 August 2021, the NBH published the technical conditions of the Green Mortgage Bond Purchase Program and the Mortgage Bond Rollover Facility.


To further encourage green mortgage lending, the NBH is expected to launch the Green Home Program in October 2021, with a total limit of HUF200 billion as part of the Funding for Growth Scheme. As in the previous phases of the FGS, the MNB will provide refinancing operations to credit institutions at 0% interest, which will be lent to residential customers at a maximum of a 2.5% fixed interest rate until the end of the maturity period.


Under the scheme, loans of up to HUF70 million and a maximum term of 25 years can be granted for constructions or purchases of new, highly energy-efficient residential real estates.
To promote green mortgage bond issuances and thereby support the construction and purchase of new and modern residential real estate, the NBH will purchase fixed-rate mortgage bonds with a green rating in accordance with international standards, denominated in HUF and issued with an original


maturity of at least 5 years on the primary and secondary markets from 2 August 2021 onwards. To increase transparency in the green securities market, the NBH expects issuers and banks participating in the program to publish regular sustainability reports and to develop customer information practices on green aspects, in addition to the market making obligations applied in the previous mortgage bond purchase program.


The NBH also decided to amend the collateral management system in line with the NBH’s Green Monetary Policy Toolkit Strategy. The most important change to the collateral management system is that the NBH will apply preferential haircuts for green securities from 1 September 2021. The change in collateral management practices can strengthen financial stability and provide a further demand-side stimulus to the green asset market.


In addition, due to the recent increase in central bank liquidity, the NBH will cease to accept shares or units of investment funds as collateral from 1 September 2021. This adjustment is not expected to affect the collateral management of banks, as the role of shares and units of investment funds in collateral management practices had remained negligible in recent months.
(2) Monetary Policy


As set forth in Hungarian law, the NBH is responsible for achieving and maintaining price stability. In June 2001, the Monetary Council decided to conduct its monetary policy within the framework of inflation targeting, which is supplemented by an exchange rate regime using a wide fluctuation margin. See “Exchange Rate Policy.” The inflation target was set at 3% for each year following 2006.


On 24 March 2015, after a scheduled review of the NBH’s inflation target, the Monetary Council decided to improve the flexibility of the inflation targeting regime by designating a ±1 percentage point tolerance band while maintaining the inflation target defined as a 3% increase in the domestic Consumer Price Index published by the Central Statistical Office. In line with past practice, the NBH publishes an assessment of performance in meeting the inflation target each year in its Annual Report.


On 23 July 2013, the governor of the NBH, Mr. György Matolcsy, announced that the Monetary Council of the NBH would provide forward guidance regarding interest rate policy. The Monetary Council of the NBH will consider (i) mid-term inflation prospects, (ii) financial stability and (iii) growth prospects in conducting interest rate policy.


On 18 September 2018, the Monetary Council announced that the NBH was also prepared for the gradual normalization of monetary policy and that the set of unconventional instruments affecting short-term yields would be simplified.


The main monetary policy instrument used by the NBH to keep the rate of inflation within the target band was its two-week, and, since September 2015, its three-month, deposit facility. The NBH periodically accepted unlimited two-week and three-month deposits at the central bank base rate (i.e., the main official interest rate). The two-week deposit instrument was terminated in April 2016.


In October 2016, the NBH began limiting the amount of bids by banks accepted at the three-month deposit tender. Subsequently, the three-month central bank deposits were terminated in December 2018.


Since then, required reserves have been the NBH’s main policy instrument. The NBH adjusts the monetary conditions necessary to achieve the inflation target in a sustainable manner by creating an optimal combination of two of its instruments: swaps providing forint liquidity and the interest rate corridor.


As part of the fine-tuning of the unconventional policy instruments affecting long-term yields, the Monetary Council decided to phase out its monetary policy interest rate swap (“MIRS”) tenders and its mortgage bond purchase program as of the end of 2018. The Funding for Growth Scheme Fix (“FGS fix”) was introduced in 2019 as planned. See “Funding for Growth Scheme” for greater detail about the FGS fix.


On 1 April 2020, the NBH announced that it would hold one-week deposit auctions on a weekly basis, where the interest rate offered would be the central bank base rate of 0.9%. The first auction took place on 2 April 2020.


According to the Quarterly Report on Inflation (the “Report on Inflation”) published on 23 September 2021, there is a high probability of achieving the 2022 and 2023 inflation target. In the Report on Inflation, the NBH estimated that the average annual inflation for 2021 would be between 4.6% and 4.7%, exceeding the 3% long-term inflation target rate and the upper limit of the tolerance band of 2%-4%. The inflation rate is projected to decrease and be between 3.4% and 3.


8% in 2022, exceeding the 3% long-term inflation target rate but within the tolerance band of 2%-4%. Inflation was projected to be between 2.8% and 3.2% in 2023, which is in line with the 3% long-term inflation target rate.
(a) Interest Rate Policy
The NBH reduced the volatility of overnight interest rates by maintaining an interest rate band around the central bank base rate.


After 2009, the interest rate corridor around the central bank base rate had been plus or minus 100 basis points. As a result, for the NBH’s counterparties, the interest rate on the overnight deposit facility was 100 basis points lower, and on the overnight collateralized loan it was 100 basis points higher than the central bank base rate. On 24 September 2015, the Monetary Council announced that effective 25 September 2015, the interest rate corridor was shifted downwards.


Since then, the Monetary Council has modified the interest rate corridor around the central bank base rate several times.


Effective as of 24 June 2020, the Monetary Council lowered the central bank base rate from 0.90% to 0.75%, kept the overnight deposit rate unchanged at (0.05)%, and kept the overnight and the one-week collateralized lending rates at 1.85%. Effective as of 22 July 2020, the Monetary Council lowered the central bank base rate from 0.75% to 0.60%, kept the overnight deposit rate unchanged at (0.05)%, and kept the overnight and the one-week collateralized lending rates at 1.85%.


In addition, the Monetary Council decided to reallocate between its instruments affecting longer-term
maturities, i.e. its long-term collateralized lending instruments and government securities purchases. Consequently, the NBH will purchase limited amounts of government securities in the segment of over 15-year maturities. In addition to improving the transmission of monetary policy, this measure is intended to support an extension in the maturity structure of government debt.


On 22 June 2021, the Monetary Council announced that, in order to ensure price stability, prevent the lasting effects of inflation risks and anchor inflation expectations, it would carry out a cycle of interest rate hikes until the outlook for inflation stabilizes around the central bank target and inflation risks become evenly balanced. According to the Monetary Council’s assessment, an increase in the one-week deposit instrument to 0.90% of the base rate was warranted.


Effective as of 23 June 2021, the Monetary Council increased the central bank base rate from 0.60% to 0.90%, kept the overnight deposit rate unchanged at (0.05)%, and kept the overnight and the one-week collateralized lending rates unchanged at 1.85%.


On 27 July 2021, the Monetary Council announced that upside risks to the outlook for inflation had generally increased. In order to ensure price stability, prevent second-round inflationary effects and anchor inflation expectations, the Monetary Council tightened monetary conditions further by several steps, including an increase in the central bank base rate by 30 basis points from 0.90% to 1.20%, an increase in the overnight deposit rate from (0.05%) to 0.


25%, and an increase the overnight and the one-week collateralized lending rates from 1.85% to 2.15%. The Monetary Council also considered a 30 basis point increase in the interest rate corridor to be justified. Additionally, the NBH continues to set the one-week deposit rate at weekly tenders. According to the Monetary Council’s assessment, an increase in the interest rate on the one-week deposit instrument by the same amount as the base rate was warranted.


Finally, the Monetary Council discontinued the use of the long-term collateralized lending facility.
Effective as of 25 August 2021, the Monetary Council increased the central bank base rate from 1.20% to 1.50%, the overnight deposit rate from 0.25% to 0.55%, and the overnight and the one-week collateralized lending rates from 2.15% to 2.45%.


Effective as of 22 September 2021, the Monetary Council increased the central bank base rate from 1.50% to 1.65%, the overnight deposit rate from 0.55% to 0.70%, and the overnight and the one-week collateralized lending rates from 2.45% to 2.60%.
(b) Minimum Reserves System


The NBH introduced a minimum reserves system in 1987. Since 1 May 2004 (the date of Hungary’s accession to the EU), the interest on minimum reserves has been equal to the prevailing central bank base rate. As a result, the profitability of banks increased, and the indirect taxation of banks was eliminated in accordance with the guidelines of the ECB. Required reserves are equal to the product of the reserve base and the chosen reserve ratio.


On 1 December 2015, the reserve ratio was set at 2% and, on 1 December 2016, the reserve ratio was reduced to 1%.
(c) Exchange Rate Policy


On 25 February 2008, in agreement with the Government, the Monetary Council decided to abandon the flexible peg of the forint to the euro within a fluctuation band and adopt a floating exchange rate regime, effective 26 February 2008. According to the Monetary Council, the floating exchange rate regime provides the NBH with better conditions to achieve its inflation target and, therefore, to meet the nominal convergence criteria to enter into the European Exchange Rate Mechanism II (“ERM II”).


Since June 2014, one of the potential instruments that the NBH uses to influence the money supply is a floating-rate long-term collateralized forint loan facility, designed to improve access to forint liquidity. However, the NBH does not use money supply targets as an instrument of monetary policy. The money supply flexibly adjusts to the money demand, which is indirectly influenced by monetary policy. Increases in monetary aggregates are slowing due to the decrease in the rate of inflation.


Since the decline of the global economy in 2008, the NBH has promoted a monetary policy to bolster Hungary’s domestic banking sector. It has introduced new instruments to provide forint and foreign currency liquidity. The NBH has also broadened the range of eligible collateral for bank operations, extended the maturity of tenders for forint loans and foreign exchange (“FX”) swaps and reduced the mandatory reserve ratio.


Other contributory factors to the continuing financial stability of the domestic banking sector include access to liquidity resulting from the financial support package provided by the IMF and the EU, as well as the financial commitment provided by foreign banks to their Hungarian bank subsidiaries.
(e) Funding for Growth Scheme


Following the Monetary Council’s decision at its meeting on 4 April 2013, the Governor of the NBH announced the launch of the Funding for Growth Scheme. The Funding for Growth Scheme consisted of three pillars and was completed as of 30 August 2013.


Under the first pillar, the NBH stood ready to provide collateralized refinancing loans to its monetary policy counterparties up to a total amount of HUF250 billion over a period of three months (from 1 June 2013 to 30 August 2013). The refinancing loans could be collateralized—with a haircut—by the loans that the credit institutions lend to SMEs under the Funding for Growth Scheme. The interest rate was 0% over the term of the loan.


The counterparties of the NBH had equal conditions of access to the refinancing loan facility, and participation in the scheme was voluntary. Credit institutions wishing to participate in the first pillar were allowed to lend further preferential financing from the NBH to SMEs by charging an interest rate margin of a maximum of 2.5%. The interest rate margin was required to include all fees and commissions as well as the costs of a potential credit guarantee.


The initial maturity of refinancing loans provided to credit institutions was a maximum of 10 years and was equal to the term of the loans to be provided to SMEs, which credit institutions will be free to tailor to the needs of borrowers. SMEs were allowed to use preferential rate loans exclusively to finance investment, to invest in working capital, contribute to and prepay EU financial support and to redeem such loans. In the case of redemption, the preferential loans could have been claimed not only at the


bank that lent the existing loan but at all of the credit institutions taking part in the Funding for Growth
Scheme.
Under the second pillar of the Funding for Growth Scheme, the NBH provided refinancing loans to convert foreign currency loans of SMEs into forint loans. The parameters of the refinancing facility and the conditions to access were identical to those described above for the first pillar.


If a loan for early repayment was taken out at the same bank where the enterprise had its foreign currency loan, the NBH provided foreign currency to the bank at market rates from its foreign exchange reserves, in order to prevent the purchase of foreign currency from resulting in volatility of the forint exchange rate. The credit institutions had to commit to use the foreign currency purchased from the NBH to repay their short-term external liabilities.


As a result of the foreign currency conversion by the NBH, the short-term foreign currency debt and foreign exchange reserves of the country declined to the same extent and Hungary’s reserve adequacy remained unchanged.


The aim of the third pillar of the Funding for Growth Scheme was to reduce Hungary’s gross external debt and the outstanding stock of two-week NBH bonds. The two main instruments to achieve this goal were (i) the NBH’s entering into FX swaps using its foreign exchange reserves and (ii) increased forint financing in the public sector.


On 11 September 2013, the Monetary Council decided to extend the Funding for Growth Scheme through a second phase. According to the decision, additional funds would be allocated in the amount of HUF500 billion, and the Monetary Council could increase the amount to HUF2,000 billion taking into account the macroeconomic and credit conditions and financial market environment.


On 2 September 2014, the Monetary Council announced an extension of the second phase of the Funding for Growth Scheme from HUF500 billion to HUF1,000 billion.
As of 31 December 2015, credit institutions participating in the second phase of the Funding for Growth Scheme had entered into contracts for a cumulative total amount of HUF1,402.1 billion. Of this amount, credit institutions had disbursed HUF1,330.5 billion to SMEs as of 31 December 2015.


On 18 February 2015, the NBH announced the extension of the Funding for Growth Scheme (this new extension, “FGS+”). As part of its monetary policy instruments, the NBH provided liquidity to credit institutions against eligible collateral under the FGS+. Counterparties used this refinancing to expand their lending to SMEs, while the NBH assumed SME credit risk from credit institutions for a limited time and to a limited extent and amount.


Under the FGS+, the NBH assumed 50% of credit losses from credit institutions, but only for up to a five-year period and maximum annually of 2.5% of the loans outstanding of the participating individual credit institutions.
On 22 April 2015, the Monetary Council extended the deadline to draw down the loans allocated in the Funding for Growth Scheme and the FGS+ to 31 December 2016. In addition, the fee for credit enhancing guarantees was not included in the loan yield maximum of 2.5%.


On 13 October 2016, the NBH announced that it would reallocate HUF60 billion, originally allotted to the second pillar, to the third phase of the Funding for Growth Scheme. Participating credit institutions were entitled to draw down the reallocated amount in the first or the second pillar providing local or foreign currency denominated loans.


The draw-down period for loans in the second phase of the Funding for Growth Scheme and FGS+ was extended by six months to 30 June 2017, and the draw-down period for loans in the third phase of the Funding for Growth Scheme was extended to 29 June 2018.


On 31 March 2017, the Funding for Growth Scheme was terminated. From 1 January 2016 to 31 March 2017, credit institutions participating in the third phase of the FGS concluded contracts for a total amount of HUF685 billion, in 21,766 transactions with 13,934 enterprises. The total loan stock effectively outstanding – that is the loan amount not including repaid installments and undrawn parts – amounted to HUF442 billion.


Since June 2013, 39,253 enterprises obtained financing amounting to almost HUF2,811 billion in the three phases of the FGS and the FGS+ altogether.
On 18 September 2018, the Monetary Council announced the introduction of the FGS fix, which went into effect in 2019. The NBH sterilizes the liquidity provided under this program by a preferential


deposit facility bearing interest at the central bank base rate. The Monetary Council launched the FGS fix with a total amount of HUF1,000 billion in early 2019. In terms of its most important parameters and operation, the new scheme was identical to the previous phases of the Funding for Growth Scheme. On 2 June 2020, the NBH announced that credit institutions participating in FGS fix had concluded loan or leasing contracts in the amount of HUF564 billion as of 29 May 2020.


The outstanding amount was HUF405 billion.


On 20 April 2020, as part of its response to the economic effects of the COVID-19 pandemic, and to ensure access to required, affordable funding for domestic small and medium-sized enterprises, the Monetary Council announced the launch of the Funding for Growth Scheme Go! (“FGS Go!”), raising the allocation amount by HUF1,000 billion. Including the HUF500 billion undrawn under the FGS fix, the NBH made available up to HUF1,500 billion to lend to the SME sector at a low cost under the FGS Go!


program. This new scheme operated identically to the previous phases of the Funding for Growth Scheme. Further, the NBH announced an interest rate of 4% (higher than the base rate) for additions to the stocks of loans and bonds made after 7 April 2020 under the FGS Go! program. On 17 November 2020, the Monetary Council announced that the utilization of the FGS Go! exceeded HUF 1,000 billion by mid-November;


therefore, the Monetary Council raised the total amount of the program by HUF 1,000 billion. On 22 June 2021, the Monetary Council announced that, with the exhaustion of the HUF3,000 billion available, the NBH would end the FGS Go! program.
(f) Growth Supporting Program


In January 2016, the NBH launched its Growth Supporting Program (“GSP”) designed to help domestic banks return to market-based financing by gradually phasing out the Funding for Growth Scheme and by announcing a new Market-Based Lending Scheme (“MLS”) providing a positive incentive for banks to boost their lending. In the preparatory phase of the GSP, several rounds of constructive consultations were held between the Hungarian Banking Association and the NBH.


The NBH took into account banks’ suggestions falling within the central bank objectives and incorporated a large part of them into its program.


As a result of the above programs, the volume of corporate and targeted SME loans was expected to increase by HUF250–400 billion in 2016. The banks participating in the MLS were to undertake a specified quantity of lending, thereby making it possible to draw a distinction between those banks that are active participants and those that are passive participants in the credit market.


As part of the GSP, the NBH launched the third, phasing-out stage of FGS+, consisting of two pillars. Within this framework, domestic SMEs had the opportunity to borrow from banks in the period from early January 2016 to the end of December 2016. Both pillars were announced with an overall amount of HUF300 billion.


Under the first pillar, the NBH provided refinancing for credit institutions at a 0% interest rate, similar to the previous two phases, which they could on-lend to enterprises at a maximum 2.5% interest rate. Compared with the second phase, the range of credit objectives was reduced and the maximum amount of loans was lowered to HUF1 billion, in order to ensure that the new funding limit allows for as wide as possible a range of smaller participants to implement their investment projects.


Under the second pillar, the NBH aimed to manage market distortions in long-term foreign currency lending, as enterprises with mainly foreign currency revenues have so far had only limited access to the scheme, while they have had access to financing on more unfavorable terms relative to their foreign competitors.


The NBH also provided funding to credit institutions at a 0% interest rate, which it converted into Euros against its foreign exchange reserves in the form of a market-priced currency swap. Credit institutions were able to on-lend the funds they receive under the scheme to SMEs with natural foreign currency hedging at a maximum 2.5% interest rate.


Simultaneously with the gradual phasing-out of FGS+, the NBH announced a new package of measures containing positive incentives, supporting banks in switching to market-based lending, in order to reduce risks of low lending activity. The MLS consists of the following three elements:  supplementing the central bank instruments with an interest rate swap conditional on lending activity (“LIRS”) and a preferential deposit facility;


 creating incentives through capital adequacy requirements for banks; and

providing an opportunity for the banking sector to have access to the corporate credit reporting
system.


The instruments supplementing the central bank instruments provided an incentive for lending through the conditions of access, as the credit institutions participating in the program undertook to increase the volume of lending to SMEs. LIRS promoted lending by managing interest rate risks, through the partial assumption of such risks by the NBH.


The overall amount allocated under LIRS was HUF1,000 billion, which was available to banks for a limited period during 2016 and at a maximum maturity of three years. Between 1 January 2016, and 31 March 2016, the allotted amount reached HUF779.6 billion. A condition of access to the facility was that banks increase their stock of performing loans to SMEs by one-quarter of the allocated amount annually, i.e. by HUF250 billion if the facility is fully allocated.


The preferential deposit facility was a supplementary instrument, under which banks were able to place part of their liquidity in excess of the amount of required reserves on their current accounts at the NBH’s central bank base rate. The expected decline in banking sector liquidity gives a higher value to the liquidity-enhancing instruments, including the preferential deposit facility.


The overall amount of preferential deposit facility introduced as a supplementary instrument was HUF500 billion.
Incentives through capital adequacy requirements for banks were also designed to contribute to an expansion in lending. A business model preferring sustainable lending to SMEs may pose smaller risks to a bank’s operations.


The gradual phasing-out of FGS+ and the introduction of the lending interest rate swaps and the preferential deposit facility was projected to raise the stock of lending to SMEs by approximately HUF250–400 billion in 2016.
(g) MARK Zrt.


On 10 February 2016, the NBH announced that according to a decision by the EU, MARK Zrt. (the Hungarian Restructuring and Debt Management Company) could begin purchasing distressed commercial real estate assets from banks. MARK Zrt., established by the NBH to support its macroprudential legal mandate, was enacted to help improve non-performing bank portfolios and contribute to a revival in bank lending and a recovery of the real estate market from recession. Since MARK Zrt.


purchased assets at market price, based on the validation of the European Commission, the planned asset acquisition program did not contain state aid.
On 10 April 2017, the NBH announced that it intended to sell MARK Zrt. to APS Investment s. r. o.; subsequently, the transaction was concluded.
(h) Swaps


In June 2014, the NBH introduced a forint interest rate swap facility, which enabled the counterparties of the NBH to mitigate the interest rate risk of long-term forint-denominated assets newly purchased or held.