Hungary achieves high overall compliance with international standards and codes, with a score of 66.67 out of 100 in our Standards Compliance Index. As a member of the European Union, Hungary's compliance in the area of macroeconomic fundamentals and financial supervision is high. Particularly notable is the financial sector, which is regulated by a single supervisor, although the supervisory framework and quality could be further enhanced. Hungary has committed to achieving full compliance in this area. Hungary also meets international standards in money laundering and payment systems, and is making efforts to converge its accounting and auditing practices with international standards. A notable exception to this compliance record is in the area of insolvency, which while having had some recent improvements still has deficiencies in several areas.

Macroeconomic Policy and Data Transparency

Hungary has been a subscriber to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) since 1996 and first met SDDS data specifications in 2000. According to the IMF SDDS website, Hungary meets or exceeds requirements for coverage, periodicity, and timeliness, and avails itself of no flexibility options. Advance-release calendars are available, and simultaneous release of data is the rule. Hungary regularly updates the metadata and summary methodologies that it posts on the SDDS website. While issues remain regarding data quality, Hungary continues to make progress in addressing them, according to the 2007 Article IV Consultation report issued by the IMF. More »

The 2006 Monetary Transparency Report by Oxford Analytica asserts that Hungary has achieved an overall rating of "compliance in progress," noting that, although considerable success has been realized, the country remains committed to further improvements. The IMF has been even more positive in its appraisal, asserting that Hungary has completely observed requirements regarding the clarity of roles, responsibilities, and objectives of monetary policy, as well as in the areas of policy formulation and reporting, accountability, and assurances of integrity. The Hungarian central bank, Magyar Nemzeti Bank, provides public access to a wide range of publications that provide monetary data and information on the methodologies and assumptions that underpin policy decision making. Hungary is a member of the IMF's SDDS and meets all requirements for timeliness, coverage, and periodicity, as well as for the issuance of advance release calendars. While Hungary remains committed to adopting the euro, its 2010 target date has been pushed back, and no new official date has yet been set. More »

The 2006 Oxford Analytica report on Hungary's fiscal transparency accorded a rating of "compliance in progress," noting that Hungary has continued to move forward in its efforts to improve transparency and accountability and to impose fiscal discipline following the recent experience of fiscal challenges. In a 2007 Report on the Observance on Standards and Codes (ROSC), the IMF, confirmed that Hungary had increased its level of transparency in the years since the original ROSC of 2001, especially in the area of fiscal reporting. However, both assessments noted that issues of political interference and attempts to improve published fiscal positions through off-budget measures during the run-up to the 2006 elections has led to a loss of credibility with regard to Hungary's fiscal reporting. The ongoing transition to the adoption of the 2001 Government Finance Statistics Manual standards, for which the Ministry of Finance has enlisted the help of the IMF and Eurostat, is expected to significantly improve transparency in Hungary's fiscal policy. The IMF also notes that improvements to fiscal transparency in various areas should facilitate Hungary's entry into the Euro area. More »

Institutional and market infrastructure

In 2003, the European Bank for Reconstruction and Development (EBRD) conducted a survey on Hungary's insolvency legislation based on the 1991 Bankruptcy Proceedings, Liquidation Proceedings and Member's Voluntary Dissolution Act as amended to that date. Drawing on that survey, R. Harmer and N. Cooper reported that Hungary had achieved only "low" overall compliance with the international standards. A 2006 EBRD survey has now been published in tabular form, in which the overall compliance rating was raised to "medium," based on changes introduced by a 2006 amendment to the basic insolvency law. While noting significant improvements, the 2006 survey still indicated a number of areas of deficiency, including still-inadequate creditor safeguards in the course of reorganizations, the failure to require that creditors be given access to material information, and the lack of independent analysis of reorganization proposals. The 2006 summary also notes that the initiation phase of insolvency proceedings is excessively long, lasting as long as 60 days. In its "Doing Business 2008" snapshot of Hungary's closing-a-business regime (published in 2007), the World Bank found that it took, on average 2.0 years to complete an insolvency action in Hungary, compared to a regional average of 3.2 years and an average among Organization for Economic Cooperation and Development (OECD) member states of 1.3 years. The cost of such proceedings in Hungary averages 15% of the debtor estate, compared to 13.7% regionally and 7.5% for OECD member states. Recoveries average 38.4 cents on the dollar in Hungary, compared to 28.9 cents for the region and 74.1 cents on the dollar for OECD member states. More »

The Hungarian accounting framework is primarily governed by the Act on Accounting, which includes the Hungarian Accounting Standards (HASs). The Act is supplemented by government decrees dealing with special provisions for banks, insurance companies, stockbrokers, investment funds, pension funds, and nonprofit entities. The HASs, according to a 2004 World Bank assessment, differ from the International Financial Reporting Standards (IFRSs), despite significant efforts at harmonization. In accordance with the European Commission (EC) Regulation No. 1606/2002, Hungary requires the application of IFRSs in the preparation of consolidated financial statements of listed companies, but this requirement is not extended to other types of companies. The 2006 EC report on the implementation of the Regulation No. 1606/2002 points out that Hungary permits application of IFRSs in consolidated accounts of all other entities, but not in the annual accounts, which must be prepared following national requirements. The use of IFRSs in the annual accounts is allowed for informal purposes only. The EC report notes that the Hungarian position on annual accounts is unlikely to change until all tax and legal issues arising due to the application of IFRSs are resolved. The 2004 World Bank assessment recommends adoption of IFRSs for all public interest entities, and noted that the Hungarian Accounting Standards Board (HASB) established at the time of the assessment is expected to converge the Hungarian accounting requirements with IFRSs within 6 to 8 years. However, as of March 2008, no information as to the progress made by the HASB is publicly available. More »

In its 2003 Corporate Governance Sector Assessment Project, the EBRD observed that corporate governance legislation in Hungary is in "high compliance" with the OECD Principles of Corporate Governance. A World Bank assessment conducted the same year confirmed that the Hungarian regulatory and legislative framework with regard to corporate governance is "robust." Nonetheless, both assessments identified key deficiencies. For instance, per the EBRD report, while minority shareholders received equitable treatment, the redress mechanism needed to be improved. In its more detailed analysis, the World Bank pointed out weaknesses in the role and functioning of the supervisory board and in share registration. Some of these issues have since been addressed. According to a 2007 EBRD report, significant corporate governance legislation was enacted in 2006 and 2007. Most importantly, a new Companies Act has been introduced. Also, the Budapest Stock Exchange approved a non-binding guide on Corporate Governance Recommendations, which takes into consideration the OECD principles and European Commission regulations. More »

According to a 2004 KPMG report titled "Investment in Hungary," the Hungarian Chamber of Auditors (CHA) started adopting International Standards on Auditing (ISAs) back in 1999. Individual ISAs were introduced over a period of three years, and auditors were expected to comply with the international standards beginning on January 1, 2001. In an assessment of accounting and auditing practices conducted the same year as the KPMG report, the World Bank confirmed that the CHA had adopted almost all ISAs as Hungarian Standards on Auditing (HSAs) and was in the process of adopting new standards published by the International Auditing Assurance Standards Board (IAASB). Furthermore, the KPMG report noted that, to keep abreast with the changes in international practices, the CHA is legally obliged to regularly update HSAs in line with ISAs. The 2007 CHA self-assessment also states that Hungarian law encloses the full text of the IAASB pronouncements and that all ISAs have been adopted and subsequent amendments to the international standards have been incorporated. The World Bank observed that, at the time of its assessment, Hungary complied with the Eighth EU Company Law Directive. However, the Directive was subsequently amended, and there is insufficient information as to whether Hungary has transposed it into the legislation. More »

Hungary achieves a high level of compliance with the Financial Action Task Force (FATF) 40+9 Recommendations on Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT), per the 2005 IMF's Report on the Observance of Standards and Codes (ROSC). This conclusion is further confirmed by a 2008 U.S. Department of State report. In 2005, the country was fully or largely compliant with 38 of the 40+9 FATF Recommendations. Further, the passage of the 2007 Act on the Prevention and Combating of Money Laundering and Terrorist Financing transposes the third European Union (EU) money laundering directive into Hungarian law, which requires all EU member countries to implement the FATF Recommendations. This Act removes the major shortcomings noted by the 2005 ROSC: gaps in the CFT legal framework and implementation shortcomings in the AML regime in Hungary. A 2007 IMF report also notes that since the 2005 IMF ROSC, Hungary has made further progress in improving its AML/CFT regime. In a recent development, Hungary's Financial Intelligence Unit, the Anti-Money Laundering Department underwent a major organizational overhaul in 2007, when it was moved from the Hungarian National Police to the Hungarian Customs and Finance Guard. More »

In 2002, when the IMF conducted an assessment of the payment systems in Hungary, it considered three systems: the large-value payment system (VIBER), the retail payment system called the Interbank Clearing System (ICS), and the securities settlement system (KELER). All three were deemed systemically important payment systems (SIPS) by the assessors. According to more recent information provided by the Central Bank of Hungary (Magyar Nemzeti Bank, or MNB) in its 2007 Report on Financial Stability, these system continue to be the prominent players in Hungary's payment infrastructure. The 2007 European Central Bank (ECB) report on payment systems in non-Euro countries also describes ICS as a SIPS. VIBER, as the large-value system in the country, is of systemic importance by default. The 2002 IMF report concluded that VIBER and ICS comply with the Core Principles for Systemically Important Payment Systems (CPSIPS) as defined by the Committee for Payment and Settlement Systems (CPSS). The only deficiency recorded was with KELER, which does not fall under the purview of this standard. Furthermore, the 2002 IMF report indicated that the MNB complies with all its payment system oversight responsibilities. VIBER is a real-time gross settlement system (RTGS) and, according to the 2007 report by the MNB, it accounts for the largest share of volume of payment transactions in the country. In its 2002 report, the IMF noted that the legal basis for the payment and settlement systems in the country is provided in the Central Bank Act. According to the ECB report, the Act gives the MNB the legal authority to establish payment systems and to oversee and monitor payment and securities clearing and settlement systems. More »

Financial Regulation and Supervision

The regulatory framework for banking supervision in Hungary was found to be largely compliant with the Basel Core Principles (BCPs) for Effective Banking Supervision by the IMF's 2002 Report on the Observance of Standards and Codes (ROSC). A 2005 assessment of Hungary's banking legislation by the EBRD arrived at a similar conclusion, stating that Hungary exhibits high levels of compliance with the BCPs in almost all areas of banking supervision. The ROSC noted that the supervisory authorities were, at the time, taking considerable steps to improve the quality of supervision and regulatory framework, with a commitment to achieve full compliance with the BCPs. Areas of less than full compliance identified by the ROSC included regulatory powers of the Hungarian Financial Supervisory Authority (PSZAF); risk-assessment requirements; rules on connected lending and on large exposures; rules on the nature and quality of board governance and oversight; and remedial actions. A 2005 Update by the IMF found a strengthened regulatory and supervisory framework with more powers, autonomy, and accountability accorded to the PSZAF; revised laws; and comprehensive risk management requirements. However, the Update found that the PSZAF still did not have the power to issue binding regulations; the oversight role of the Ministry of Finance in the new accountability framework was not clear; and there were no changes to the rules on connected lending and large exposures. A 2007 IMF report found more proactive, risk-based supervision by the PSZAF. Hungary expects to implement Basel II by 2008. More »

In 2005, the securities and financial market supervisor - the Hungarian Financial Supervisory Authority (PSZAF) - published a self-assessment on Hungary's compliance with the International Organization of Securities Commission's (IOSCO) Objectives and Principles of Securities Regulation. The PSZAF found Hungary to be fully or broadly compliant with most of the principles. According to the IMF's 2005 Financial System Stability Assessment Update, based on the 2000 Financial Stability Assessment Program, the regulatory and supervisory framework in Hungary was strengthened and considerable progress was made towards achieving a risk-based approach to supervision. Furthermore, the regulatory and supervisory regime conformed in most material respects with the principles, and was in line with relevant international standards. The extensiveness of securities regulation practices in Hungary was further reviewed in 2004 by the EBRD Securities Markets Legislation Assessment. This study concluded that securities regulation in Hungary was in "medium compliance" with the IOSCO Objectives and Principles. Weaknesses were identified by both assessments with regards to the PSZAF's lack of powers in issuing binding regulations. The securities markets in Hungary, which are still at an early stage of development, are mainly governed by the 2002 Capital Markets Act. The PSZAF was established in April 2000 as an integrated financial supervisory authority for the securities, banking, and insurance sectors. More »

Insurance supervision in Hungary exhibits a high level of compliance with the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors in 2003, as noted by a 2005 IMF assessment and a 2005 self-assessment prepared by the Hungarian Financial Supervisory Authority (PSZAF). Since its accession to the EU in 2004, Hungary has been part of the EU regulatory framework, and is also an active participant in the EU level deliberations on financial sector supervision. The laws pertaining to insurance supervision and activities have been completely overhauled since 2000, and have helped to push Hungary closer to full compliance with ICPs. The areas where Hungary is found deficient by the PSZAF self-assessment are the PSZAF's power to issue binding regulations; fit and proper testing; internal control; risk assessment and management regulations; insurance activity; investments and the use of derivatives; capital adequacy and solvency; and consumer protection. The 2005 IMF assessment also identifies as a weakness the PSZAF's lack of the power to issue conditional licenses. The assessment, however, notes that Hungary will improve its compliance in the areas of corporate governance, internal control, comprehensive risk assessment and management, and capital adequacy and solvency as EU directives and regulations in these areas, including the Solvency II framework, are implemented. More »

Legend:

Credit Ratings

Moody's A2/Stable

Fitch BBB+/Stable

Standard & Poor's BBB+/Negative

Macroeconomic Data

2007 GDP (Current Prices): 138.388 billion USD (IMF)

2007 GDP (Per Capita): 13,762 USD (IMF)

2008 GDP (Growth Forecast): 1.8% (IMF)

2008 Inflation (CPI): 5.9% (IMF)

2007 Unemployment: 7.1% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 6.098 billion USD (UNCTAD)

FDI (Outward): 3.016 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)