Hungary: Tax cuts, better mortgage rates and wage increases

Economic growth expected at 2.5 percent this year and lending should grow at an even faster pace

Hungary plans to set up a special vehicle to handle non-performing mortgages that burden banks' books, part of its efforts to encourage lending and spur the economy after a weak first quarter, it has been revealed.

Hungary's economic growth slowed to an annual 0.9 percent in the first quarter, encouraging Hungary to take on a number of new steps, Minister for National Economy Mihaly Varga told the Reuters Eastern Europe Investment Summit this week.

These included tax cuts in the 2017 budget, which parliament would pass in June, a more efficient use of European Union development funds, wage rises in the public sector and investment in infrastructure, he said.

The government still projects economic growth of 2.5 percent this year and Varga said bank lending should grow at a faster pace than economic growth.

"2016 will be a watershed year in the sense of whether the tax cut (for banks) would boost banks' willingness to lend," Varga said. Hungary reduced its hefty windfall tax on banks this year and will cut it further in 2017.

Varga said the government planned to set up a special housing fund, in which banks could place some of their non-performing mortgages. About 18 percent of all household loans are non-performing, which weigh on banks' books.

"This would improve banks' balance sheets, and would allow smaller provisions and increased lending," Varga said.

He said around 40,000 to 50,000 mortgages could be placed in the fund, adding that precise details would be revealed after talks with all partners are finished.

Varga also said the government would probably close a deal to buy a 15 percent stake in Erste Bank's (ERST.VI) Hungarian unit in the first half of June. The purchase is based on an agreement signed with Erste and the European Bank for Reconstruction and Development (EBRD) last year.

He said Hungary would pay between 30 billion and 40 billion HUF for the Erste stake, but declined to give the final figure before the contract is signed.

Varga also said he expected the sale of state-owned Budapest Bank to be finalized by next year, with proceeds already flowing into the 2017 budget.

"I very much hope we will sell this bank for as much as we paid for it when we bought it," Varga said. Hungary paid $700 million to buy Budapest Bank from GE Capital last year.

The minister said Hungary could issue another yuan-denominated sovereign bond this year after it made the first such issue from Central Europe in April.

"I think before the end of the year, or early next year we could carry out another such issuance," Varga said.