The economy is still suffering from the effects of strong currency appreciation in 2001-02 and excessive wage rises in 2001-02 and excessive wage rises in 2002-03. In addition, export markets have been weak, although signs of improvement bode well for a pick-up in economic growth,starting in the second half of 2004.In June 2003 the National Bank of Hungary (NBH the central bank)devalued the forint`s central rate again the euro,provoking currency weakness.The NBH has since had since had to raise interest rates by 600 basis points,and policy is likely to remain tight in the short term.Ambitious budget targets have recently been abandoned,making it likely that euro entry will be delayed beyond the government`s original target date of 2008.In the short term,strong private consumption growth should sustain a real GDP growth rate of over 3% but current-account deficits will top 5% of GDP in 2004,coming down significantly in the following year. The fundamental position of the Hungarian government remains stable,despite the small majority that it has in parliament and its deteriorating public support.There are currently no issues on issues on the horizon that that would appear to cast serious doubt on the government serving out its full term.which runs until mid-2006.However,the majority partner in the governing coalition the Hungarian Socialist Party is suffering a steep mid-term fall in its popularity,mainly because of the poor economic performance in 2003. Economic policy continues to be muddled,after several policy reversals in the past year.Although the NBH is mainly to blame, the government has not helped mattres by overshooting fiscal target and pursuing a tax-and-spend approach to budgeting.The sacking of the finance minister,Csaba Laszlo,in January, and his replacement by Tibor Drakovics,is unlikely to change policy drasrically,although budget will probably become more realistic and plans to adopt euro in 20008 abandoned. The economy showed the first signs of turning around in the third quarter of 2003,with real GDP growth accelerating to 2.9% year on year,from 2.4% in the second After falling to a post-communist low in May 2003,year-on-year inflation has begun to rise a result of tax harmonisation with the EU and deregulation of the energy market.After three years of massive gains,wages are beginning to stabilise so that the external sector will soon have to resume its tardtional role as adriver of growth. Trade and current-account deficits doubled in 2003 in US$ terms,reflecting stagnation in Hungary`s main EU export markets and strong consumer demand sparked by a sharp rise in wages.In view of the large current-account deficits and the weakness of foreign direct investment (FDI),external borrowing is expanding rapidly.

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