Analyst view: Hungary seeks equal treatment in deficit cuts

BUDAPEST (BestGrowthStock) – Hungary’s Prime Minister Viktor Orban said on Thursday the country sought equal treatment to other European Union member as it worked to reduce its budget deficit under the 3 percent threshold mandated by the EU.

Here are analysts’ latest comments on Hungary.

ZOLTAN AROKSZALASI, ERSTE BANK:

“This is not necessarily positive news from a market standpoint…”The current measures make this year’s 3.8 percent (of GDP) budget deficit attainable, but I think that the bank tax alone, not even mentioning the personal income tax, will not be enough to bring the deficit down to 3 percent.

“This is what the prime minister’s words reflect, which suggest that he would not like to reach the 3 percent deficit. That is in line with their earlier comments that there would not be anymore austerity.

“I do not think that is good news for markets. What makes the market reaction milder now is the fact that there are some grounds for the argument that Hungary has undergone a significant fiscal adjustment in the past few years, which other European countries have yet to adopt. That’s the only part of this picture that might improve markets’ assessment.”

SIMON QUIJANO EVANS, CHEUVREUX:

“(Orban) has a point here, because Hungary was one of only two EU members to have a primary surplus last year, the other being Sweden.

“I don’t think there’s any point in arguing about semantics here. It’s not going to be a major issue if there’s a surge of all of 0.5 percent of GDP. As long as we get proactive comments from government on budget plans, the government can get away with this.

“What we need is less volatility from government comments, particularly from the prime minister, and more clear-cut mid-term plans. The best thing would be for the government to come forward and say, this is our three-year plan. Not in detail, but at least come up with a three-year plan where we can at least see what the government wants.”

“I don’t think markets are going to get hyped up about a 0.5 percentage point difference. The most important thing is to keep up the EU project — there’s no way any government can abandon that, and there is no sign the Hungarian government plans anything like that.”

IMRAN AHMED, EMERGING FX STRATEGIST RBS

“Orban says he will decide with the EU rather than the IMF how to reduce the deficit — hello, it’s the IMF that is providing the money. The IMF money should be running out in October, and nothing has really changed in the relationship between the stance of the IMF and the current stance of Hungary. All of the comments we are seeing from Hungary are about a wider deficit next year, these are highly populist comments. We remain negative on any forint rally, part of this is a positioning squeeze, though some people may be seeing this as positive news.”

NEIL SHEARING, SENIOR ECONOMIST, CAPITAL ECONOMICS IN LONDON

“Its slightly odd as I can’t see the EU agreeing to anything without the IMF being involved. The two go hand-in-hand. That was the precedent for countries in the European Union such as Greece and Latvia.

“I suspect there is something to the notion that this is a comment for the domestic audience ahead of October municipal election…

“I must admit I’m increasingly of the view that the government’s huge mandate will not be used for any kind of radical structural reforms that are needed. For each step forward, we get one step back.

“All-in-all risks are still to the downside. Hungary will not be forced to go back to the IMF in the near-term as their financing needs for this year are small. However they may find that any new deal next year could come on tougher terms.

“The IMF were more flexible on targets during the downturn. I can’t see them being that generous in future.”

PETER ATTARD MONTALTO, EMERGING MARKETS ECONOMIST, NOMURA

“The muted market reaction so far seems to have emboldened Orban. This increases the risks on the downside when the market takes stock again of the situation. The fact remains that Hungary has an outsized stock of external debt and is reliant on capital flows from foreigners. These flows can be reversed very quickly. We don’t believe the EU will proceed with negotiations without the IMF. It would cause a diplomatic storm. More likely, the EU could start non-compliance legal moves against Hungary over the independence of its central bank. The risks to Hungary are great if global risk sentiment turns.”

GYORGY BARCZA, K&H BANK:

“The main thing is still the fact that we are reducing the deficit, even if not as quickly as some people might desire, but more slowly. Especially when compared to other countries in the region, this is fairly favorable. Slovakia and Poland will each run deficits close to 7 percent of gross domestic product this year.

“This demand has logic to it politically, but also economically. If we presume 2 percent growth, 3 percent inflation and a budget deficit anywhere below 4 percent of GDP, the 80 percent total debt is on a declining path already.”

“It’s not that Hungary goes against the trend, it’s that it would like more favorable parameters for itself.

“Nobody priced a 3 percent deficit for 2011 on the market anyway. If it comes in at 3.5 percent that would still be good news. The first question, in any case, is whether Hungary can meet its 3.8 percent deficit goal for 2010, which is by no means a sure thing, even counting the bank tax.”

GYORGY BARTA, CIB BANK:

“The prime minister’s words suggest that a new IMF ‘protective shield’ is considered by the government to be insignificant at this point. The bold comment may be risky, as without another credit deal, the country could remain more fickle in the current whimsical market environment (even if a deficit reduction plan is agreed on with the EU)….

“Clearly, the strict requirements listed by international lenders penalize Hungary for its past irresponsible policies and fiscal profligacy (this mirrors the higher risk premium required on Hungarian assets, as well). Also, we think the IMF’s presence and regular reviews are a guarantee for the market that much-needed structural reforms could be put in place.

“Without this guarantee, fiscal consolidation could be conducted through non-sustainable measures, which would not contribute to a sufficiently rapid reduction of the country’s debt levels.

“Of course, not resorting to IMF money would be possible but market confidence could still only be maintained through the introduction of sweeping reforms and a reduction of redistribution within the economy.”

Investing Research

(Reporting by Marton Dunai; Editing by Jon Boyle)

Analyst view: Hungary seeks equal treatment in deficit cuts