Q+A-What next after Hungary bites bullet on 2011 budget?

Sept 10 (BestGrowthStock) – Hungary’s centre-right government has
bowed down to European Union demands to finally bring its budget
gap below the bloc’s 3 percent of GDP ceiling next year,
shelving plans to widen the deficit.

The pledge seems to have calmed currency and bond markets,
helping the forint recover from record lows past 226 versus the
volatile Swiss franc — the funding unit of trillions of forints
worth of foreign currency (Read more about trading foreign currency. debt in the household sector.

The ruling Fidesz party faces local elections on Oct. 3
where it will seek to consolidate its powers after April’s
two-thirds parliamentary triumph, ending eight years of rule
under the left.

Investors hope the party, whose main priorities are job
creation and boosting economic growth, will shed light on its
detailed 2011 budget plans and present a medium-term policy
package after the municipal elections next month.

WILL LOCAL ELECTIONS BRING CLARITY ON THE FISCAL OUTLOOK?

Most likely they will. By pushing the deadline of presenting
the draft budget to the government to Oct. 15, after the local
election, Fidesz has won more time to finalise its plans and
delay the announcement of budget cuts needed next year.

Fidesz has rejected the austerity measures of the previous
Socialist government as a failed economic policy, but with
efforts to widen the deficit slapped down by Brussels, it will
have to cut spending by 100-200 billion forints in 2011.

That could entail layoffs, public sector pay cuts or both —
the annoucement of which Fidesz will want to avoid before the
vote, focusing instead of popular issues, such as support for
household borrowers reeling under foreign currency (Read more about trading foreign currency. debt.

The economy minister has pledged to launch public sector
reforms in 2011 without providing any details on what those
might entail.

A new 200 billion forint financial sector tax will remain in
place in 2011 to plug holes in the budget and should economic
growth miss the government’s hopes of at least 2.5 percent next
year, further belt-tightening may be necessary.

The government still plans to phase in a 16 percent flat
personal income tax next year to stimulate demand.

HAS THE RISK OF A FULL-BLOWN SELL-OFF ABATED?

It has for the time being. Credit rating agencies Moody’s
and Standard & Poor’s threatened Hungary with a downgrade in
July after Budapest walked away from talks with the IMF, citing
increased fiscal risks and concerns over debt sustainability.

With Hungary now apparently committed to bringing the 2011
defcit to levels agreed by the previous government under the
country’s 20 billion euro IMF/EU loan programme, the risk of an
imminent ratings downgrade has dissipated.

Credit rating agencies are likely to wait until the main
figures of the 2011 budget and some policy details on achieving
the deficit target are known before they pull the trigger on
Hungary.

If rating agencies see the government’s commitment backed up
by credible and sustainable policies, they may remove the
country from their watchlist and affirm its ratings — clearing
the threat of a downgrade hanging over the Hungarian market.

Market participants say Hungarian assets could rally if the
government presents a credible 2011 budget — with many
investors attracted by higher returns offered by Hungarian
assets but staying put for a lack of clarity on the future.

WHAT IS FIDESZ’ ECONOMIC PHILOSOPHY?

The party has lowered corporate taxes and seeks to extend
the tax cuts to households next year by phasing in a flat, 16
percent personal income tax rate in one, or two-three stages —
hoping to boost ailing domestic demand.

The choice to put pro-growth minister Gyorgy Matolcsy in
charge of the economy reflects the idea that deficits can be
reduced not just by spending cuts but also by measures
increasing the country’s potential growth.

Fidesz, which wants to distance itself from leftist
governments of the past eight years, loathes the idea of
austerity for fear of being branded the same as the Socialists.

Its efforts to meet this year’s 3.8 percent of GDP budget
deficit goal centre on a financial sector tax. Fidesz’s
reluctance to introduce harsher spending cuts and its insistence
on the bank tax strengthened its populist image among investors.

Other measures, most notably a pay cut at the helm of the
central bank as well as other public sector institutions,
further enhance this image.

WHO MAKES THE DECISIONS IN FIDESZ?

Prime Minister Viktor Orban, 47, is the ultimate decision
maker in both the Fidesz party and the government.

Orban is the strategist when it comes to politics, while in
economic matters he is said to be listening mostly to Matolcsy,
who has a pro-growth vision of policy which differs from that of
fiscally-focused former Socialist prime minister Gordon Bajnai.

Orban is advised by experts including ex-central banker
Gyorgy Szapary and former finance minister Mihaly Varga, but it
is Orban who puts the final seal of approval on all major
decisions. He has a tight grip over his party and the cabinet.

Getting back into power with an unprecedented over
two-thirds majority in parliament in April was his biggest
victory and gratification for elections lost in 2002 and 2006.
Orban plans for the long term and has envisaged the next 15-20
years of Hungarian politics would be defined by “one central
political force” — his Fidesz party.

(Reporting by Gergely Szakacs)

Q+A-What next after Hungary bites bullet on 2011 budget?