WRAPUP 3-Hungary approves budget framework, data shows risks

* Hungarian parliament approves 2011 budget parameters

* Budget based on pro-growth, revenue boosting strategy

* 3 pct/GDP deficit target seen achievable, but risks high

* Growth fcast seen optimistic, debt worries persist

* Budget data shows big overshoot of 2010 deficit target

(Updates with November budget data, analyst comment)

By Gergely Szakacs and Marton Dunai

BUDAPEST, Dec 7 (BestGrowthStock) – Hungary’s lawmakers approved a
2011 budget framework on Tuesday, sticking to a plan that relies
on optimistic growth projections and policies that have shaken
investors’ confidence in its finances.

The government said Hungary would meet its commitment to the
European Commission to cut its fiscal gap to 3 percent of annual
output but, contrary to the belief of many economists who
advocate cost cutting, said only high growth could put it there.

After a downgrade to a notch above “junk” status by debt
ratings agency Moody’s on Monday, lawmakers voted 249 to 83 to
approve the government’s budget parameters aiming for a deficit
of 2.94 percent of GDP.

The budget forecasts growth next year of 3 percent compared
to the Commission’s 2.8 percent prediction. The final vote on
the full budget draft law is scheduled for Dec. 23.

The law is the latest measure in a pro-growth campaign of
unconventional measures from Prime Minister Viktor Orban’s
cabinet that has stunned investors, including big taxes on banks
and other firms and a plan to seize some $14 billion in
privately held pension assets for government coffers.

“After eight years (under Socialist rule) Hungary can again
have a budget which makes achieving the goals undertaken —
above all, the deficit target — a complete certainty,” Economy
Ministry state secretary Zoltan Csefalvay told parliament.

Data also showed the budget deficit hit 172 billion forints
at the end of November, higher than the full year goal by half.

The Economy Ministry said the 2010 target of 3.8 percent of
GDP was still achievable thanks to 250 billion forints it
expects to earn in December from a second round of crisis taxes
on banks, telecoms, utilities and big retail chains.

But analysts were sceptical. Nomura economist Peter Attard
Montalto foresaw an overshoot to a 4.2-percent-of-GDP deficit.

“I simply fail to get how the economy ministry can still say
the deficit target is achievable. They are so far behind,” he
said.

Industrial output growth also came in at 8.3 percent
year-on-year in October, down from 10.9 percent a month earlier
and below expectations, signaling the risks to the government’s
forecasts, especially if the wider EU economy struggles in 2011.

The forint rebounded from a 1 percent slide on Monday due to
the Moody’s downgrade, helped by a rise in the euro/dollar. It
was up 0.86 percent against the euro at 1645 GMT.

UNCONVENTIONAL MEASURES

Orban has launched a flat 16 percent personal income tax and
a 10 percent small business tax, rejecting cost cuts prescribed
in a 2008 EU and International Monetary Fund bailout.

The measures have bolstered support for his Fidesz party,
which took power in July, and Orban said he expected ratings
agencies to change their negative outlook towards Hungary’s
investment risk.

“We need some time to have results,” Orban told journalists
in Stockholm. “In the close future we will be upgraded again.”

Economists warn there may still be a large hole in revenues
next year but the tax and pension measures — worth 4.4 pct of
GDP based on the government’s budget draft [ID:nLDE69T070] —
mean it will still probably meet its deficit target.

Along with around 350 billion forints ($1.66 billion) from
crisis taxes, the government aims to spend 530 billion forints
of private pension assets next year and will channel another 360
billion forints of private pension transfers into state coffers.

But economists say the taxes will hurt growth and the
pension-fund raid will just postpone the reckoning of a large
debt hole until later. Budapest must begin repaying 20 billion
euros in IMF-led loans next year.

“The deficit goal is attainable in 2011,” said K&H Bank
analyst Gyorgy Barcza. “Next year, one risk that remains is the
4 billion euros worth of foreign exchange bonds the government
will have to issue. That will be a serious test.”

Orban has also taken steps to change Hungary’s institutional
set-up, moving to strip the state’s budget watchdog of staff and
— most controversially for markets — seeking changes to how
central bank policymakers are appointed.

The latter moves will allow a parliament committee to
nominate all new members in the Monetary Council in March, which
could lead to monetary easing, which the government supports.

“You could just expect the new government to put people
representing its own views into the Monetary Council, let’s say
in the 4:3 ratio,” former bank Governor Zsigmond Jarai, recently
named to head the bank’s supervisory council, told InfoRadio.

(Additional reporting by Patrick Lannin in Stockholm; writing
by Michael Winfrey; editing by Ron Askew)

WRAPUP 3-Hungary approves budget framework, data shows risks