Hungary package more credible this time, Barclays says


Hungary's governments have had fiscal packages before, one critical difference this time is, however, that Prime Minister Ferenc Gyurcsány's austerity program is based upon measures that the central bank deems credible which is in stark contrast with previous years, Barclays Capital said on Tuesday.

In its monthly Convergence Monitor survey released in London, the bank said that under the Convergence Program submitted to the EC, the Hungarian government is currently targeting a reduction of the ESA measure of the budget deficit from 10.1% of GDP this year to 6.8% next year. Those are "terrible numbers" and based on the Socialist government's past struggles with implementation, "we had been surprised by the apparent market confidence in this new program ... however, having spent time with officials from both the government and the central bank (during a recent trip to Budapest), we are now similarly impressed".

Unlike the overshot budgets of recent years, the 2007 budget has been written on quite conservative macro assumptions (2.2% GDP growth and 6.2% CPI inflation) and, perhaps more importantly, there looks to be a much more effective budgetary reserve, Barclays Capital said. Budget credibility has also been improved by the move to fully incorporate the motorways into the official budget figures. That means that the ESA and cash budget figures should be much closer each month, and therefore lead to more effective scrutiny, it added. And, "we return from Budapest with the view that Gyurcsány has successfully seen off the challenge of the October 'lies, lies, lies' period, there seems little open rebellion within the Socialist party, and momentum for the opposition looks very much lost".

The anti-government protests remain low key and as for the fiscal austerity measures, Socialist party officials are more concerned with regional projects and spending than reducing the tax burden. That leaves the austerity program largely unchallenged, and has been reflected by the relative ease with which the Prime Minister has pushed through the fiscal measures thus far, Barclays Capital said. In a separate report released late last month, following talks in Budapest with Hungarian officials and analysts, JP Morgan said that there is now a great deal of confidence that the government will be able to meet, or possibly even outperform, its 2007 ESA fiscal deficit target of 6.8% of GDP including pension reform costs.

"Contrary to our previous trips, confidence was expressed not only by government officials, but also by independent economists and, most importantly, the National Bank of Hungary" (MNB). In fact, the latter two expect the 2007 fiscal deficit to come in 0.6-0.8% pt of GDP below the official target, citing very conservative official growth and revenue assumptions, the JP Morgan report said. (Mti-Eco)

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