Govt likely to overshoot 2012 deficit target, says GKI

Hungary is likely to have a government budget deficit of 2.9% of GDP in 2012, surpassing the targeted deficit of 2.5% of GDP but keeping the ratio below the 3% Maastricht limit, economic research-company GKI predicted in its newest forecast on Tuesday.

GKI attributed the higher-than-projected deficit partly to a projected recession, noting that keeping the budget deficit under 3% of GDP will require further cuts in government expenditures.

GKI predicted GDP growth of 1.5% this year and GDP contraction of 1.5% next year, unchanged from the company's most recent projections in September. GKI attributed Hungary's projected 2011 GDP growth to a 20% rise in agricultural production due to good weather.

The research institute predicted that industrial output will grow 5% in 2012 as a result of the completion of major automotive industry investments during the year. But domestic sales will decline around 3% next year as a result of a 1.5%-2% drop in real wages stemming from the government's income tax changes and elimination of tax write-offs.

GKI said that employment will rise somewhat this year, though will decline in 2012 as a result of the continued reorganization of Hungary's public sector, loss of markets in the private sector and rising wage-related expenses. GKI noted that the government's public work schemes would produce only a statistical improvement in employment data.

GKI predicted average annual inflation of 3.8% this year as a result of rising taxes and a weakening forint, forecasting average annual inflation of 4.8% next year.

GKI said that the National Bank of Hungary could elect to hike interest rates as a result of a rise in Hungary's risk premium, a reduction in demand for Hungarian government bonds and a possible downgrade of Hungary's credit rating.