War on debt continues

Prime Minister Viktor Orbán said that Hungary's state debt automatically falls if the fiscal deficit is under 3% of GDP.  The government expects 2% GDP growth both this year and next. The debt projections are down from the previous government forecast of 3.1% GDP growth this year and 3.0% next year.

The excise tax raise is expected to take effect on 1 November, the earliest. In Hungary, new regulations may come into effect 45 days after passing the bill. Thus, higher revenues are expected only in November and December in 2011.

Scraping up the money

The accelerated restructuring of the government and a "full stop" on procurements is expected to result in savings of HUF 40 billion. A more efficient and faster VAT and excise tax collection is expected to generate an additional HUF 40 billion in revenues. The government hopes to collect HUF 10 billion from the increase in excise taxes and another HUF 10 billion from dividends on foreign equities in the private pension fund portfolio. 

The debt cut will be worth a combined € 4 billion and will reduce the ratio of state debt to the GDP by about 4 percentage points. Within the total, € 3 billion will come from the called but unused part of a former IMF-led international loan, deposited with the National Bank of Hungary (MNB). The additional € 1billion will come from private pension fund assets transferred to the state earlier this year.

More “holes”

According to Equilor analyst Péter Harsányi the measures focus on short term solutions and he thinks these may be not enough to ease pressure on local budget uncertainties. The news are rather neutral for Hungary now, but PM proposed further steps to be announced later, Harsányi noted. 

Nomura analyst Peter Attard Monalto sees more than one “holes” in the budget. There is a HUF 250 billion hole caused by EU court ruling on VAT, that is not addressed by today's measures, and he believes that there is very little fiscal room to move on this. Resolution is likely to be more technical trying to get around EU court decision, he noted.

“There is then a HUF 250 billion hole by our own calculations of budget slippage this year,” said Monalto. “There also is virtually no room for additional measures in our mind to fill that remaining hole without crimping growth further.”

Buda-Cash analysts have doubts about the collection of the planned extra revenues from VAT.  They note that dividend revenues are not exactly new savings, as they were already in place. In addition, the gap in the budget could be higher than the estimated HUF 100 billion. 

Second debt reduction 

The debt reduction in the autumn will be the second one this year after a cut of about HUF 1,340 billion in June from the withdrawal of government securities the state received in the transfer of private pension fund assets.

Hungary's Maastricht-conform gross government debt stood at HUF 21,285 billion or 76.8% of GDP at the end of June according to preliminary MNB figures, down from 81.9% of GDP at the end of March, mainly reflecting the withdrawal of government securities in the private pension fund portfolio. 

Hungarian members of private pension funds had until the end of January to move back to the state pension pillar along with their retirement savings Approximately 97% of members returned to the state pillar, bringing some HUF 2,946 billion in assets with them.

The unused part of the IMF-led loan deposited with the NBH is part of the NBH international reserves that stood at € 36.106 billion at the end of July.