IMF deal seen "paving way" to stronger forint

Ratings

A credible deal with the International Monetary Fund (IMF) should "pave the way" to a stronger forint and lower risk premiums but negotiations are likely to prove prolonged and difficult, London-based emerging markets analysts said on Friday.

Emerging Europe economists at Goldman Sachs said they do not expect the announcement on the new IMF talks to be followed quickly by an actual arrangement. Rather, "we see some difficult negotiations ahead as the government attempts to limit the program conditionality and minimise the potential political cost of re-engaging with the IMF".

However, a credible program would help Hungary avoid "a vicious spiral" of slowing growth and rising fiscal austerity.

A program, "or at least a credible agreement on one", could also help stave off the risk of a sovereign rating downgrade to speculative grade, since it could improve policy predictability, one of the factors leading to negative rating actions last week, analysts at Goldman Sachs said.

Fitch Ratings revised its outlook to negative from stable on Hungary last Friday, and Standard & Poor’s said a few hours later it had placed Hungary’s ratings on CreditWatch with negative implications.

Economists at Commerzbank said on Friday that the Hungarian government is "likely to be reluctant" to accept direct financial aid due to the strict IMF conditions attached to that.

Thus a "precautionary agreement a la Romania" looks more probable, one which does not involve a direct flow of funds but allows the IMF to support the country should the Hungarian government suddenly have major financing requirements.

This "insurance solution" alone would be likely to contribute to a significant fall in the Hungarian risk premium. However, to fuel further forint gains it will now be important to create "a good climate for fruitful negotiations which would create the foundation for a realistic agreement without any major implementation risk". If that is successful, "the downward path for EUR-HUF has been paved", analysts at Commerzbank said.

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