Deficit targets in fiscal package "realistic", growth assumptions "optimistic", says City

Analysis

Deficit targets in Hungary's new fiscal package are realistic but the GDP growth assumptions it is based on are overly optimistic, and the composition of the measures may potentially strain relations with the IMF, London-based analysts said after the consolidation plan had been announced on Wednesday.

Economists at 4cast, a major London-based financial consultancy, said the readiness to make additional steps gives markets an encouraging signal that the government does not want to let talks with the EU and the IMF derail this time, and that is "a major plus after the half-hearted package of 5 October".

Also, the revenue targets – with the exception of the increase in the VAT collection efficiency - seem realistic and should bring the 2013 deficit target closer within reach, albeit once again the tax on the Treasury "is a pseudo measure only".

At the same time, all of the new measures will boost CPI further and will depress both growth and potential output. "We believe the government is extremely optimistic on (the package's) mild impact on growth for 2013", 4cast's analysts said.

Emerging markets economists at Morgan Stanley in London said that the measures that bring the total discretionary fiscal tightening in 2013 to "a whopping 2.5% of GDP" may well tip the economy back into recession next year, and "it seems optimistic" for the government to pencil in just a minor growth downgrade from 1.0% to 0.9%.

"Our own forecast of 0.7%, which was made pre-fiscal tightening, is also looking increasingly optimistic".

"We think that today’s actions may elicit different responses from the IMF and the EC". The policy mix is "far from ideal" to the IMF, especially with respect to the bank levy and the "excessive focus" on revenues and taxes.

On the other hand, from a consolidation standpoint Hungary "has now done plenty" to assuage the EC's concerns. If anything, "we think that it has probably tightened too much".

Progress of the talks on an assistance package depends on the interaction between the IMF and the EC, whose views are usually fully aligned. Assuming that the EC thinks these measures are sufficient to take the deficit sub-3% of GDP, it is hard to imagine that a sub-optimal policy mix in the IMF's eyes is in itself a sufficient reason to stall the deal.

"Our working assumption is still a deal in early 2013", Morgan Stanley's analysts said.

Economists at Barclays, a major City-based banking group, said the main problem with the new set of measures is that they are relatively "unfriendly to business".

Given that this particular set of measures appears to be less growth friendly and leaning more on unorthodox polices, the new package could strain relations with the IMF.

Nevertheless, "we still expect an IMF mission will visit Hungary this year, probably in November".

"We do not think a new mission will lead to an immediate agreement and instead expect more missions in 2013 ... We are still unsure that the government and the IMF can find enough common ground to reach an agreement", analysts at Barclays in London said.

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