In the latest isssue of their fortnightly CEEMEA Macro Monitor report, Morgan Stanley‘s analysts say they think that the fiscal measures presented by the government stand a good chance of putting the country on a sustainable debt/GDP trajectory, and should avert further downgrades.
“Of course, implementation risks exist, but we think that even a partial implementation of the reform agenda will deliver substantial results in terms of debt sustainability … assuming the output gap narrows a bit and 60% of the reforms are implemented, debt/GDP should stabilise even using conservative growth assumptions”.
The cumulative deficit in the first quarter reached 108% of the annual target. But despite near-term challenges, “we do feel that Hungary may be at a turning point, and this is the best chance the country has had in a long time to implement a more sustainable macro framework and address its long-term structural weaknesses, such as a bloated public sector and a low labour force participation rate”, Morgan Stanley said.
In a separate research note released in London on Monday, Commerzbank said, however, that while optimism surrounding Hungary’s economic prospects has soared over the past quarter, with the stock market, CDS spreads and the forint’s rally all reflecting this optimism, long-standing structural imbalances, such as Hungary’s external debt burden and political risk, “have not gone away”.
Factors such as monetary tightening and the one-off bond inflow from the recent dollar bond issue that pushed reserves up by 6.4% in one week could be used to explain forint appreciation, but the behaviour of other assets, such as the stock market – which is negatively impacted by higher interest rates – hints at broader sentiment improvement. “We think that optimism is being driven by a change in view about cyclical convergence, coupled with a change in view about the relevance of risk in the near term”.
Yet, much of this “will likely leave room for doubt and scepticism in the minds of investors … (for example) we forecast the trade surplus to narrow significantly once Hungary’s output gap begins to noticeably narrow”. Also, Hungary’s debt repayment schedule is not harsh at the moment but, beginning in 2012, the obligations will begin to re-accelerate, in particular when the repayment of IMF/EC funding kicks off, Commerzbank said.
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