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City concerned over PM’s potential departure

The likelihood of Prime Minister Ferenc Gyurcsány leaving before the approval of the 2009 Budget is on the rise, but is “by no means a done deal yet”, London-based emerging markets analysts said on Monday.

Also in the City, Hungary’s latest set of GDP data has been branded “very disappointing”, with the potential of worse to come. In its daily Emerging Markets research note released in London, Dresdner Kleinwort said that since rejecting the tax plan put forward by Gyurcsány at the end of August, the SzDSz, has not advanced any specific counterproposal. However, the party is increasingly pushing for the departure of Gyurcsány before an agreement can be reached on the 2009 Budget.

The Socialist Party (MSzP) is governing in minority, and relies on the votes of the small liberal party Free Democrates (SzDSz) which left the governing coalition in the spring. The combination of weak growth, limited scope for significant tax cuts and low popularity were creating growing political tensions which could lead to the departure of Gyurcsány or early elections, Dresdner Kleinwort said.

At this stage, “we continue to believe that the probability of early elections remains low but rising as the Free Democrats maintain a hard line on the tax negotiations”. Negotiations between the two parties are likely to continue in coming weeks, at least until it becomes clearer what tax reforms could be acceptable to both, although “this is likely to come at the cost of greater fiscal loosening next year”, Dresdner said. Political uncertainty and growing fiscal risks are negative for the forint, but the MNB (central bank) will maintain “a vigilant stance and tune up the hawkish rhetoric” should the currency begin to depreciate significantly, it added.

In a separate research note released on Monday in London, financial consultants 4cast said of the latest GDP figures for the Q2 that “it is very hard to be happy about Hungary’s Q2 GDP growth”. The key reason to be worried is not the fact that the preliminary growth figure of 2.2% year-on-year was “watered down” to 2.0% but the fact that the picture ex farming looks “far more disappointing than we had thought and what lies ahead looks even worse”, 4cast said. Ex farming, the headline GDP reading was “somewhere in the 0.5-1.0% range, according to our ex post estimates”.

The strong oil prices have put a big pressure on disposable incomes and domestic demand has been far slower to pick up than expected. Most importantly, however, the “unexpectedly abrupt slowdown” of the euro zone economic activity is what took its toll on the Hungarian industry. In light of the very strong maize crop projections, “we still believe that the already impressive farming output is underestimated in the current GDP statistics and we are looking for a sharper acceleration and upward revisions to past data over the coming quarters”.

Yet, due to the very slow recovery of domestic demand and the massive slowdown in the euro zone economic activity, Hungarian GDP growth ex farming could easily fall to zero in Q3 and/or Q4, though the agriculture will continue to provide “a very sizeable cushion”, 4cast said. (MTI-Econews)