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City sees risks in minority government

Hungary would run the risk of missing its fiscal consolidation targets under a minority government amid signs of dwindling political support for the reform package, London-based emerging markets analysts warned on Tuesday.

Franklin Gill, Standard and Poor’s Director of European Ratings, told Econews in London that S+P had recently put Hungary on negative outlook because it felt there was increasing evidence after the referendum of a “reduced appetite” among most Hungarians to support the fiscal consolidation program. The defeat of the Socialist party was “symptomatic” in showing the weakness in the support of the consolidation program across the political spectrum. He said the latest developments confirm S+P’s view that “the political landscape is moving away from supporting (Prime Minister) Gyurcsány’s package ... which is a concern”.

Asked how a minority government would impact the chances of further meaningful expenditure reductions, Gill said that even before the Socialist party’s approval rating “started to decline towards 15% ... there was very little additional commitment to new expenditure reform ... I don’t think anyone was really expecting much on the expenditure side”.
But the current situation makes the Socialist government look “even more of a lame duck government” without political support to fully implement everything in the consolidation package, he added.
He wouldn’t comment on the question whether the latest political developments could bring forward the resolution of Hungary’s negative outlook, but said that what S+P is looking at is the fiscal results.
“We’re going to watch next year’s budget in particular and which measures the government is able to push through and which ones they are not able to push through”.
The current macroeconomic backdrop globally is not particularly propitious for the consolidation package which is “quite bad luck” for both the Socialists and the opposition.
Should the opposition win, they are going to be faced with the same issues and “I don’t think (opposition leader) Orbán has been very specific about, what he would propose ... it’s not really clear that the opposition has the answers either”, he added.

David Heslam, ratings director at Fitch Ratings in London, told Econews that should the Prime Minister resign, that would be a clear sign that support for his fiscal consolidation program “had vained sufficiently” within the party and that means the possibility of a fiscal loosening ahead of the elections “becomes material”. That would have a negative pressure on Hungary’s ratings, Heslam said.

Goldman Sachs said in a comment released in London that its main scenario is still that Ferenc Gyurcsány will remain PM until the next general election in 2010, although he could be replaced as party leader, and that the Free Democrats will remain in the coalition. “We also think that the budget deficit reduction will not be reversed, but further fiscal tightening is unlikely”.
If the PM is replaced, “we would expect a somewhat looser fiscal policy at the margin”, but the disciplinary force of the market would severely limit the scope of any loosening.
In terms of asset prices, the political noise could lead to some volatility. The Free Democrats leaving the coalition or a serious challenge to or replacement of the PM would be market negative in the short run.
Barring a major policy turnaround regarding fiscal policy (which is unlikely), “we do not expect a sell-out driven by purely domestic macro fundamentals”.
In the current global environment, though, even the prospect of a government that is preoccupied with infighting until the next election could weigh on asset prices, Goldman Sachs said.

In a separate comment, Dresdner Kleinwort said that the probability of early elections “has clearly risen”, while the prospects of advancing the important fiscal responsibility reforms “have fallen dramatically ... to virtually nil”.
These developments make Hungary even more vulnerable to the global environment. As a result, “we raise the interest rate forecast to 9.00% by year end, from 8.00% (the current rate after Monday’s 50bp rise) previously, and warn that growth will continue to surprise on the downside, while the political background will further deteriorate", Dresdner said. (MTI-Econews)