The determination of the Hungarian government to reduce the fiscal shortfall is “admirable”, but the composition of the tax plans designed to meet the targets “raises several issues”, London-based emerging markets analysts said.
In a report released to investors in London, Morgan Stanley said that by taxing the companies while sparing households more pain, the Prime Minister “hopes to please both the electorate and the bond market”. The crisis taxes included in the plan, however, are temporary in nature, not structural. As such, it does not seem to address fundamental fiscal issues, although the previous government already made a lot of progress on those, leaving Hungary in a better shape.
Also, the state seems to be taking away money from pension funds, mostly buyers of government debt, in order to reduce issuance needs. Essentially, “this would negate the pension reform and turn the clock back by a few years, albeit temporarily”.
Overall, if the idea was to stick to the 2.8% budget target for 2011 by trying to fill the HUF 300-400 billion hole, then these new taxes should go a long way, so the government deserves “kudos for the effort”.
However, “we do not think that either the rating agencies or the MNB will be impressed with measures which are anti-growth and temporary in nature ... so while the headline numbers and the desire to cap the deficit are likely to be received well, the nature of the measures are much less impressive”, Morgan Stanley said.
Bank of America-Merrill Lynch also said in its comment released on Monday that while the corrective measures will likely make it feasible for Hungary to meet the deficit goals in 2010-11, the temporary and “somewhat anti-growth” nature of the special taxes put the medium-term fiscal outlook at risk.
The suspension of payments into private pensions is “also an undesirable measure”. Pension funds have about €10 billion in assets, 53% of which is invested in debt securities, mostly government bonds. Along with insurance funds, they also hold about a third of outstanding government debt. “We think the budget holds some risks on the financing side, as the temporary and tax based nature of some of the other budget measures being discussed is not encouraging confidence among foreign investors”, Bank of America-Merrill Lynch said. (MTI – Econews)