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EBRD raises Hungary growth forecast for 2011, notes risks to fiscal adjustment

The European Bank for Reconstruction and Development (EBRD) raised to 2.7% its forecast for this year's GDP growth in Hungary, while noting risks to fiscal adjustment over the medium term in its fresh report of the EBRD region.

The EBRD raised its forecast for 2011 GDP growth to 2.7% from 2.0% forecast in a previous report in January, and it projects growth to pick up slightly to 2.8% next year.

Growth in Hungary will still lag behind most countries in the region, the forecast showed. EBRD noted that Hungary, together with Croatia and Bulgaria, is one of the few countries in the region where recovery has remained driven by net exports instead of becoming more domestic-demand-driven.

Against a general trend of recovering credit growth in the region, "...in the Baltic states, Hungary, Slovenia, and Romania, where recoveries have so far been hesitant or have lagged, credit growth continues to be negative or weak, albeit often with an improving trend", the bank said.

The GDP projections are lower than the average growth forecasts, of 3.5% for 2011 and 3.3% for 2012, for Central Europe and the Baltic states, or the government's respective forecasts of 3.1% and 3.0%.

The EBRD put 2011 inflation in Hungary at 4.2%, somewhat over the official 4.0% forecast, mentioning Romania, Croatia and Hungary among countries where weak growth in late 2010 prevented a pickup of core inflation.

In a brief summary on Hungary the bank said that the Hungarian government is committed to meeting targets under the EU excessive-deficit procedure, but has so far refrained from any wide-ranging expenditure consolidation. It mentioned the country as one where "questions about the credibility of medium term fiscal adjustment remain".

The bank specifically noted that "many analysts have questioned the sustainability of 'crisis taxes' -- extraordinary taxes levied on telecom, energy and retail companies for a temporary three years -- adding that some investors consider the tax discriminatory. It also noted confidence-weakening measures, such as those against private pension funds.

All three ratings agencies now assess the country at one level above speculative grade, EBRD said, noting that tension between government and central bank may also further disrupt bond markets.