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Euromoney: Hungary fiscal outlook remains uncertain

Analysts asked by Euromoney's online service Euromoney Country Risk said they see Hungary's fiscal numbers as improving, while the country's fiscal outlook remains uncertain.

Euromoney Country Risk asked the analysts whether, after unveiling a spate of controversial policies last year, the Hungarian government is finally making progress with the country's public finances.

Friedrich Mostboeck of Erste Bank said the government's fiscal consolidation strategy is taking shape. "While there are feasibility risks with the plan, which aims to reduce the budget by 1.9% in 2012 and 2.9% of GDP by 2013, the convergence programme submitted in April contains additional spending cuts, and the government also said that further measures may be implemented to keep the deficit plan on track," he said.

If the government is able to contain the deficit, CDS spreads, currently about 90bps higher than they were before the parliamentary elections, could fall to their level before the spring 2010 election, Mr Mostboeck said, noting support from a current account surplus and GDP growth close to 3%.

He saw a good chance for the forint and government bonds to strengthen if the government carried out the planned reforms and unless global investor sentiment deteriorated.

Nicholas Spiro of Spiro Sovereign Strategy said "While the twin deficit problem that plagued Hungary before the 2008 crisis has been rectified, fiscal adjustment is being partly carried out by nationalising the pension system in order to compensate for revenue shortfalls. Moreover, there are significant execution risks in consolidating public finances, with the deficit already nearing the annual budget target of on a cash-flow basis in the first four months of 2011."

Mr Spiro added that Hungary's high foreign-currency-denominated debt continues to make "public- and private-sector balance sheets ...extremely sensitive to the exchange rate." He noted this is why Hungary turned to the IMF in the first place. He said the risk of a sharp depreciation of the forint has receded with the significant improvement in the country's external position, yet remains a serious concern.

"Ultimately, Hungary's prospects hinge on the government's ability to stabilise and lower the country's public debt through expenditure restraint and structural reforms designed to raise the country's woefully low employment rate," Mr Spiro said.

Daniel Lenz of DZ Bank said "Apart from the possibility of further regulatory policy sins, Hungary's plans to spend scarce FX reserves on strategic acquisitions, such as the recent purchase of a 21% stake in MOL, the state oil company, is risky. The IMF loan repayment, which begins in autumn, will reduce reserves, while a shortage of liquidity is still possible in the event of external shocks such as the Greek sovereign default."

Among the series of government's surprise measures since it took office a year ago," the fiscal package was surely the best of the government's unorthodox policies, although the growth assumptions were perhaps too optimistic," Mr Lenz said, listing the bank levy, the termination of IMF negotiations, nationalization of mandatory pension funds, the fiscal package and, most recently, the mortgage relief plan and the announced purchase of MOL shares.

Mr Lenz concluded "Nationalizing the private pillar of the pension system may be considered myopic, but it was effective in turning the budget from a deficit into a 2% GDP surplus this year. The surplus could have been even higher, but acquisition expenditures reduced it by about 4% of GDP. We expect public debt to decrease to 73% of GDP by 2012, while gross foreign debt to GDP will fall to 124% from 147% in 2009. So yes, Hungary's fiscal numbers should improve."