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Fitch sees rising public finance risks in Central Europe

The public finances in the Czech Republic, Hungary and Poland will continue to worsen as a result of the economic downturn, with average government debt set to rise by 10 percentage points of GDP by 2010 compared with their end-2008 levels, Fitch Ratings said in a special report on Monday.

“The marked deterioration in public finances in these countries could lead to negative rating actions if they fail to identify and implement credible medium-term fiscal consolidation programs. In all three countries, politics and electoral cycles add to the risk of fiscal slippage”, said David Heslam, Director in Fitch's Sovereign team.

Hungary's fiscal policy will continue to be guided by IMF commitments, with the government targeting a 0.1 percentage point reduction in the 2010 budget deficit to 3.8% of GDP, which Fitch considers realistic.

However, the deficits of the Czech Republic and Poland are both forecast at 6.3% GDP in 2010, an annual widening of 0.3 percentage points and 0.8 percentage points of GDP, respectively, Fitch said.

Hungary's government debt is forecast to rise by 10 percentage points of GDP between end-2008 and end-2010, to 82.5% of GDP. Hungary is grappling with the need to implement a multi-year improvement in its public finances to correct past fiscal excesses, restore market confidence and prevent a sharper rise in its already relatively high government debt burden against the outlook for a prolonged period of weak economic growth.

With its already elevated debt levels, the country has little room for policy slippage or for absorbing further negative shocks. Implementation risk is non-negligible as scheduled general elections approach in April 2010. “On current opinions polls, the elections are likely to be won by the opposition Fidesz-KNDP party, whose fiscal policy priorities and targets have not been clearly articulated”, Fitch Ratings said.

It expects Hungary's GDP to sink 6.7% this year, and decrease by a further 0.4% next year.

Sovereign Long-term Foreign Currency/Local Currency IDRs and Outlooks for Hungary are 'BBB' Negative/'BBB+' Negative at Fitch Ratings. (MTI-Econews)