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GKI sees contraction deepening to 4-5% in 2009

  GKI sees Hungary’s economy contracting 4-5% in 2009, the economic think tank said in a projection prepared with Erste Bank and published on Monday. The forecast is well over one for a 3.5% contraction published by GKI at the beginning of March.

GKI projects real wages will fall 2-3%, dropping 1-2% in the private sector and 6-7% in the public sector. Purchased consumption is set to drop 5%.

Inflation will remain low, around 3.5%, in spite of a VAT and excise tax increase, to be offset in part by lower payroll and personal income taxes. Falling demand is expected to take a big bite out of corporate profits and reduce revenue from the corporate profit tax.

GKI sees state revenue falling HUF 400-450 billion under the target in the budget, though it also projects expenditures will be HUF 300-350 billion under the target as the government introduces new mandatory reserves and spending caps, and reduces subsidies.

The end result will put the deficit some HUF 100 billion over the target or at around 3% of GDP, about the same as the deficit in 2008.

If Hungary calls down all of an international credit line from the IMF, EU and World Bank in 2009, state debt as a proportion of GDP could rise over 80%, though this depends on the forint’s exchange rate at the end of the year, GKI said, noting that the IMF estimates the average level of state debt for the G20 will reach 90% in 2009.

GKI sees Hungary’s external financing need dropping sharply to €2 billion in 2009, or 2.2% of GDP, from €7.8 billion in 2008. Hungary’s trade surplus will grow as imports fall, and lower profits will mean a drop in profit repatriation.

At the same time, EU transfers will rise from €1.1 billion to about €2.5 billion. The €2 billion deficit can be financed by net FDI inflows or with Hungary’s credit line from the IMF, EU and World Bank.

GKI expects household savings to rise to at least 5% of GDP as Hungarians are forced to save because of higher loan repayments or are attracted by high interest rates. (MTI-Econews)