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Good headline numbers, "implementation risks" in Hungary fiscal plan, says City

Hungary's long-awaited structural consolidation package, announced on Tuesday, is "more impressive than many expected", contains "realistic" headline targets but also some implementation risks, London-based emerging markets analysts said after the government published the planned measures.

Eurasia Group, a major global financial risk consultancy, said that "the numbers and agenda are more impressive than many expected, and for the first time Fidesz has adopted a constructive, realistic tone regarding Hungary's bad debt dynamics".

"So the headline numbers and tone look good, but we are still waiting for a lot more detail (to see) how these reforms will work", Preston Keat, Eurasia's research director said.

In general, the reforms will be popular with the upper middle classes, who will benefit from tax cuts, while poorer groups will feel the pain of social expenditure and benefits cuts. "This will hurt Fidesz politically among its more populist - typically poorer - constituents".

In the overall package, about 70% of the measures are expenditure cuts and 30% are tax and revenue increases. "This looks like a reasonable balance", Keat said.

European emerging market analyst at the London investment unit of Bank of America-Merrill Lynch, Raffella Tenconi, told MTI that the "overall balance of the published measures is positive", because their sum total is "more ambitious than expected". The postponement of decreasing the company tax "should widen the room of maneuver" for the Government, the analyst added. Bringing the state debt/GDP ratio under 60% by 2016 is "reasonable, if the government carries out what it says", the analyst said.

Analysts at JP Morgan said that the fiscal targets set out in the plan "appear realistic" and should help to ease concerns over the deterioration that would have otherwise occurred in Hungary's post-2012 fiscal outlook. "We estimate that even after excluding one-off revenues from pension assets, the fiscal deficit would remain around 3% of GDP in 2013-2014".

"Clearly implementation remains a risk", particularly as popular support for the government has declined. "Yet, we assume that the majority - 75-80% - of the measures announced will come into effect", JP Morgan's London-based analysts said.

The association last held talks with government representatives in the autumn of 2010, when the bank levy was introduced, he said. Last year, bank lending significantly decreased in real terms, Erdei recalled.

The bank levy generated about HUF 182 billion in budget revenue in 2010 and is targeted to bring in HUF 180 billion in 2011. Revenue from the tax was earlier set to be halved in 2012.