National Bank of Hungary (MNB) Governor András Simor said it was encouraging that Hungary's Prime Minister Viktor Orbán and the government are sticking to the budget deficit target and plan to reduce state debt despite the prospect of lower-than-expected growth.
"It is encouraging and soothing that Orbán has expressed commitment to the below-3% (fiscal) deficit target and to debt reduction", Simor told journalists, referring to the prime minister's statement last Wednesday. Simor was responding to a question on the likely budgetary consequences of recent statistics on slower growth at a press conference held after the Monetary Council decided to leave the central bank base rate unchanged at 6% on Tuesday.
It remains to be seen how the government will tackle the situation, he added, noting that the outlines of next year's budget should be out in a month.
"The task before the government is not an easy one, which is why the commitment (to the fiscal targets) is important", the MNB governor said.
The slowdown in growth is unfavorable to the budget, although much depends on the structure, whether the slowdown reflects slower exports or less consumption, the latter having far more adverse impact on tax revenues, Simor said. Detailed figures on the structure of growth are not yet available, he said.
The MNB is aware of the deterioration of growth prospects, although inflation has developed in line with its earlier forecast. The bank will incorporate the changes into its forecasts in the next Inflation Report, due to be published on September, Simor said.
Last Wednesday, Orbán said the government will stand by its general government deficit target for 2011, bringing it below 3% of GDP, regardless of what happens. The target is for a 2.94% of GDP deficit this year, excluding the effect of assets transfers from private pension funds. He said further fiscal measures both on the revenue and the expenditure sides will be required because of the effect on Hungary of the eurozone debt crisis, but also said that fresh data indicate 2011 GDP growth at around 2%, one percentage point less than earlier thought, resulting in a gap of at least HUF 100 billion.
Hungary's GDP rose an unadjusted 1.5% in Q2 from the same period a year earlier, slowing from 2.5% growth in the previous quarter, the Central Statistics Office (KSH) said in a preliminary estimate last Tuesday. Analysts had put GDP growth for the period at 2.1-2.3%.
The government's or banks' so-called home protection programs (measures temporarily easing the debt service of borrowers of Swiss-franc-denominated home loans) could blunt the slowdown of consumption to some extent, Simor said. The actual effect could vary highly, however, as estimates for the percentage of borrowers actually choosing the option range from between 5% and 50%, he noted.
The steep strengthening of the Swiss franc, the main denomination of home loans, has raised loan installments, thus reducing disposable income.
Hungary's risk assessment has deteriorated somewhat during the past month, but in the MNB's view that reflects global effects, Simor said. The higher risk spreads have affected Hungarian asset prices, but have had little effect on the forint, which remained fairly stable against the euro. Therefore there is no reason for the MNB to consider any intervention, Simor responded when asked whether the bank was assessing means of propping up the forint.