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Govt would be better off keeping financing buffer - MNB report

The government would be better off keeping its existing financing buffer in 2012in order to prepare for the big expiries due in 2013 and 2014 than use part of it to reduce government debt, National Bank of Hungary (MNB) analysts said in a report on the general government published late last week.

State debt would drop even without tapping the financing buffer next year, although the reduction would be less than targeted. Weaker growth and a weaker forint would lift the state debt-to-GDP well above targeted levels, the report said.

Central government debt will rise less in nominal terms next year than will the cash flow deficit according to projections in the 2012 budget bill, the MNB researchers pointed out.

That implies part of next year's deficit will be financed with some of the financing buffer, that is, the foreign currency deposits of the State Treasury -- the disbursed and yet unused part of Hungary's IMF-led financial support package -- and the remainder of the assets taken over from private pension funds earlier this year.

The plan to finance part of next year's deficit from these financing reserves explains the big targeted reduction of gross central government debt -- a narrower measure than Maastricht-conform debt used for EU comparisons -- between the end of 2011 and 2012 under the bill: by 1.9 percentage points, to 66.4% of GDP .

Central government debt would drop by one percentage point without drawing on the financing reserves in 2012, the researchers projected, and it would reach 70% of GDP by the end of next year.

Gross general government debt, as used for EU comparisons, will also drop one percentage point next year, in line with the government plan, but it would still reach 77.5% of GDP at the end of 2012 instead of the 71.8% ratio projected in the budget bill, the researchers said.

They forecast a higher, 78.5% state debt ratio for the end of 2011, compared to the planned 73% ratio announced by the Prime Minister late in summer.

The differing estimate for growth and the weaker exchange rate the MNB calculated would explain most of the gap between the two projections, the MNB analysts said.

The MNB analysts forecast Hungary's GDP would grow 1.6% this year and 0.6% in 2012, both down from the respective government projections of 1.9% and 1.5%. They also used the current market rate for their projections which is significantly weaker than the HUF/EUR exchange of HUF 268 rate in the budget bill.

Hungary's gross state debt stood at 81.3% of GDP at the end of 2010. It fell by the equivalent of about 4 percentage points of GDP to around 77% in the summer when the government securities in the private pension fund assets portfolio transferred to the state were withdrawn.