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Hungarian fiscal targets “doubtful”, IMF deal only in “severe market stress”, says City

Pledges to reduce Hungary's fiscal gap to less than 3% of GDP next year have become more difficult to achieve after last year's deficit figures were recently revised upwards, but the government is still unlikely to seek new financing from the IMF unless international debt markets become “severely stressed” again, London-based emerging markets analysts said.

Commenting on the outcome of the local elections, Capital Economics, a major investment consultancy, said that with the elections out of the way, the hope is that Fidesz “finally details" its plans to tackle the public finances. While Hungary is "a long way from being the new Greece”, its comparatively high level of public debt and recent record of fiscal laxity mean that it is “still walking a fiscal tightrope”.

Economy Minister György Matolcsy has pledged to bring the deficit down below 3% of GDP next year, which would make it amongst the lowest in the EU. However, “three factors mean that we remain cautiously skeptical about whether this can be achieved”.

First, following last week's upward revision to the 2009 fiscal deficit figure to 4.4% from 4.0% of GDP, the government's target has already become more difficult to reach.

Second, the pledge is conditional on the government achieving “a number of optimistic performance targets”. These include bringing the budget deficit down to 3.8% of GDP this year “which appears unlikely”, particularly given last week's revision, and that the economy grows by 2.5%-3.0% in 2011 whereas “we expect growth of just 1.5% next year”.

Finally, the government's plans are likely to remain heavily reliant on revenue-raising measures, including keeping “a controversial and populist bank tax” in place next year, as opposed to more concrete spending cuts.

As it stands, “we estimate that further fiscal tightening measures worth around HUF 350 billion - 1.25% of GDP - will be needed to achieve the government's pledge”.

Overall, “we expect the pace of consolidation to be slower than planned, and that the deficit will still be around 4% of GDP next year ... If we are right, the forint looks set for a rough ride over the coming years”, Capital Economics said.

In a separate comment released to investors in London, Morgan Stanley also said that as a result of the revision of last year's deficit, the fiscal starting point for 2010 is “worse than previously thought”. For the planned new flat tax system to prove viable, further cuts on the expenditure side will “almost certainly” be needed, it added.

Morgan Stanley said, however, that it disagrees with analysts who think that Fidesz will now change its tone with the IMF and seek another program following the expiry of the current agreement. “We believe that seeking another IMF agreement would be out of character for a government that has made running policy independently of international institutions an explicit goal for the future .... therefore, we think that the Fidesz-led government will go back to the IMF only if funding markets come under severe stress, but not before”. (MTI – Econews)