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Hungary fiscal package to bring short term benefits, medium term worries persist, says City

Hungary's forthcoming fiscal adjustment package, due to be debated later this month, should be enough to underpin HUF assets "for now", but worries over medium term fiscal sustainability remain, London-based emerging markets analysts said on Tuesday.

In a report discussing the possible impacts of the upcoming package, Capital Economics said that achieving savings in the region of HUF 600-650 billion, or 2-2.5% of GDP, over the next three years, already referred to in statements by officials, "is the benchmark" and anything less than this "will be a disappointment".

As far as the size of the package is concerned, "we expect the government to deliver cuts broadly in line with - or perhaps even greater - than what has been reported". In contrast to most EU countries, Hungary's headline budget balance looks set to come in "comfortably below" the Maastricht limit of 3% of GDP this year. Depending on how the government accounts for "the mass" of returning second-pillar pension fund assets, the balance could even surge into surplus.

The plans should be enough to stabilize the forint around 265-270/euro "for now". This should help to ease immediate concerns about the balance sheet position of households and firms and recent fears over imported inflation at the Central Bank. Given the possibility of a more dovish Monetary Council from March, interest rates could end 2011 at a lower level than at present, Capital Economics said.

More generally, though, "we are less optimistic that the measures will restore fiscal sustainability over the medium term". While it is possible that some spending cuts are well-directed and yield lasting savings, "we suspect that a big chunk of the measures will be skewed towards less tangible commitments, i.e. efficiency savings, which are typically difficult to deliver".

Moreover, the government is unlikely to drop its "overly optimistic" forecasts for economic growth over the coming years either, and this calls other official forecasts into question too, particularly the existing official view that public debt as a share of GDP will fall sharply in the coming years, Capital Economics said. (MTI-Econews)