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IMF-EU delegation gives Hungary good marks but says further measures necessary

Hungary's government has taken sufficient measures to stabilize the economy, but a strict fiscal policy as well as maintaining risk reserves is still necessary, and further measures must be taken in 2011 to bring the general government deficit under 3% of GDP, IMF delegation head James Morsink said, after a review of Hungary's progress meeting the conditions of a €20 billion financial support package from the IMF, EU and World Bank granted in November 2008, after the country's bond market locked up.

Further measures are required to reduce Hungary's state debt from over 80% of GDP to 65% in the next five years, Morsink said.

Hungary's main opposition party Fidesz has expressed its readiness and intention to continue a strict fiscal policy in talks with the IMF, Morsink said, answering a question. Politicians from the Opposition have confirmed the cooperation with the IMF is important and they wish to continue this cooperation, he added.

Fidesz is tipped to win general elections in the spring based on polls.

Hungary is progressing in the right direction toward a pickup, supported not by domestic consumption but based on external demand, Morsink said. The IMF projects Hungary's economy will contract by 0.2% in 2010, but expects growth of more than 3% in 2011.

The Hungarian economy has stabilized and is moving along the right path but due to major budget risks this year's deficit target can only be achieved with a strict budget policy and it might also be necessary to restructure reserves, head of the European Commission's delegation Barbara Kaufmann said.

Hungarian Finance Minister Péter Oszkó reiterated that the government does not want to draw down another tranche of the financial support package as the country can get financing on the market.

Oszkó said that last year's 3.9%- and this year's 3.8%-of-GDP general government deficit targets seem achievable, but he acknowledged that further disciplined fiscal policy is required. Even though the 75% of the full-year deficit for 2010 will be reached as early as the first quarter, the government will freeze the HUF 170 billion of risk reserves, ensuring the full-year target is met. Risk will be reduced by some HUF 60 billion in general government revenue from private pension fund members returning to the state pension system and by about HUF 50 billion because of lower interest rates.

He said the government's projection for GDP this year was changed to minus 0.2%, a slight improvement over a projection of minus 0.3% made a month earlier. In January the government had projected a 0.6% drop in GDP for 2010.

National Bank of Hungary governor András Simor said steps Hungary had promised the IMF it would take to strengthen financial market regulator PSzÁF had all been completed.

The IMF's representative in Hungary Iryna Ivaschenko acknowledged the steps to strengthen the independence of PSZAF. Hungary's banking system is stable and remains profitable, and banks' parents in the West have confirmed their commitments to units in Hungary, she added.

The capital adequacy ratio of Hungary's bank system was almost 10% in 2009, preliminary data show, just slightly under the level in 2008, Simor said.

Of the €12.3 billion IMF stand-by loan, Hungary drew down €4.9 billion in November 2008, upon the approval of the package. It drew down €2.3 billion in March 2009, €1.4 billion in June 2009 and a slight €55 million in September 2009. The country has made no further draw-downs since the last review carried out in December 2009.

Of €6.5 billion from the EU, Hungary drew down €2 billion in December 2008, another €2 billion in March 2009 and €1.5 billion in July 2009.

Hungary may still call down €5.7 billion of the IMF, EU and World Bank package until October 5, 2010.

The quarterly review wound up on Monday was the fifth by the IMF and the fourth by the European Union. (MTI – Econews)