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IMF expects Hungary’s economic recovery to be slow, though deficit to drop sharply - extended

  The International Monetary Fund said in a staff report published on Monday that it expects Hungary’s economy to recover slowly from recession, though anticipates that the country’s current-account deficit will drop sharply. Hungary signs agreement for EU loan.

The IMF said in the report that it expects Hungary’s economy to contract by 1% next year and grow by a modest 0.6% in 2010 before reaching its estimated potential of 3% only after 2011. The IMF staff report forecast that Hungary’s current-account deficit would fall to 2% of GDP in 2009 from an expected 6.2% of GDP this year. With regard to Hungary’s current-account deficit, the IMF report stated that “It is projected to drop by more than 4 percentage points of GDP between 2008 and 2009, mainly due to the depreciation of the real exchange rate . . . and lower growth. The process will be driven primarily by a sharp contraction of imports.”

The IMF report said that Hungary’s economic growth is expected to reach 3% only after 2011 due to a slowdown in western Europe, the country’s main export market, and the global deleveraging process. “In a difficult global environment and with low domestic demand, the economy is projected to recover only gradually,” the IMF report stated.

Hungary secured a $25.1 billion financial-support package from the IMF, the European Union and the World Bank in October in order to bolster the country’s weakening currency and financial markets. The IMF financing was linked to strong commitments on the part of Hungary’s government to make further cuts in its budget deficit and spending, mainly public-sector wages and pensions. The IMF said that implementation of these plans was of key importance, urging broad political consensus on structural reforms.

The IMF report also highlighted the fact that Hungary’s external-financing requirement would remain high in spite of a sharp fall in the current-account gap next year. The country’s gross external-financing requirement is still projected at about €39 billion through the end of 2009, the IMF said.

Much of this financing is expected to be covered through foreign direct-investment, net positive capital transfers with the European Union, portfolio flows, and bank and corporate foreign financing, leaving a €20 billion financing gap. “Commitments by the European Union (€6.5 billion) and the World Bank (€1 billion) will lower the financing gap. Absent such financing, gross reserves would deteriorate substantially,” the IMF said.

The IMF also warned that Hungary’s monetary policy must remain cautious, after the central bank hiked interest rates by 300 basis points to 11.5% last month. “With the risk that global deleveraging may continue to put downward pressure on the exchange rate (which could have inflationary consequences), monetary policy will need to remain vigilant and premature easing will be avoided,” the IMF report said.

 

SIGNS AGREEMENT FOR EU LOAN

Hungary’s Finance Minister János Veres and central-bank Governor András Simor signed an agreement on Monday for a €6.5 billion loan from the European Union, the National Bank of Hungary reported on its website. The statement said that the EU loan will help Hungary’s government to implement its financial and economic program and continue the process of fiscal consolidation. (MTI-Eco)