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IMF sees Hungary fiscal position, debt to improve only temporary without further measures

The International Monetary Fund (IMF) projected slower growth for Hungary and, except for this year, lower inflation than the government over the middle term up to 2015, and forecast that the government deficit would increase again after temporary improvements stemming from the pension system changes this year, the IMF said in a report.

The illustrative medium-term scenario, part of the IMF staff report prepared as part of consultations with Hungary and post-program monitoring, did not take into account a fiscal consolidation program the government is to announce at the end of February. Based on recent announcements, the government is expected to announce a package of measures trimming at least HUF 600 billion (more than 2% of GDP) from the deficits in 2011-2013.

The IMF projects Hungary's economy will grow 2.8% in 2011, under the government's forecast 3%-of-GDP growth, projecting that growth would rise to 3% in 2012 and stay there for the subsequent three years. That scenario is well under the government's projection, which expects the growth rate to reach 5% by 2014 and rise to 5.5% in 2015.

The fund put 2010 GDP growth at 1.1%, just a tad over the National Economy Ministry's end-of-November projection of 1%.

The IMF estimated that Hungary's general government deficit, calculated with EU methodology, reached 4.0% of GDP in 2010, slightly over the government's 3.8% target. Preliminary figures show that the 2010 deficit target was met.

The IMF staff projects the general government to reach a 5.6%-of-GDP surplus for 2011, with the one-off accounting of the assets transferred from Hungary's private pension pillar to the state pension pillar. It forecasts, however, that the improvement will only be temporary, with deficits returning to 5.2% of GDP already in 2012 and exceeding 7% of GDP each year between 2013 and 2015.

Last year's slight 0.1%-to-GDP surplus of the primary general-government balance will widen to 9.5% of GDP with the transfer of pension assets, the IMF staff projected. But the structural primary balance, which excludes one-off effects, will turn into a 0.3% deficit, the first such deficit after surpluses in the last three years, including a 2.8% surplus in 2009 and a 0.8% surplus in 2010.

The IMF's projections differ sharply from the Hungarian government's forecasts: namely of an ESA95 deficit target of 2.94% of GDP for this year, and a drop of the deficit ratio to 1.9% by 2014.

In line with its fiscal position forecast, the IMF foresees Hungary's general government debt ratio dropping from an expected 79.5% of GDP at the end of last year to 69.9% by the end of 2011, also resulting from the transfer of the pension assets, though the ratio is expected to jump back to 71.5% next year and rise gradually to slightly above 80% of GDP by 2015.

The IMF puts average annual inflation at 4.1% in 2011, over the 3-3.5% government projection, and forecasts that the rate will drop to 3.5% next year and stay at 3% in the following three years. The government projects average inflation dropping to 3.3% next year, but to accelerate again, to 3.5%, by 2015.

In a statement published late Thursday, the National Economy Ministry did not comment on the report, only said that an IMF delegation visited Hungary between October 13-15 last year with the aim of preparing the report as part of the regular annual Article 4 consultations with member states. The delegation met for talks with officials and experts from the government, the MNB and PSzÁF as well as with some financial market players. Hungary's scheduled biannual monitoring related to its 2008 loan agreement with the IMF also took place during the visit.

The next Article 4 consultations are expected to happen in a year, while the next monitoring visit will take place in the second quarter of 2011, the ministry said. (MTI – Econews)