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London analysts: Hungary reforms point to right direction, with inflation and growth risks

The structural reform programme of the Hungarian government affects every field necessary without any significant risks this year, London-based analysts said, noting risks to growth and inflation on the longer run.

"The reforms cover all the right areas and the government has such a wide majority that the question of implementation is really one of political will", Morgan Stanley said in its Thursday report.

The group's analysts recently visited Budapest, and had meetings with private sector economists, asset managers, Economic Ministry representatives, the IMF and political analysts.

"Our overall impression from our conversations is that not enough risks of an adverse feedback loop on growth from the austerity measures are built in", they noted in the report.

The consolidation measures point, however, towards growth risks, the analysts said as the fiscal targets in Hungary's convergence plan amount to a fiscal tightening of approximately 2% of GDP next year.

Although this is offset by some tax cuts, but the latter primarily favour richer households, who have a lower propensity to consume.

Morgan Stanley says that the government's assumption for 3.1% growth this year and 3.0% in 2012 do not look totally out of reach, but the risks appear clearly tilted to the downside. If growth were to disappoint, and given that the reforms are already proving unpopular with the electorate, a return to a more populist stance, especially in the second half of the parliamentary term, is a key risk, they warned.

Morgan Stanley said it found broad-based agreement among local observers with their own view that the NBH’s recent CPI forecast is too benign. Rate stability is viewed as the most likely outcome, with the risks of a rate hike late this year still higher than those of a rate cut. The analysts also noted that pressure on Governor Simor has abated over recent months and the relationship between the government and the NBH has improved, admittedly from a low level.

After a team visit to Budapest Timothy Ash, head of Royal Bank of Scotland (RBS) London global emerging market research recently said the Hungarian government "appears determined" to push the bulk of its reform programme through, adding that substantial implementation risks remain.

BofA Merrill Lynch Global Research analysts had also positive impression regarding the reform plans as their recent report titled "So far, so good" summarising their recent meetings with government officials and analysts in Budapest shows. They noted, however, that the implementation of the convergence plan was still "a challenge", as the weak economic pickup leaves the Hungarian financial government a very narrow room for error.