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Market unmoved by budget deficit surprise

The forint did not strengthen significantly after Hungary posted a positive surprise deficit of Ft 40.4 billion in January, much below the forecast of 176 billion. The ministry had earlier projected the Q1 gap would come to as much as Ft 695 billion. After the publication of the deficit numbers, the Hungarian currency strengthened to the Ft 249 forints/euro level.

The following day, credit rating agency Standard & Poor’s announced that it would not downgrade Hungarian foreign debt until after the elections, but if the new government – to be formed by whichever party wins the elections – will not take austerity measures, downgrading would be unavoidable. After this announcement, the forint weakened back to the Ft250-Ft251 per euro level.
 
Currency traders and analysts were not surprised by the good news, because the Finance Ministry regularly forecasts rather large monthly deficit numbers mid-month, compared to which the final deficit numbers always seem to be a pleasant surprise, Bence Lányi, analyst of Raiffeisen Bank Rt, said. Last year it happened in ten of the 12 months, and seven times in a row since July 2005, he added. Whether the ministry is unable to forecast the course of fiscal events, or it is a conscious effort to create positive news about the budget, it is hard to see it as a positive sign and foreign investors have learned to discount it, he added. Considering that the 2005 budget deficit, calculated according to the ESA ’95 EU-compatible standards, came to about 6.1% of the GDP, twice as much as the EU’s Maastricht criteria allow, and in 2006 the deficit calculated on a cash flow basis (GFS) will be Ft 1545 billion, 50% higher than the Ft 984 million in 2005, these monthly “positive surprises” cannot be interpreted as an improvement of the fiscal situation, Lányi added. 
 
The other reason why markets were not really moved by the good news is that the lower-than-expected expenses are influenced by one-off items, analyst warned in the press last week. From the extra revenue the government received for the privatization of Budapest Airport Rt, several VAT reimbursements which could have been paid in January 2006 were instead made in advance in December 2005, György Barcza, analyst of ING Bank said. Similar pre-payments in housing loan subsidies were also financed from privatization revenues, Barcza added.
 
Finally, forint-buying investors might not have been happy to hear Finance Minister János Veres say that after the better-than-expected January budget deficit figures, the February overspending will be above the forecast by the same amount it was below expectations in January.
Veres did not gave an explanation on the worsening numbers, but Barcza assumes this will be the first month when the recent reduction of the VAT rate will show up on the revenue side of the budget, and some delayed payments might also appear. “Last year, when a part of several ministry’s budget was frozen, the government might have promised that the money held back then will be given back early this year,” Barcza opined. It is worth remembering that in election years, the budget deficit is usually Ft 300 billion-Ft 400 billion higher than in other years due to fiscal laxity, the analyst warned.