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Sound structural package may boost Hungary ratings outlook, says City

Hungary's credit rating outlooks may improve as early as this year if the government's anticipated structural consolidation package, due next month, materially improves the fiscal position, London-based emerging markets analysts have said.

In a report released to investors in London, emerging European economists at BILLIONP Paribas drew up a scenario based on their assumption that overall cuts in spending will amount to 70% of the February fiscal package, with the bulk of revenue-boosting measures stemming from new “green taxes”.

Under this scenario, the general government deficit could decline to below 3.0% of GDP this year and to less than 1.5% in 2012.

Public debt would remain on a rapidly declining path, falling to around 67% of GDP by 2013, due to primary surpluses averaging at some 3.0% of GDP during 2011-2013. “The obvious advantage would be that the new measures ... would cut the fiscal deficit in a structural, sustainable way”.

“We expect (Hungary's) rating outlook to be revised from negative to stable later this year should structural measures help to improve the budget data”,  BILLIONP Paribas said.

The three major rating agencies - Standard & Poor's, Moody's Investors Service, Fitch Ratings - have all downgraded Hungary to the lowest investment grade, only one notch above “junk”, with all three keeping a negative outlook on the ratings.

In a separate report, Capital Economics, a major London-based financial consultancy, said the announcement of the expected package "could go one of three ways". In the first, and most market friendly scenario, the government would unveil a comprehensive fiscal package, broadly in line with the reported size and aimed at addressing Hungary's underlying fiscal frailties.

A second, less positive, outcome would be for a sizeable package, but made up of less tangible steps that are likely to be difficult to implement, such as efficiency savings. Finally, the worst case scenario would be for a smaller-than-anticipated package.

“We suspect that the violent swings seen in the forint at the end of last year, triggered by the government previously not delivering on the fiscal front, may jolt Fidesz into action this time around”. All told, while radical reforms are “perhaps unlikely”, “we think that a middle ground will be reached, and the forint will remain relatively stable around 275/euro in the near term”, Capital Economics said. (MTI-Econews)