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Things to watch as IMF/EU to review Hungary

  The International Monetary Fund and the European Union will review Hungary’s performance this month for the first time since a new government took office and announced budget cuts to contain the deficit.

The delegation of IMF and EU officials, due to arrive in Hungary on Wednesday, will assess Hungary’s fiscal and debt path and economic outlook after the new government announced it expected the economy to contract by up to 6% this year, down from a previous forecast for a 3.5% fall in GDP.

The delegation will check whether Hungary is executing the program agreed last year in a $25.1 billion IMF-led rescue package which helped the country avert financial meltdown. Based on the review the IMF will decide on the disbursement of the next, third tranche of its €12.3 billion ($1.73 million) loan which Hungary needs to keep financing its debts.

WHAT IS EXPECTED FROM THE IMF/EU REVIEW?

The economic crisis led to the fall of Prime Minister Ferenc Gyurcsány in March and the ruling Socialists formed a new minority government last month with Prime Minister Gordon Bajnai and a new Finance Minister, Péter Oszkó, a tax expert.

The new government said it would cut spending this year by an additional HUF 200 billion ($942.6 million) on top of cuts worth 200 billion announced by the previous government, and will cut by a further HUF 900 billion next year.

Analysts said the IMF will likely be content with the Bajnai package of spending cuts.

“At this stage Hungary’s IMF program is probably the best performing in the region while PM Bajnai’s fiscal package should mean that this second review goes pretty smoothly, allowing the IMF to disburse more funds next month. I don’t expect any hiccups,” said Gillian Edgeworth at Deutsche Bank.

Analysts said that during the talks the issue of allowing a slightly higher deficit for Hungary would likely be discussed. Bajnai said in April that while Hungary can meet its 3% of GDP deficit goal it was open to “alternative scenarios” that would offer a faster recovery.

Oszkó has said Hungary was seeking the support of the IMF for a new policy adding economic stimulus measures to planned spending cuts.

“We think most likely the IMF/EU visit could keep it (the deficit) around 3% for now, but may give some leeway for a higher deficit if the economy sinks more than expected,” said György Barcza, economist at K&H Bank. “The deficit overshoot seems to be a bigger issue for many other countries in the region and in western Europe, so the relative position of Hungary is improving.”

Zsolt Kondrat, economist at MKB Bank, said the IMF and the EU will likely be content with the Hungarian measures if those are implemented, and they might allow a bigger budget deficit in exchange for more reform measures or tax cuts.

“As Hungary fulfils the IMF/EU requests, there is a basis for allowing a somewhat bigger deficit if that definitely serves faster growth in the long run ... An approval from the IMF seems more likely -- the EU could be stricter on this,” he said.

WHAT HAS CHANGED SINCE LAST IMF REVIEW IN FEB?

Since February Hungary’s economic growth outlook has worsened considerably as prospects in key markets, mainly Germany, have deteriorated, hitting Hungary’s exports.

The government said it wants to keep the budget deficit below 3% of GDP, as agreed with the IMF in February when the 2009 target was raised to 2.9% from 2.6%.

The finance ministry expects the deficit to rise above the full-year target by the end of June but said the spending cuts would reduce the gap in the second half of the year.

Some analysts say the deficit can be contained around 3% while others say it is likely to overshoot.

The European Commission released its fresh forecasts on May 4 in which it projected Hungary’s economy would shrink by 6.3% this year and the deficit would come in at 3.4%. (Reuters)