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What is the future of Hungary's economy? - Nomura

In light of the current discussions regarding the government's ability to implement debt cuts and structural reform if economic growth is not there as well as the debate over Fidesz' political commitment to carrying out mid-term plans, conducted an interview with London-based Nomura analyst Peter Attard Montalto.

Peter Attard Montalto, London-based Nomura analyst, believes that "it would be really very wise if Hungary were to have a stand-by or precautionary credit line, but that’s clearly not going to happen because of the fraught relationships" with the International Monetary Fund.

In his opinion, investors should not label Hungary as one of the Eurozone periphery countries. However, he acknowledges that long-term risks exist.

Montalto said the core of Hungary's reform plan is not bad and contains a number of beneficial elements, such as the incentives to go back to work. The key question, however, is how exactly the reforms can be implemented if there is no economic growth. More so, with the country and politicians approaching the elections. Therefore, investors are equally concerned about the plan as its implementation. 

The government recognises the importance of the 2012 budget to investors and is less concerned about lower growth because of fiscal drag next year. Reducing debt and being successful with implementing reforms is more important for 2012 given the amount of political capital already put into these initiatives. For 2013 and beyond, however, Montalto believes that growth will become more important for the government as the elections approach.

He also believes that the situation in Hungary cannot be compared to that in the PIIGS countries in that the economy is developing still and it is at a different point in its two-element cycle. And one of the government’s core objectives is to reduce debt - a positive step, in his view. However, he acknowledges that there are a few similarities, when it comes to low potential growth and competitiveness.

In order to avoid the contagion, Montano suggest Hungary do more to ease pressure on the forint and limit extreme rate fluctuations. One such measure would be buying of the currency using EU structural funds, like Poland, in the open market rather than through the central bank.

In terms of the rating, assigned by various agencies, including Nomura, Montano believes that it is not the overall level that is dangerous, but rather the speed at which the country is approaching it.

In order to improve the assessment, he recommends taking more actions at the local level, getting expenditure under control, and establishing a better backstop against external financial contagion as well as working on structural weaknesses and getting re-engaged with the IMF. Consistently sticking with structural reform plans will certainly help improve investor confidence and removing some of the one off and distortive revenue measures that target investors.