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City hopeful of strong government

Fiscal consolidation efforts by the current government have been “outstanding”, and markets would look favorably at a strong new government after the upcoming elections, London-based emerging markets analysts said in their latest pre-election forecasts.

UBS said that Hungary has been “outstandingly successful” in reducing its cyclically-adjusted budget deficit, considering the peak-to-trough changes during 2006-2010. The 1.7% of GDP cyclically adjusted deficit in 2009 “makes Hungary well prepared” to meet the budget deficit criteria for euro adoption if growth bounces back. Improving prospects of euro adoption and hence lower risk premia should support asset performance in Hungary, be it fixed income, FX or equity, UBS said.

A Fidesz-led government is likely to take a different approach, however, and focus more on trying to correct the underlying structural problems, while aiming for less aggressive fiscal consolidation. “We believe a Fidesz-led government would try to raise the 2010 budget deficit target to around 5.5% of GDP from the original target of 3.8% ... mainly as a result of an accounting move to incorporate some losses from state-owned enterprises”.

UBS said that a Fidesz victory and the formation of a single-party majority government would still likely be positive for financial markets, as it offers the opportunity for a structural reform push. This positive impact, however, could be moderated by the lack of a detailed economic program and the likely shift in policy focus in the initial period until September-October 2010.

 In a separate research note, Eurasia Group said it expects that “the IMF will show some flexibility”, but only if the government demonstrates that it can pass material reforms that will help with fiscal consolidation in later years. The new deficit target figure “may end up at around 5% of GDP”. (MTI – Econews)