Hungary to meet first deficit targets since 2001

Interview

The gap between expenditure and revenue will probably hit the revised target of 10.1% of GDP this year and 6.8% in 2007, a Bloomberg survey of 14 economists shows. The European Union yesterday said the goals were „reasonable.” The Socialist government, which missed its deficit target every year since 2001, is raising taxes and cutting subsidies to narrow the EU's biggest gap. Lifting this year's target has helped restore credibility with investors even after crowds thronged the streets demanding the cabinet resign, analysts said. „We now believe what they are telling us,” said Csaba Hegedűs, an economist at the Budapest unit of SanPaolo IMI SpA. „The government isn't hiding anything this year. They have regained some credibility by admitting the actual level of the deficit.”

Prime Minister Ferenc Gyurcsány’s government, which will debate the first reading of the 2007 budget on October 18, pledged to follow a deficit-cutting plan endorsed by the EU last month. Gyurcsány has defied calls for his resignation and for the austerity measures to be scrapped. EU finance ministers yesterday gave until April 10 for the government to present more detailed measures to reduce the deficit through 2009 and warned that the country's economy remains at „high risk” because of the shortfall. The budget deficit in September was Ft 70.2 billion ($325.1 million) compared with a government forecast of Ft 142.7 billion, the Finance Ministry said yesterday. That raised the nine-month shortfall to 82.8% of the annual target.

Japan Credit Rating Agency Ltd. on October 4 cut its rating for Hungary's long-term foreign currency debt on concern that the government won't implement the measures. Moody's Investors Service and Fitch Ratings last month said they may do the same. „Recent developments have increased the chances that the government's much-needed reform program, spearheaded by the prime minister, will be diluted,” David Heslam, a Fitch credit analyst, said in an e-mail on September 20. The forint, which declined after anti-government protests degenerated into riots for three days starting on September 18, is set to recover to 270 per euro by the end of the year, according to the survey. It traded at 270.46 in Budapest at 1:19 p.m., the highest in two months, from 271.79 late yesterday. Economists predicted a rate of 265 per euro for the end of next year.

Hungary aims to reduce the budget deficit to a third by 2009, which would allow the country to adopt the euro two years later. The government in July scrapped its official entry date of 2010 and has yet to set a new one. The economists in the survey expect the country to switch currencies in 2014. The budget measures are set to slow GDP growth to the slowest pace in a decade, according to the survey. The economy may expand 2.4% in 2007 from 3.9% this year, it showed. Higher taxes and lower price subsidies for energy, medicines and public transport may also push up inflation to an annual average rate of 6.3% next year from this year's 3.8 %. The government forecasts are 3.7% for 2006 and 6.2 % in 2007. The central bank has raised its key interest rate four consecutive times through September to 7.75%, the EU's highest. Economists in the survey expect the current level to hold through the end of the year and decline by the end of 2007. (Bloomberg)

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