Election results already priced in, President's remarks may fuel pressure


The President's statement that strongly criticized the Prime Minister could add to the pressure, London-based emerging markets analysts said on Monday. Shortly after the analysts were polled, the Prime Minister said he would call for a vote of confidence on the government's programs as well as on his person for Friday. Gillian Edgeworth, European emerging markets analyst at Deutsche Bank, told Econews that the forint "wasn't substantially weaker this morning which seems to suggest that the markets take the news very well". The risk is, however, that tensions continue over the coming weeks ahead of the Socialist party's conference and the anniversary of the 1956 uprising, and "it is something that will continue to weigh on the market", she said. Edgeworth said that the President's statement has certainly put additional pressure on the government and "this is something that the market will be looking at as the market is looking very closely at whether Gyurcsány will stay or go over the coming weeks and months".

Dwyfor Evans, Vice President for emerging markets strategy at Bank of America, said that the markets have effectively ignored the election results as they had already priced in "an element of political risk in Hungary that wasn't there a few weeks ago". "How much of a negative it is very much depends on what this means for the continued existence of the coalition and the Prime Minister". If the Prime Minister does go, the key driver of fiscal reforms will be "off the agenda ... the question mark then will be how much of a fiscal reformist the new Prime Minister would be". If Gyurcsány is forced to leave, there would be some serious questions about whether the government still had the appetite to go through with the fiscal package, so that would probably generate a negative reaction from the markets, Evans said. Dresdner Kleinwort, Dresdner Bank's London-based investment arm said in its comment on Monday that the "attrition between President Sólyom and PM Gyurcsány is not new". However, the President's negative message and the landslide victory of the opposition are likely to renew questions about the Prime Minister's future and that of the reforms.

The ruling coalition remains strongly in support of Gyurcsány and "we don't anticipate this to change in the near term, implying that Gyurcsány should be able to maintain the leadership for the time being". The ruling coalition is well aware of the risks involved in slowing the push for reforms, given the warnings voiced by the credit ratings agencies and the EU Commission, and "we expect them to continue to advance the policy changes anticipated in the Convergence program, at least in the coming quarters", Dresdner said. In a separate comment, Goldman Sachs said the outcome of the elections is "neutral news". The results are as expected, which is a slight positive, but it is roughly counterbalanced by the effects of the President's speech, which may encourage protest in the next few days.

It is symbolically important that the mayor position in Budapest was retained by the coalition. "We do not, therefore, expect the election results to change the mind of the Socialist party, or the Free Democrats, who could have forced the resignation of the PM ... we expect the PM to stay for now and the (peaceful) protest to die down in a few weeks at the maximum". GS said it does not expect the election results to undermine the austerity program and the 2007 budget should remain as tight as envisaged in the Convergence Program. There is no credible challenger to the PM in the Socialist party, and the party understands that there is not much choice but to go ahead with fiscal tightening, at least for now. This can change in a few years' time: a credible challenger to the PM could emerge, the Socialists could decide that they may have a better chance to win an election without him, and there could be some pressure to loosen fiscal policy. But for now "we expect political noise to gradually subside", Goldman Sachs said. (Portfolio)

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