City sees risks in minority government

Hungary would run the risk of missing its fiscal consolidation targets under a minority government amid signs of dwindling political support for the reform package, London-based emerging markets analysts warned on Tuesday.
Franklin Gill, Standard and Poorâs Director of European Ratings, told Econews in London that S+P had recently put Hungary on negative outlook because it felt there was increasing evidence after the referendum of a âreduced appetiteâ among most Hungarians to support the fiscal consolidation program. The defeat of the Socialist party was âsymptomaticâ in showing the weakness in the support of the consolidation program across the political spectrum. He said the latest developments confirm S+Pâs view that âthe political landscape is moving away from supporting (Prime Minister) GyurcsĂĄnyâs package ... which is a concernâ.
Asked how a minority government would impact the chances of further meaningful expenditure reductions, Gill said that even before the Socialist partyâs approval rating âstarted to decline towards 15% ... there was very little additional commitment to new expenditure reform ... I donât think anyone was really expecting much on the expenditure sideâ.
But the current situation makes the Socialist government look âeven more of a lame duck governmentâ without political support to fully implement everything in the consolidation package, he added.
He wouldnât comment on the question whether the latest political developments could bring forward the resolution of Hungaryâs negative outlook, but said that what S+P is looking at is the fiscal results.
âWeâre going to watch next yearâs budget in particular and which measures the government is able to push through and which ones they are not able to push throughâ.
The current macroeconomic backdrop globally is not particularly propitious for the consolidation package which is âquite bad luckâ for both the Socialists and the opposition.
Should the opposition win, they are going to be faced with the same issues and âI donât think (opposition leader) OrbĂĄn has been very specific about, what he would propose ... itâs not really clear that the opposition has the answers eitherâ, he added.
David Heslam, ratings director at Fitch Ratings in London, told Econews that should the Prime Minister resign, that would be a clear sign that support for his fiscal consolidation program âhad vained sufficientlyâ within the party and that means the possibility of a fiscal loosening ahead of the elections âbecomes materialâ. That would have a negative pressure on Hungaryâs ratings, Heslam said.
Goldman Sachs said in a comment released in London that its main scenario is still that Ferenc GyurcsĂĄny will remain PM until the next general election in 2010, although he could be replaced as party leader, and that the Free Democrats will remain in the coalition. âWe also think that the budget deficit reduction will not be reversed, but further fiscal tightening is unlikelyâ.
If the PM is replaced, âwe would expect a somewhat looser fiscal policy at the marginâ, but the disciplinary force of the market would severely limit the scope of any loosening.
In terms of asset prices, the political noise could lead to some volatility. The Free Democrats leaving the coalition or a serious challenge to or replacement of the PM would be market negative in the short run.
Barring a major policy turnaround regarding fiscal policy (which is unlikely), âwe do not expect a sell-out driven by purely domestic macro fundamentalsâ.
In the current global environment, though, even the prospect of a government that is preoccupied with infighting until the next election could weigh on asset prices, Goldman Sachs said.
In a separate comment, Dresdner Kleinwort said that the probability of early elections âhas clearly risenâ, while the prospects of advancing the important fiscal responsibility reforms âhave fallen dramatically ... to virtually nilâ.
These developments make Hungary even more vulnerable to the global environment. As a result, âwe raise the interest rate forecast to 9.00% by year end, from 8.00% (the current rate after Mondayâs 50bp rise) previously, and warn that growth will continue to surprise on the downside, while the political background will further deteriorate", Dresdner said. (MTI-Econews)
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