ECR forum: Hungary’s fiscal outlook remains uncertain

Market sentiment towards Hungary has been gradually improving since the government unveiled its fiscal consolidation plan in February. Euromoney Country Risk asks three analysts whether, after unveiling a spate of controversial policies last year, Victor Orban’s administration is finally making progress with Hungary’s public finances.



Friedrich Mostboeck, head of research at Erste Bank, argues that the government’s fiscal consolidation strategy is taking shape. "While there are feasibility risks with the plan, which aims to reduce the budget by 1.9% in 2012 and 2.9% of GDP by 2013, the convergence program submitted in April contains additional spending cuts, and the government also said that further measures may be implemented to keep the deficit plan on track.”

“CDS spreads are currently about 90 bps higher than they were before the parliamentary elections last year. If the government proves that it can contain the deficit, then there is no reason for a harsher risk assessment now than before the election, particularly with a current account surplus and GDP growth close to 3%.”

“If the government can carry out the reforms as planned, and there is no significant deterioration in global investor sentiment, then that could create a good basis for strengthening on Hungarian FX and government bond markets."

Nicholas Spiro at Spiro Sovereign Strategy says that “While the twin deficit problem that plagued Hungary before the 2008 crisis has been rectified, fiscal adjustment is being partly carried out by nationalising the pension system in order to compensate for revenue shortfalls. Moreover, there are significant execution risks in consolidating public finances, with the deficit already nearing the annual target on a cash-flow basis in the first four months of 2011."

“Public and private sector balance sheets remain extremely sensitive to the exchange rate given Hungary’s very high levels of foreign currency-denominated debt. This is why Hungary turned to the IMF in the first place. The risk of a sharp depreciation of the forint has receded because of the significant improvement in the country’s external position, yet remains a serious concern. Ultimately, Hungary’s prospects hinge on the government’s ability to stabilise and lower the country’s public debt through expenditure restraint and structural reforms designed to raise the country’s woefully low employment rate.” 

Daniel Lenz, strategist at DZ Bank, warns that risks remain on the horizon. “Apart from the possibility of further regulatory policy sins, Hungary’s plan to spend scarce FX reserves on strategic acquisitions, such as the recent purchase of a 21% stake in Mol, the state oil company, is risky. The IMF loan repayment, which begins in autumn, will reduce reserves, while a shortage of liquidity is still possible in the event of external shocks such as a Greek sovereign default."

But he adds, "Since Hungary’s government entered office in 2010 it has always been good for a surprise. The long list of measures include the bank levy, the termination of IMF negotiations, nationalization of mandatory pension funds, the fiscal package and, most recently, the mortgage relief plan and the announced purchase of MOL shares. The fiscal package was surely the best of these often unorthodox policies, although the growth assumptions were perhaps too optimistic.”

“Nationalizing the private pillar of the pension system may be considered myopic, but it was effective in turning the budget from a deficit into a 2% GDP surplus this year. The surplus could have been even higher, but acquisistion expenditures reduced it by about 4% of GDP. “

“We expect public debt to decrease to 73% GDP by 2012, while gross foreign debt to GDP will fall to 124% from 147% in 2009. So yes, Hungary’s fiscal numbers should improve.”

A version of this article first appeared in Euromoney Country Risk. Euromoney Country Risk is an online service from Euromoney dedicated to sovereign and country risk.