A lean Hungary by 2011?

By bne IntelliNews January 22, 2010

Robert Smyth in Budapest -

Prime Minister Gordon Bajnai has repeatedly made the bold claim that Hungary can retake its position as the region's leading economy, just as Finance Minister Peter Oszko believes the economy can become the region's most economically stable and competitive by 2011. Is this just wishful thinking for a country that has been so hammered by the global financial crisis?

"At the moment Hungary is very far from becoming the most dynamic economy in region, but it certainly does have a much better chance than it did a year ago," Balint Torok, an analyst at BudaCash brokerage, says. "Hungary has managed to stabilize its government balance and budget deficit. Thanks to the past year, Hungary's position has at least stabilized."

Radoslaw Bodys, Central and Eastern Europe economist at BofA Merrill Lynch Global Research, is more upbeat on Hungary's prospects. He says that despite Hungary's massive fiscal tightening that has contributed to the economic decline, the tightening itself "is why Hungary is going to be the world's fiscal leader next year." In 2011, Hungary will probably be one of the only major countries in the world likely to be easing fiscal policy when the whole world is tightening theirs, he asserts.

Bajnai, a former business leader, somewhat reluctantly became Hungary's PM in March after the country's longest-serving post-communist premier, Ferenc Gyurcsany, threw in the towel as his popularity plummeted. Viewed as less of a political animal and more of a crisis manager, Bajnai has unwaveringly stuck to the task of implementing painful fiscal reforms.

Coming up short

Gyurscany had acted swiftly and decisively in asking the International Monetary Fund (IMF) and other multilateral lenders for a $25.1bn credit facility in the autumn 2008 as the crisis bit, which at the time made Hungary look a desperate borrower calling on its last line of credit. Since then, it has carried out the kind of strict fiscal measures that has some sections of the analyst community in raptures. Now it looks like Hungary won't have to use the whole amount of the loan.

Analysts had predicted that Hungary would be able to meet the deficit target of 3.8% of GDP necessary to appease the IMF's loan-related requirements in 2009, so the 3.6% of GDP it actually realized meant the country came in beyond expectations for once. "The unparalleled fiscal tightening the Bajnai cabinet successfully delivered last year gives hard evidence to investors that even in the most radical circumstances Hungary could hold onto its pledge taken to the IMF and EU by keeping the deficit in check," Daniel Orosz, strategic advisor at Financial AXA Group Hungary, says.

Nevertheless, hitting the 2010 deficit target of 3.6% looks questionable, despite the budget that the government reckons necessary to achieve this being passed by Hungary's parliament on November 30. "We reckon that the IMF would tolerate if the deficit was exceeded by a couple of decimal percentage points next year (margin of error), in case of lower than expected revenues. But exceeding the target by 2-4 percentage points would send a very negative message to the IMF and credit rating agencies and the market would punish the country as well, via a sharp rise of CDS (Credit Default Swap) rates, and increased Forint volatility," furthered Orosz.

On January 20, Dow Jones reported the IMF warning Hungary that it would not tolerate an increase in the 2010 budget deficit to 7% - the figure predicted by the current opposition party Fidesz, which is extremely likely to sweep into power in the spring elections.

Bodys goes as far as estimating that the efficiency of budget cuts, adjusted for cyclical swings (what it would be if the economy was performing normally), would leave Hungary with a 1.3% surplus next year. According to a forecast released by GKI Economic Research prepared in co-operation with Erste Bank, the Hungarian economy has probably reached the bottom, with a 6.5% drop in Hungary's GDP expected in 2009, being replaced by a year of stagnation in 2010. "Compared with the preceding quarter, some growth is expected in the fourth quarter of 2009; however, in comparison with the corresponding period of the previous year, some small growth is likely only in the second half of 2010."

One thing is certain; Bajnai himself will not be around to carry on with his reforms, having announced he won't stand for election next May. If the door wasn't already completely open for opposition Fidesz before Bajnai announced his decision, it most certainly is now. With it appearing almost certain the Socialist government will be replaced by an opposition Fidesz-led government this spring, anything could happen - and as in the past when the government changes in Hungary, it usually does. "Because of the extremely likely change in power, we can't predict anything," says Torok.

Therefore, a continuation of the technocratic Bajnai's vision depends on the next government bucking the post-communist trend of undoing the long-term measures applied by previous governments in a quest for popularity. "There are strong risk factors ahead, and it's not sure how the new government would change fiscal policy. It might try to let the deficit control go and encourage growth," says Torok.

Indeed, Fidesz has already hinted that it might ease the purse strings, although Orosz believes that's just rhetoric aimed at attracting voters, while the truth is that the costs of incurring IMF penalties are just too high to risk. Orosz also noted Hungary's public debt level resembles that of a more-advanced Western European economy than the emerging economy it is. Orosz observed that based on the figures of the European Commission, Hungary's public debt level reached almost 80% of GDP in 2009, which is considerably higher than Poland's 52% or the Czech Republic's 37% - two country's which have usurped Hungary as regional leaders. Furthermore, debt would be severely detrimental to the country's aspirations. According to Standard & Poor's, Hungary is "quite a bit away" from having its rating upgraded due to the very high debt stock the county amassed in previous years. S&P, which currently places Hungary at the lowest-investment grading notch of BBB-, noted that Hungary needs to curb its total debt burden and accelerate GDP growth before its rating should move upward.

Meanwhile, while the macro indicators of Hungary's neighbours, Slovakia and Romania, might be worsening, they've done more in terms of structural reforms than Hungary, according to Torok. "If Hungary can make structural reforms, it can improve. But unfortunately the fact is that nothing has happened in the last four or five years and structurally speaking we can't say Hungary is out of the woods."

The short-term crisis management steps might look to have been successful, but the real long-term issues haven't been addressed, concludes Torok. Whether or not Hungary can re-emerge as a regional frontrunner, a position it held for a good part of the 1990s, it is more likely to be more closely compared to the likes of the relatively fledgling Slovakia and Romania than the more advanced Poland and Czech Republic for quite some time to come.

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