Hungary for power but Fidesz unlikely to risk IMF wrath

By bne IntelliNews January 28, 2010

Nicholas Watson in Prague -

As Hungary prepares to go to the polls in April, a lot has been made in the press about how the campaign and likely election winner, the opposition Fidesz party, could blow a hole in the country's already stretched finances. This fear is overblown, argue some analysts.

Certainly, the International Monetary Fund has concerns. The IMF representative in Hungary, Iryna Ivaschenko, told Dow Jones Newswires in an interview in January that her organization, which arranged a €20bn bailout package for the country in 2008, would not tolerate a rise in the country's budget deficit to 7% of GDP.

The IMF rep's comments were in response to comments out of Fidesz that the budget shortfall could reach 7.5% of GDP this year as the party tries to haul Hungary out of its slump quicker than the current Socialist government is attempting. The administrations under the previous prime minister of Ferenc Gyurcsany and now Gordon Bajnai have sacrificed growth to meet spending-cut pledges to the IMF and the EU. The government did a sterling job keeping the budget deficit to an estimated 3.9% of GDP last year and forecasts a 3.8% shortfall for this year. And a draft report from the EU, obtained by Reuters on January 26, states the government has taken sufficient measures to reduce its deficit to below the EU's cap of 3% of GDP before the agreed deadline of the end of 2011.

However, Fidesz under the charismatic politician Viktor Orban has promised tax cuts and said the party if elected would rewrite the 2010 budget to make it more growth-friendly. This has led analysts like Kubilay Ozturk at HSBC to warn that, "there is a risk that Hungary's budget deficit may deviate from the current fiscal path agreed with the IMF, once Fidesz assumes power this year."

However, Fidesz was fiscally responsible last time they were in power at the end of the 1990s, beginning of the noughties and analysts say the party's rhetoric could change after the elections. Anette Skovgaard of Nordea believes the tight policy course is unlikely to be changed markedly if Fidesz wins, but uncertainties about what might happen could hurt Hungary's currency over the coming months. Such uncertainties could stem from accounting adjustments and consolidation of one-off items, which would increase the budget deficit but make a comparison with the 3.8% of GDP like "comparing apples and oranges," as the IMF's Ivaschenko describes it.

Laszlo Domokos, a leading Fidesz official, said the party if elected would put an end to an era of "budgetary tricks;" Fidesz may include the losses of state-owned companies in the budget, for example, which HSBC's Ozturk predicts would probably push the budget gap to 5% of GDP.

"Our message to the opposition is that it's really important to keep policy continuity, for confidence. As regards the numbers, it is important to understand what numbers and what definitions we are talking about," the IMF's Ivaschenko said.

Campaign promises

The budget problems, though, could start earlier in the run-up to the first round of parliamentary elections set for April 11 (a second round will be held on the 25th), as the highly unpopular government indulges in a bit of pre-election spending to win over undecided voters. This, points out Neil Shearing, is not unusual for Hungary, as the chart below shows.

However, Shearing says there are good reasons to think that things might be different this time around. "Most obviously, there is little incentive for Hungary's current 'technocrat' government, the key ministers in which are not seeking a return to office, to ramp up spending in order to buy public support," he says.

So far, he notes there is little evidence of a spending splurge in the monthly public finances data and, with less than three months left until the first vote, there isn't much time for things to go drastically wrong.

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