In its latest report on emerging Europe, Capital Economics, a major City-based economic consultancy, said that “Hungarian households are paying the price for their new government’s decision to cut ties with the IMF” as the forint has recently touched a record low against the Swiss franc.
Emergency interest rate hikes are possible, but are “made less likely by the fact that they have been relatively unsuccessful in the past”.
Against this backdrop, the high external financing requirement will probably force the government to re-engage with the IMF “at some point towards the end of next year”, particularly if the eurozone economy slows and its banks come under renewed pressure, “as we expect”, Capital Economics said.
Also, with domestic demand set to remain “extremely weak”, and as the recent upswing in exports is likely to fade next year on the back of a still weak global demand, the outlook for growth is “grim – we would not rule out the possibility of a double-dip recession” in Hungary, it added.
In a separate note, Economist Intelligence Unit said that although the government is likely to maintain a restrained fiscal policy, its decision to reject IMF assistance – at least until after local elections in October – leaves Hungary vulnerable to shifts in market sentiment, and the government’s hopes of striking a more favourable support deal with the EU “look ill-founded”.