In a report prepared after a recent trip to Hungary, economists at BofA Merrill Lynch Global Research said the updated convergence plan contained major additional fiscal measures “that should safely keep the deficit below 3 percent of GDP this year and the next”.
“We believe this is an important positive step forward for two reasons … First, it should halt the infringement procedure by the EC, thus removing the risk of a halt in the EU cohesion funds; secondly, it will facilitate the loan negotiations with the EC, as the size and the type of adjustment in our view is broadly acceptable to the Commission”.
“We believe the government is strongly committed to deliver the adjustment despite the weakening economic backdrop,” it added.
But at this stage it is hard to pin down a time for the finalisation of the IMF/EU talks as the situation is fluid, also in light of the escalation of the Greek crisis, the report said.
“We continue to believe that Hungary will not attempt to tap the eurobond market before negotiations for an international loan are at an advanced stage and investors’ confidence has significantly improved,” it said, adding that BofA Merrill Lynch Global Research expected a 50-basis-point cut in interest rates in the second half of the year. Given the weakness in the economy, the potential size of the monetary easing cycle ahead is as much as 200 basis points, though the pace and timing of the easing would be strongly influenced by the unfolding of the euro-zone fiscal crisis, the report said.