In its annual country report published on Wednesday, the IMF said Hungary’s economy would grow by 0.3 percent in 2012 and 1.5 percent in 2013.
Adam Keszeg, analyst at Raiffeisen Bank, said this year’s growth projection is below the government’s target of 0.5 percent, but it exceeds prevalent market expectations, which are currently for a recession.
Keszeg said the IMF report confirms press reports that the government-sponsored flat-rate tax or the Fiscal Council could be topics included among the IMF’s conditions for a safety net Hungary is seeking. He said the report mentioned that a flat-rate personal income tax has adverse effects on consumers and stifles economic growth.
Based on revised data from mid-January the IMF projected Hungary’s budget deficit would reach 3.9 percent of GDP this year and 4.1 percent in 2013.
Keszeg said the 3.9 percent projection means the government may be planning further corrective measures.
Zoltan Reczey, analyst at brokerage firm Buda-Cash, said the IMF predictions came as no surprise and agreed that it was positive the annual report did not see a recession coming.
“Many market players expect a recession, perhaps even the majority does, so in comparison this is a favourable outlook,” he said.
As a possible cause for optimism Reczey mentioned improved growth expectations in the German economy, “to which Hungary is attached with many strings.”
He said the IMF, along with economists at home and abroad, called for steps which would put the Hungarian economy on sustainable footing instead of temporary measures like the crisis tax and other one-off revenues. Changes are expected also on the spending side, he said.
“The markets think so, too. There are few who think this year’s deficit goal can be met without further measures,” he said.
The IMF report said Hungary’s recently-adopted 2012 budget considerably tightened fiscal policy, by incorporating economic measures and raising VAT and excise taxes. In addition, despite a still large output gap, the central bank has recently hiked its base rate to 7 percent given inflationary pressures and the risks of a rising premium and weakening forint/euro exchange rate, the report said.
The IMF “underscored the need for a well-crafted policy mix that restores confidence in economic governance, anchors the ongoing adjustment, and strengthens economic institutions.”
London-based emerging markets analysts polled on Wednesday were divided over the issue of the central bank’s fiscal tightening, with some analysts saying the tightening cycle would likely continue if talks with the IMF/EU suffered longer delay. Others said this is likely to be the end of the tightening and if Hungary managed to secure a deal and keep to it, an easing could come in the fourth quarter.
Hungary’s central bank decided to keep its base rate on hold at 7 percent on Tuesday, against wide expectations of another rate rise after the recent two in previous months.
Barclays Capital gave warning however that Hungary was “far from” reaching an agreement with the European Commission over the infringiment procedures launched against Hungary, or with the IMF “on other issues”. The Hungarian government is trying to improve its negotiating position, but if this “stalemate” situation is prolongued markets may lose patience, triggering a devaluation of the forint and rising yields, Barclays Capital said, adding that further monetary tightening was likely.
Analysts at Goldman Sachs agreed that the Hungarian government’s readiness for compromise and a commitment to reach agreement with the IMF/EU may have led the central bank to hold its rates for now, but this could backlash if talks were delayed or agreement on conditions and legislative measures stalled. Goldman Sachs predicted further base rate rises in the upcoming months to 9.5 percent by June.
The IMF report added that despite a weaker growth outlook, fiscal tightening is necessary, considering “high public debt and uncertain financing prospects.” The report said Hungary’s 2012 deficit target of 2.5 percent of GDP was ambitious but appropriate. The IMF directors commended Hungary’s commitment to “fiscal sustainability in the recently-passed constitutional mandate, which requires reducing public debt to below 50 percent of GDP.”
The IMF projected public debt would drop to 75.5 percent of GDP by the end of 2012 from an estimated 77.7 percent at the end of 2011. The debt ratio is set to drop slightly further to 75.1 percent in 2013.
The report projects annual average inflation will rise to 5 percent in 2012 (from 3.9 percent in 2011) before easing to 3.7 percent in 2013.
It forecast a jobless rate of 11.5 percent for 2012 and 11 percent for 2013.