Analysts at Morgan Stanley, a major global financial service provider, said that from the IMF’s standpoint, Hungary’s policy mix is “far from ideal”, especially with respect to the bank levy, and the excessive focus on revenues and taxes.
Although the Hungarian authorities have denied reports that talks with the IMF have effectively broken down, a deal this year now looks increasingly unlikely and this is not now “our base case”.
However, progress on the talks on an assistance package depends on the interaction between the IMF and the European Commission, whose views are usually fully aligned.
Assuming that the EC eventually thinks Hungary has done enough to take the deficit below 3 percent of GDP, “it is hard to imagine” that even a suboptimal policy mix in the IMF’s eyes is in itself a sufficient reason to stall the deal indefinitely.
Ultimately, programmes are seldom perfect from the IMF’s standpoint, and they are often the result of extended negotiation and compromise.
At the same time, the recent developments on the banks and likely criticism by the IMF reduce the odds of a quick deal. In addition, the latest media campaign by the government, perceived to be anti-IMF, is also unlikely to help smooth relations, Morgan Stanley’s London-based analysts said.
Timothy Ash, a senior emergig markets economist at Standard Bank in London, said in a separate research note released to investors that “the temptation surely must still be for the administration to look to tap liquid global markets sooner rather than later”, with or without an IMF deal. However, the risk then would be that the market takes this as a signal to sell, as it would suggest that the government would then have less incentive to lock in a conditional IMF programme.
Prime Minister Viktor Orban now “clearly has an eye on the electoral cycle … and is likely to be loath to be locked in a restrictive IMF programme in the run-up to the vote”.
The government’s cash position remains fairly strong, and Hungary does have underlying strengths, including a current account surplus and a positive net basic external balance, helped by net FDI inflows.
The budget deficit has also been contained below 3 per cent of GDP, while the public sector debt GDP level has been stabilised at just below EU average levels, around 77 percent of GDP, Timothy Ash said.