Bloomberg News

IMF Urges Hungary Overhaul for Growth as Talks Resume

July 27, 2012

The International Monetary Fund urged Hungary to step up efforts to boost growth and make budget financing sustainable as part of a week of “constructive” loan talks that the Cabinet said will resume in September.

Hungary needs to move away from “ad hoc” taxes to plug budget holes and should create a more “business friendly” environment, the IMF said in a statement late yesterday. Hungary is ready to compromise on some policies, including a financial- transaction tax criticized by the European Central Bank, and the chances for an IMF accord rose after the talks, government chief negotiator Mihaly Varga told HirTV yesterday.

Hungary resumed negotiations with the IMF and the European Union after a seven-month delay as it seeks about 15 billion euros ($18.2 billion) to reduce financing costs and protect against euro-area contagion. Policies such as a special tax on lenders and the nationalization of private-pension funds damaged investor confidence, contributed to the downgrade of the country’s credit rating to junk, cut investments and pushed the economy to the brink of its second recession in four years.

“The fact that both sides sounded optimistic about the talks is good,” Zoltan Arokszallasi, a Budapest-based economist at Erste Bank AG, said by phone today, adding that he expects an agreement in the fourth quarter. “Still, major policy differences remain.”

Forint Strengthens

The forint strengthened to as much as 282.2 per euro today, the highest level in more than 10 months, after ECB President Mario Draghi pledged yesterday to do “whatever it takes” to preserve the euro. The forint traded down 0.2 percent at 284.48 at 10:58 a.m. in Budapest.

The currency has gained 10.9 percent against the euro this year, the fourth-biggest surge in the world, as investors speculate Hungary will obtain an aid deal. The forint plunged 15 percent, the most in the world, in the second half of 2011.

IMF and EU officials are focusing on untangling policies that contributed to an economic contraction in the first quarter. That includes special levies on banks that made the financial industry unprofitable in 2011 for the first time in 13 years and hampered their capacity to lend.

“The key near-term challenge is to maintain macroeconomic and financial stability, while building the foundations for a more robust recovery which is necessary to raise living standards,” the IMF said in its statement. “Reforms to restore banking system soundness in a more business-friendly environment are critically important so that banks can contribute to economic recovery.”

Tax Changes

Hungary’s flat-personal income tax regime, which cut budget revenue without raising consumption, is one of the policies the IMF is asking the country to change, Varga told HirTV yesterday. Another is a financial-transaction tax, which the government plans to levy next year on commercial lenders, the central bank and the Treasury, to help fund payroll tax cuts. The ECB said this week that taxing the central bank violates monetary-policy independence.

The lenders and the government also disagreed about the projected budget shortfall next year, with the IMF and the EU estimating a significant overshoot compared with the Cabinet’s 2.2 percent of gross domestic product target, Varga told the MTI news service in an interview published late yesterday.

The result of the first week of talks was “no game- changer” and the road to a loan agreement will be “bumpy” and fraught with uncertainty as Hungary and the lenders try to reach a compromise on policies, Ketan Gada, a London-based portfolio manager at BlackRock Inc. (BLK:US) who helps manage $10.3 billion in emerging-market funds, said by phone today. He maintains a neutral position on Hungarian government debt.

To contact the reporters on this story: Andras Gergely in Budapest at agergely@bloomberg.net; Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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