Bloomberg News

Hungary-IMF Pact Doubted in Analyst Poll

November 19, 2012

Hungary-IMF Pact Doubted in Analyst Poll as Talks Enter Year Two

Hungary’s outlook for obtaining International Monetary Fund aid before the 2014 elections remains clouded a year after talks started, with a plurality of economists in a poll predicting there would be no agreement. Photographer: Akos Stiller/Bloomberg

Hungary’s outlook for obtaining International Monetary Fund aid before the 2014 elections remains clouded a year after talks started, with a plurality of economists in a poll predicting there would be no agreement.

Ten of 22 analysts from London to Budapest said Hungary’s negotiations with the IMF and the European Union won’t yield an accord in the next 1 1/2 years, compared with eight who expect a deal and four who give it a 50 percent chance, according a Bloomberg survey. None predicted an aid package in 2012.

Prime Minister Viktor Orban sought aid on Nov. 17, 2011 as the forint plunged to a record low against the euro, the country’s credit rating was cut to junk and the government struggled to sell debt at auctions. Talks for a loan of about 15 billion euros ($19 billion) have been delayed because of Orban’s resistance to meet legal and economic terms set by the lenders.

“There will be no IMF agreement before elections unless there is a significant deterioration in market sentiment,” Nora Szentivanyi, a JPMorgan Chase & Co. (JPM:US) economist in London, said by e-mail.

The forint has gained 10.9 percent against the euro this year, the world’s best performance. Hungary has benefited from stimulus by the U.S. Federal Reserve and the European Central Bank; investors’ hunt for higher-yielding assets amid record-low rates in the developed world; and speculation that the government is nearing a loan accord with the IMF and the EU.

The currency advanced 0.2 percent to 284.13 per euro by 9:31 a.m. in Budapest.

‘Really 50-50’

The cost to insure Hungarian government debt against non- payment with five-year credit-default swaps fell to 317 basis points from as high as 735 points Jan. 5, data compiled by Bloomberg show. The yield on the benchmark 10-year forint- denominated government bond dropped to 6.91 percent from 10.8 percent on Jan. 4.

The performance of Hungarian assets may convince the government that it doesn’t need IMF assistance, said David Nemeth, an economist at ING Groep NV (INGA) in Budapest.

“It’s really 50-50 and it depends on the market but if things will go as well next year as this year then my guess is there won’t be an agreement,” Nemeth said in an e-mail.

Orban shunned the IMF after winning a two-thirds parliamentary majority in 2010 to conduct economic policy without having to adhere to lending conditions.

‘Unorthodox’ Measures

The government implemented what it called “unorthodox” measures to keep the budget under control without backtracking on election pledges to end five years of austerity and to introduce a flat-rate personal income tax. It effectively nationalized private-pension savings and levied industry taxes on financial, energy, telecommunications and retail companies.

The measures damaged investor confidence, while Europe’s largest bank levy contributed to curtailing credit as the foreign lenders that control most of the country’s financial industry cut support to their units to repair balance sheets and comply with tighter rules.

Hungary last year lost its investment grade at Fitch Ratings, Standard & Poor’s and Moody’s Investors Service, while the forint plunged 15 percent against the euro in the second half of last year, the most in the world.

The economy is in its second recession in four years. The contraction continued in the third quarter this year, with gross domestic product shrinking 1.5 percent from June to September compared with a year earlier. That is making it more difficult for the government to keep the budget deficit within the EU’s 3 percent limit.

‘Balanced, Sustainable’

The government backtracked on a pledge to cut a bank tax in half, raised a financial transaction levy, announced charges on utilities, and renounced a plan to raise teachers’ wages.

The policies widen the distance between Hungary and the IMF. The Washington-based lender is looking for a “balanced and sustainable package of measures” from Hungary, Gerry Rice, an IMF spokesman, said on Oct. 4.

The Cabinet decided to make the special bank levy permanent and raised the tax load of energy companies as it seeks to ensure the 2013 shortfall will be 2.7 percent of GDP, the Economy Ministry said on Nov. 16. That was the third set of measures announced by the government to shore up next year’s budget.

Billboard Campaign

IMF and EU officials held a week of “constructive” talks in Budapest in July, following a seven-month standoff over a central bank law the lenders said would have undermined the Magyar Nemzeti Bank’s independence.

Optimism about a deal faded as Hungary launched an anti-IMF billboard campaign last month. The Washington-based lender has no date set to continue talks, Rice said Nov. 1.

Elections in 2014 may be the biggest obstacle to a deal as support for Orban’s ruling party has slipped since 2010, according to Attila Tibor Nagy, an analyst at the Meltanyossag political research institute in Budapest.

“As elections approach the government can’t pass austerity measures” or give up on the flat tax “whose biggest beneficiaries are Fidesz voters,” Nagy said in phone interview Nov. 15.

Orban’s Fidesz leads all parties with 22 percent backing, according to a Median poll published on HVG weekly’s website on Nov. 7. Egyutt 2014, a newly formed opposition umbrella group, had 14 percent, followed by 10 percent both for the Socialist Party, and the radical nationalist Jobbik, Median said. No margin of error was given.

The government insists that it is nearing an aid deal. Orban on Nov. 16 said the government wants to reach an agreement and is close to a pact.

A deal may be reached if market conditions deteriorate, according to several economists in the Bloomberg survey, including Neil Shearing of Capital Economics Ltd. in London.

“If the euro crisis escalates once again - and our house view is that it will - then Hungary could come under serious pressure,” Shearing said in an e-mail. “This in turn could prove the trigger for a deal with the IMF.”

To contact the reporter on this story: 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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