Bloomberg News

Hungary Budget Endorsement in Doubt as EU, IMF Warn

January 28, 2013

The European Union and the International Monetary Fund said Hungary’s budget policies were unsustainable, casting doubt over Prime Minister Viktor Orban’s chances to ease fiscal monitoring and create spending room.

Hungary needs to take additional steps to keep the budget deficit under the EU limit of 3 percent of gross domestic product in a “durable and balanced manner,” the European Commission said yesterday after a review. The IMF forecast a gap of 3.25 percent this year and more than 3 percent through 2015.

Orban sacrificed growth to reduce the deficit, trim government debt and keep access to EU funds. He’s looking to end the trading bloc’s longest excessive-deficit procedure, which started in 2004, to create fiscal room before elections in 2014. Planned spending includes boosting teachers’ pay this year after a strike threat.

“Keeping the deficit below the 3 percent of GDP Treaty reference value in a durable and balanced manner, as recommended by the Council, will require additional steps,” the Commission said. “These should preferably be on the expenditure side.”

The forint yesterday fell to 299.99 per euro, its weakest since June 6, 2012, and traded at 298.26 at 8:27 p.m. in Budapest.

Orban is meeting European Commission President Jose Manuel Barroso tomorrow in Brussels, with the excessive-deficit procedure against Hungary topping the agenda. The government has said it expects to be released from the group of EU budget offenders in June after a meeting of the bloc’s finance ministers.

Deficit Forecast

The Commission in November estimated Hungary’s 2013 budget deficit at 2.9 percent of GDP, predicting it would widen to 3.5 percent in 2014. The mission from the EU’s Brussels-based executive arm didn’t indicate that it would change that forecast, Mihaly Varga, the country’s chief negotiator for a bailout loan, said in an interview with the state-run MTI news service yesterday.

Hungary’s budget measures are sustainable and ensure that the budget deficit stays within 3 percent of GDP, the Economy Ministry said in an e-mailed statement yesterday.

Hungary’s government financing needs are the highest in eastern Europe, Moody’s Investors Service said yesterday. The country needs to borrow the equivalent of 19 percent of its economic output this year, higher than 10 of its regional peers, the ratings service said.

Orban’s Policies

Orban has relied on special levies on banking, energy, retail and telecommunication companies as well as the nationalization of private pension fund assets to reduce the budget deficit and public debt levels.

The measures damaged lending, investments and growth and may also neutralize the effect of Orban’s austerity measures by keeping the government debt level, the highest in European Union’s east, hovering around 78 percent of GDP, the IMF said.

“That’s some 10 percentage points higher than its pre- crisis level, despite the notable consolidation effort in 2012 and the one-off effect from the transfer of assets from the private pension funds in 2011,” the IMF said.

Orban came to office in 2010 declaring a “war on debt” amassed by his predecessors and rejected obtaining a new loan from the IMF to allow room for what the government described as unorthodox measures. The policies ended up hurting investor confidence and costing the country its investment grade, ultimately forcing Orban to turn to the IMF for help in 2011.

‘New Course’

Hungary needs a “new policy course” to support expansion, including the phasing out of “distortive” industry taxes and reducing spending, including by better targeting social benefits, the IMF said among its recommendations.

The Commission “stressed the importance” of improving the banking environment to boost lending and investments. Lenders in Hungary currently pay the highest banking levy in the EU.

Growing investor appetite for riskier, higher-yielding assets after quantitative easing from the world’s major central bank as well as Orban’s budget cuts reduced bond yields to 6.5 percent yesterday from 9 percent a year ago.

That helped open the way for Hungary to start investor meetings yesterday in Los Angeles for a potential Eurobond sale, which would be the first in 20 months.

Orban faces elections next year. While his support has slipped in polls, the ruling party remains in first place. Orban’s Fidesz party had 23 percent support this month among eligible voters, compared with 42 percent after winning the last election in May 2010, pollster Ipsos said on its website. The biggest opposition party, the Socialists, had 12 percent backing, Ipsos said, without providing a margin of error.

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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